UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________

FORM 10-Q


(Mark One)
☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2020~~2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-34385

Invesco Mortgage Capital Inc.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

26-2749336

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

1555 Peachtree Street, N.E., Suite 1800,

Atlanta,

Georgia

30309

(Address of Principal Executive Offices)

(Zip Code)

(404) 892-0896

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

Title of Each Class

Trading Symbol

Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share

IVR

New York Stock Exchange

7.75% Series A Cumulative Redeemable Preferred Stock

IVRpA

New York Stock Exchange

7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock

IVRpB

New York Stock Exchange

7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock

IVRpC

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-Accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~May 31, 2020,~~April 30, 2021, there were ~~164,966,357~~246,397,710 outstanding shares of common stock of Invesco Mortgage Capital Inc.

~~Table of Contents~~

~~Explanatory Note~~

As previously disclosed in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on April 17, 2020, filing of the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (this “Quarterly Report”) was delayed due to disruptions in the Company’s day-to-day activities caused by the ongoing COVID-19 pandemic. The original filing deadline for this Quarterly Report was May 11, 2020. The COVID-19 pandemic caused the Company’s support personnel to work from home and resulted in delays in receiving information from the Compan~~y's custodian~~ and various counterparties and clearing certain sales trades between the Company and third parties. The Company is relying on the SEC’s Order Under Section 36 of the Securities Exchange Act of 1934, as amended (Release Nos. 34-88318 and 34-88465), to file this Quarterly Report within the 45-day time frame provided by the extension, on or before June 25, 2020.

Table of Contents

INVESCO MORTGAGE CAPITAL INC.

TABLE OF CONTENTS

Page

PART I FINANCIAL INFORMATION

Item 1.

Financial Statements

Unaudited Condensed Consolidated Balance Sheets as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020

Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020

Unaudited Condensed Consolidated Statements of Stockholders' Equity for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020

Notes to Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

3527

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

6153

Item 4.

Controls and Procedures

6557

PART II OTHER INFORMATION

Item 1.

Item 1A.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

6958

Item 3.

Defaults Upon Senior Securities

6958

Item 4.

Mine Safety Disclosures

Item 5.

Item 6.

PART I

ITEM 1. FINANCIAL STATEMENTS

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


		As of					As of
$ in thousands except share amounts		March 31, 2020	December 31, 2019
$ in thousands, except share amounts				$ in thousands, except share amounts	March 31, 2021		December 31, 2020
ASSETS	ASSETS					ASSETS
Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $7,485,083 and $21,132,742 respectively)		8,044,808	21,771,786
Mortgage-backed securities, at fair value (including pledged securities of $8,641,007 and $7,614,935, respectively; net of allowance for credit losses of $830 and $1,768, respectively)				Mortgage-backed securities, at fair value (including pledged securities of $8,641,007 and $7,614,935, respectively; net of allowance for credit losses of $830 and $1,768, respectively)	9,099,742		8,172,182
Cash and cash equivalents	Cash and cash equivalents	143,291	172,507	Cash and cash equivalents	198,357		148,011
Restricted cash	Restricted cash	221,688	116,995	Restricted cash	380,678		244,573
Due from counterparties	Due from counterparties	394,424	32,568	Due from counterparties	11,440		1,078
Investment related receivable (including pledged securities of $534,524 as of March 31, 2020)		832,043	67,976
Investment related receivable				Investment related receivable	18,536		15,840
Derivative assets, at fair value	Derivative assets, at fair value	—	18,533	Derivative assets, at fair value	17,193		10,004
Other assets (including pledged security of $21,577 and $44,654, respectively)		140,993	166,180
Other assets				Other assets	36,890		41,163
Total assets	Total assets	9,777,247	22,346,545	Total assets	9,762,836		8,632,851
LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY			LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:	Liabilities:			Liabilities:
Repurchase agreements	Repurchase agreements	6,287,746	17,532,303	Repurchase agreements	8,240,887		7,228,699
Secured loans		1,350,000	1,650,000

Derivative liabilities, at fair value	Derivative liabilities, at fair value	302	352	Derivative liabilities, at fair value	4,273		6,344
Dividends payable	Dividends payable	93,590	74,841	Dividends payable	24,888		18,970
Investment related payable	Investment related payable	560,807	99,561	Investment related payable	1,454		274
Accrued interest payable	Accrued interest payable	8,679	43,998	Accrued interest payable	547		823
Collateral held payable	Collateral held payable	50,135	170	Collateral held payable	1,337		3,546
Accounts payable and accrued expenses	Accounts payable and accrued expenses	2,539	1,560	Accounts payable and accrued expenses	1,967		1,448
Due to affiliate	Due to affiliate	13,068	11,861	Due to affiliate	5,551		5,589
Total liabilities	Total liabilities	8,366,866	19,414,646	Total liabilities	8,280,904		7,265,693
Commitments and contingencies (See Note 14):	Commitments and contingencies (See Note 14):			Commitments and contingencies (See Note 14):	0		0
Stockholders' Equity:
Stockholders' equity:				Stockholders' equity:
Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized:	Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized:			Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized:
7.75% Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding ($140,000 aggregate liquidation preference)	7.75% Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding ($140,000 aggregate liquidation preference)	135,356	135,356	7.75% Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding ($140,000 aggregate liquidation preference)	135,356		135,356
7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares issued and outstanding ($155,000 aggregate liquidation preference)	7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares issued and outstanding ($155,000 aggregate liquidation preference)	149,860	149,860	7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares issued and outstanding ($155,000 aggregate liquidation preference)	149,860		149,860
7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 11,500,000 shares issued and outstanding ($287,500 aggregate liquidation preference)	7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 11,500,000 shares issued and outstanding ($287,500 aggregate liquidation preference)	278,108	278,108	7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 11,500,000 shares issued and outstanding ($287,500 aggregate liquidation preference)	278,108		278,108
Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 164,966,357 and 144,256,357 shares issued and outstanding, respectively		1,650	1,443
Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 246,397,710 and 203,222,108 shares issued and outstanding, respectively				Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 246,397,710 and 203,222,108 shares issued and outstanding, respectively	2,464		2,032
Additional paid in capital	Additional paid in capital	3,239,602	2,892,652	Additional paid in capital	3,548,230		3,387,552
Accumulated other comprehensive income	Accumulated other comprehensive income	129,728	288,963	Accumulated other comprehensive income	54,827		58,605
Retained earnings (distributions in excess of earnings)	Retained earnings (distributions in excess of earnings)	(2,523,923)	(814,483)	Retained earnings (distributions in excess of earnings)	(2,686,913)		(2,644,355)
Total stockholders’ equity	Total stockholders’ equity	1,410,381	2,931,899	Total stockholders’ equity	1,481,932		1,367,158
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	9,777,247	22,346,545	Total liabilities and stockholders' equity	9,762,836		8,632,851

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


		Three Months Ended March 31,				Three Months Ended March 31,
$ in thousands, except share amounts	$ in thousands, except share amounts	2020	2019	$ in thousands, except share amounts	2021	2020
Interest Income
Interest income				Interest income
Mortgage-backed and credit risk transfer securities	Mortgage-backed and credit risk transfer securities	185,536	185,492	Mortgage-backed and credit risk transfer securities	39,434	185,536
Commercial and other loans	Commercial and other loans	1,163	1,582	Commercial and other loans	576	1,163
Total interest income	Total interest income	186,699	187,074	Total interest income	40,010	186,699
Interest Expense
Interest expense				Interest expense
Repurchase agreements(1)	Repurchase agreements(1)	79,042	101,875	Repurchase agreements(1)	(1,660)	79,042
Secured loans	Secured loans	6,646	11,144	Secured loans	0	6,646
Total interest expense	Total interest expense	85,688	113,019	Total interest expense	(1,660)	85,688
Net interest income	Net interest income	101,011	74,055	Net interest income	41,670	101,011
Other Income (loss)
Other income (loss)				Other income (loss)
Gain (loss) on investments, net	Gain (loss) on investments, net	(755,483)	268,382	Gain (loss) on investments, net	(331,857)	(755,483)
(Increase) decrease in provision for credit losses				(Increase) decrease in provision for credit losses	938	0
Equity in earnings (losses) of unconsolidated ventures	Equity in earnings (losses) of unconsolidated ventures	170	692	Equity in earnings (losses) of unconsolidated ventures	(94)	170
Gain (loss) on derivative instruments, net	Gain (loss) on derivative instruments, net	(910,779)	(201,460)	Gain (loss) on derivative instruments, net	286,961	(910,779)
Realized and unrealized credit derivative income (loss), net	Realized and unrealized credit derivative income (loss), net	(33,052)	7,884	Realized and unrealized credit derivative income (loss), net	0	(33,052)
Net loss on extinguishment of debt		(4,806)	—
Net gain (loss) on extinguishment of debt				Net gain (loss) on extinguishment of debt	0	(4,806)
Other investment income (loss), net	Other investment income (loss), net	803	1,029	Other investment income (loss), net	(16)	803
Total other income (loss)	Total other income (loss)	(1,703,147)	76,527	Total other income (loss)	(44,068)	(1,703,147)
Expenses	Expenses			Expenses
Management fee – related party	Management fee – related party	10,953	9,534	Management fee – related party	4,884	10,953
General and administrative	General and administrative	3,103	2,258	General and administrative	1,993	3,103
Total expenses	Total expenses	14,056	11,792	Total expenses	6,877	14,056
Net income (loss)		(1,616,192)	138,790
Net income (loss) attributable to Invesco Mortgage Capital, Inc.				Net income (loss) attributable to Invesco Mortgage Capital, Inc.	(9,275)	(1,616,192)

Dividends to preferred stockholders	Dividends to preferred stockholders	11,107	11,107	Dividends to preferred stockholders	11,107	11,107
Net income (loss) attributable to common stockholders	Net income (loss) attributable to common stockholders	(1,627,299)	127,683	Net income (loss) attributable to common stockholders	(20,382)	(1,627,299)
Earnings (loss) per share:
Net income (loss) per share:				Net income (loss) per share:
Net income (loss) attributable to common stockholders	Net income (loss) attributable to common stockholders			Net income (loss) attributable to common stockholders
Basic	Basic	(10.38)	1.05	Basic	(0.09)	(10.38)
Diluted	Diluted	(10.38)	1.05	Diluted	(0.09)	(10.38)

(1)Negative interest expense on repurchase agreements for the three months ended March 31, 2021 consists of $3.7 million of current period interest expense on repurchase agreements and $5.4 million of amortization of net deferred gains on de-designated interest rate swaps. For further information on amortization of amounts classified in accumulated other comprehensive income before we discontinued hedge accounting, see Note 8 - "Derivatives and Hedging Activities" and Note 12 - "Stockholders' Equity".

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


		Three Months Ended March 31,				Three Months Ended March 31,
$ in thousands	$ in thousands	2020	2019	$ in thousands	2021	2020
Net income (loss)	Net income (loss)	(1,616,192)	138,790	Net income (loss)	(9,275)	(1,616,192)
Other comprehensive income (loss):	Other comprehensive income (loss):			Other comprehensive income (loss):
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net	Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net	(186,605)	52,349	Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net	981	(186,605)
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net	Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net	36,957	10,147	Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net	0	36,957

Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense	Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense	(10,067)	(5,851)	Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense	(5,368)	(10,067)
Currency translation adjustments on investment in unconsolidated venture	Currency translation adjustments on investment in unconsolidated venture	480	(276)	Currency translation adjustments on investment in unconsolidated venture	609	480
Total other comprehensive income (loss)		(159,235)	56,369
Total other comprehensive loss				Total other comprehensive loss	(3,778)	(159,235)
Comprehensive income (loss)	Comprehensive income (loss)	(1,775,427)	195,159	Comprehensive income (loss)	(13,053)	(1,775,427)

Less: Dividends to preferred stockholders	Less: Dividends to preferred stockholders	(11,107)	(11,107)	Less: Dividends to preferred stockholders	(11,107)	(11,107)
Comprehensive income (loss) attributable to common stockholders	Comprehensive income (loss) attributable to common stockholders	(1,786,534)	184,052	Comprehensive income (loss) attributable to common stockholders	(24,160)	(1,786,534)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the three months ended March 31, ~~2020~~2021 and ~~2019~~2020

(Unaudited)


																									Additional Paid in Capital			Accumulated Other Comprehensive Income (Loss)					Retained Earnings (Distributions in excess of earnings)				Total Stockholders’ Equity																									Additional Paid in Capital	Accumulated Other Comprehensive Income (Loss)	Retained Earnings (Distributions in excess of earnings)	Total Stockholders’ Equity
		Series A Preferred Stock						Series B Preferred Stock						Series C Preferred Stock																																						Series A Preferred Stock					Series B Preferred Stock				Series C Preferred Stock					Additional Paid in Capital	Accumulated Other Comprehensive Income (Loss)	Retained Earnings (Distributions in excess of earnings)	Total Stockholders’ Equity
$ in thousands except share amounts																		Common Stock																				Additional Paid in Capital				Accumulated Other Comprehensive Income (Loss)				Retained Earnings (Distributions in excess of earnings)
			Shares		Amount		Shares		Amount		Shares		Amount		Shares	Amount														Accumulated Other Comprehensive Income (Loss)				Total Stockholders’ Equity
Balance at December 31, 2019		5,600,000		135,356		6,200,000		149,860		11,500,000		278,108		144,256,357	1,443	2,892,652	288,963	(814,483)			2,931,899
Cumulative effect of adoption of new accounting principle		—		—		—		—		—		—		—	—	—	—	342			342
$ in thousands, except share amounts																			$ in thousands, except share amounts	Series A Preferred Stock				Series B Preferred Stock									Series C Preferred Stock																		Common Stock					Additional Paid in Capital			Accumulated Other Comprehensive Income (Loss)	Retained Earnings (Distributions in excess of earnings)		Total Stockholders’ Equity
																													Amount												Shares				Shares				Amount
Balance at December 31, 2020																			Balance at December 31, 2020	5,600,000			135,356			6,200,000							149,860				11,500,000				278,108						203,222,108			2,032

Net income (loss)	Net income (loss)	—		—		—		—		—		—		—	—	—	—	(1,616,192)			(1,616,192)	Net income (loss)		—			—					—				—				—				—				—			—			—		—			(9,275)	(9,275)
Other comprehensive income (loss)		—		—		—		—		—		—		—	—	—	(159,235)	—			(159,235)
Other comprehensive loss																			Other comprehensive loss	—			—			—					—				—				—				—				—			—			(3,778)		—			(3,778)
Proceeds from issuance of common stock, net of offering costs	Proceeds from issuance of common stock, net of offering costs	—		—		—		—		—		—		20,700,000	207	346,819	—	—			347,026	Proceeds from issuance of common stock, net of offering costs		—			—					—				—				—				—				43,150,000			432			160,549		—			—	160,981

Stock awards	Stock awards	—		—		—		—		—		—		10,000	—	—	—	—			—	Stock awards		—			—					—				—				—				—				25,602			—			—		—			—	—
Common stock dividends	Common stock dividends	—		—		—		—		—		—		—	—	—	—	(82,483)			(82,483)	Common stock dividends		—			—					—				—				—				—				—			—			—		—			(22,176)	(22,176)
Preferred stock dividends	Preferred stock dividends	—		—		—		—		—		—		—	—	—	—	(11,107)			(11,107)	Preferred stock dividends		—			—					—				—				—				—				—			—			—		—			(11,107)	(11,107)
Amortization of equity-based compensation	Amortization of equity-based compensation	—		—		—		—		—		—		—	—	131	—	—			131	Amortization of equity-based compensation		—			—					—				—				—				—				—			—			129		—			—	129
Balance at March 31, 2020		5,600,000		135,356		6,200,000		149,860		11,500,000		278,108		164,966,357	1,650	3,239,602	129,728	(2,523,923)			1,410,381
Balance at March 31, 2021																			Balance at March 31, 2021	5,600,000			135,356			6,200,000					149,860				11,500,000				278,108				246,397,710				2,464			3,548,230			54,827		(2,686,913)			1,481,932


																									Additional Paid in Capital			Accumulated Other Comprehensive Income (Loss)				Retained Earnings (Distributions in excess of earnings)					Total Stockholders’ Equity																															Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Distributions in excess of earnings)	Total Stockholders’ Equity
		Series A Preferred Stock						Series B Preferred Stock						Series C Preferred Stock																																						Series A Preferred Stock								Series B Preferred Stock							Series C Preferred Stock							Additional Paid in Capital	Accumulated Other Comprehensive Income (Loss)	Retained Earnings (Distributions in excess of earnings)	Total Stockholders’ Equity
$ in thousands except share amounts																		Common Stock																				Additional Paid in Capital			Accumulated Other Comprehensive Income (Loss)				Retained Earnings (Distributions in excess of earnings)
			Shares		Amount		Shares		Amount		Shares		Amount		Shares	Amount													Accumulated Other Comprehensive Income (Loss)					Total Stockholders’ Equity
Balance at December 31, 2018		5,600,000		135,356		6,200,000		149,860		11,500,000		278,108		111,584,996	1,115	2,383,532	220,813	(882,087)			2,286,697
Net income		—		—		—		—		—		—		—	—	—	—	138,790			138,790
Other comprehensive income (loss)		—		—		—		—		—		—		—	—	—	56,369	—			56,369
$ in thousands, except share amounts																			$ in thousands, except share amounts	Series A Preferred Stock								Series B Preferred Stock																				Series C Preferred Stock								Common Stock								Additional Paid in Capital			Accumulated Other Comprehensive Income (Loss)		Retained Earnings (Distributions in excess of earnings)		Total Stockholders’ Equity
																																					Shares							Amount
Balance at December 31, 2019																			Balance at December 31, 2019	5,600,000			135,356			6,200,000							149,860						11,500,000			278,108				144,256,357			1,443
Cumulative effect of adoption of new accounting principle																			Cumulative effect of adoption of new accounting principle	—			—			—				—					—				—			—				—
Net income (loss)																			Net income (loss)	—			—			—				—					—				—			—				—			—				—				(1,616,192)				(1,616,192)
Other comprehensive loss																			Other comprehensive loss	—			—			—				—					—				—			—				—			—				(159,235)				—				(159,235)
Proceeds from issuance of common stock, net of offering costs	Proceeds from issuance of common stock, net of offering costs	—		—		—		—		—		—		16,672,000	167	258,386	—	—			258,553	Proceeds from issuance of common stock, net of offering costs		—			—				—					—				—			—				20,700,000				207				346,819				—				—			347,026

Stock awards	Stock awards	—		—		—		—		—		—		10,501	—	—	—	—			—	Stock awards		—			—				—					—				—			—				10,000			—				—				—				—			—
Common stock dividends	Common stock dividends	—		—		—		—		—		—		—	—	—	—	(57,720)			(57,720)	Common stock dividends		—			—				—					—				—			—				—			—				—				—				(82,483)			(82,483)
Preferred stock dividends	Preferred stock dividends	—		—		—		—		—		—		—	—	—	—	(11,107)			(11,107)	Preferred stock dividends		—			—				—					—				—			—				—			—				—				—				(11,107)			(11,107)
Amortization of equity-based compensation	Amortization of equity-based compensation	—		—		—		—		—		—		—	—	132	—	—			132	Amortization of equity-based compensation		—			—				—					—				—			—				—			—				131				—				—			131
Balance at March 31, 2019		5,600,000		135,356		6,200,000		149,860		11,500,000		278,108		128,267,497	1,282	2,642,050	277,182	(812,124)			2,671,714
Balance at March 31, 2020																			Balance at March 31, 2020	5,600,000			135,356			6,200,000				149,860					11,500,000				278,108			164,966,357				1,650			3,239,602				129,728				(2,523,923)				1,410,381

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Three Months Ended March 31,				Three Months Ended March 31,
$ in thousands	$ in thousands	2020	2019	$ in thousands	2021	2020
Cash Flows from Operating Activities	Cash Flows from Operating Activities			Cash Flows from Operating Activities
Net income (loss)	Net income (loss)	(1,616,192)	138,790	Net income (loss)	(9,275)	(1,616,192)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:	Adjustments to reconcile net income (loss) to net cash provided by operating activities:			Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of mortgage-backed and credit risk transfer securities premiums and (discounts), net	Amortization of mortgage-backed and credit risk transfer securities premiums and (discounts), net	10,658	3,185	Amortization of mortgage-backed and credit risk transfer securities premiums and (discounts), net	11,625	10,658
Realized and unrealized (gain) loss on derivative instruments, net	Realized and unrealized (gain) loss on derivative instruments, net	922,703	205,969	Realized and unrealized (gain) loss on derivative instruments, net	(291,510)	922,703
Realized and unrealized (gain) loss on credit derivatives, net	Realized and unrealized (gain) loss on credit derivatives, net	37,770	(2,534)	Realized and unrealized (gain) loss on credit derivatives, net	0	37,770
(Gain) loss on investments, net	(Gain) loss on investments, net	755,483	(268,382)	(Gain) loss on investments, net	331,857	755,483
Decrease in provision for credit losses				Decrease in provision for credit losses	(938)	0
(Gain) loss from investments in unconsolidated ventures in excess of distributions received	(Gain) loss from investments in unconsolidated ventures in excess of distributions received	222	(692)	(Gain) loss from investments in unconsolidated ventures in excess of distributions received	18	222
Other amortization	Other amortization	(9,936)	(5,719)	Other amortization	(5,239)	(9,936)
Net loss on extinguishment of debt	Net loss on extinguishment of debt	4,806	—	Net loss on extinguishment of debt	0	4,806

Changes in operating assets and liabilities:	Changes in operating assets and liabilities:			Changes in operating assets and liabilities:
(Increase) decrease in operating assets	(Increase) decrease in operating assets	37,955	(10,015)	(Increase) decrease in operating assets	(1,990)	37,955
Increase (decrease) in operating liabilities		(33,431)	7,758
Decrease in operating liabilities				Decrease in operating liabilities	(43)	(33,431)
Net cash provided by operating activities	Net cash provided by operating activities	110,038	68,360	Net cash provided by operating activities	34,505	110,038
Cash Flows from Investing Activities	Cash Flows from Investing Activities			Cash Flows from Investing Activities
Purchase of mortgage-backed and credit risk transfer securities	Purchase of mortgage-backed and credit risk transfer securities	(4,444,744)	(4,340,536)	Purchase of mortgage-backed and credit risk transfer securities	(7,012,452)	(4,444,744)
(Contributions to) distributions from investments in unconsolidated ventures, net		1,168	299
Distributions from investments in unconsolidated ventures, net				Distributions from investments in unconsolidated ventures, net	1,233	1,168
Change in other assets	Change in other assets	19,269	1,154	Change in other assets	0	19,269
Principal payments from mortgage-backed and credit risk transfer securities	Principal payments from mortgage-backed and credit risk transfer securities	636,498	300,222	Principal payments from mortgage-backed and credit risk transfer securities	200,590	636,498
Proceeds from sale of mortgage-backed and credit risk transfer securities	Proceeds from sale of mortgage-backed and credit risk transfer securities	16,238,252	734,834	Proceeds from sale of mortgage-backed and credit risk transfer securities	5,545,566	16,238,252
Proceeds from sale of credit derivatives	Proceeds from sale of credit derivatives	2,283	—	Proceeds from sale of credit derivatives	0	2,283
Settlement (termination) of futures, currency forwards and interest rate swaps, net		(904,220)	(232,387)
Settlement (termination) of forwards, swaps, swaptions and TBAs, net				Settlement (termination) of forwards, swaps, swaptions and TBAs, net	282,250	(904,220)

Net change in due from counterparties and collateral held payable on derivative instruments	Net change in due from counterparties and collateral held payable on derivative instruments	4,849	(14,060)	Net change in due from counterparties and collateral held payable on derivative instruments	(3,438)	4,849
Principal payments from commercial loans held-for-investment	Principal payments from commercial loans held-for-investment	136	7,128	Principal payments from commercial loans held-for-investment	0	136

Net cash provided by (used in) investing activities	Net cash provided by (used in) investing activities	11,553,491	(3,543,346)	Net cash provided by (used in) investing activities	(986,251)	11,553,491
Cash Flows from Financing Activities	Cash Flows from Financing Activities			Cash Flows from Financing Activities
Proceeds from issuance of common stock	Proceeds from issuance of common stock	347,299	258,966	Proceeds from issuance of common stock	161,413	347,299

Principal repayments of secured loans	Principal repayments of secured loans	(300,000)	—	Principal repayments of secured loans	0	(300,000)
Proceeds from repurchase agreements	Proceeds from repurchase agreements	44,017,958	28,316,732	Proceeds from repurchase agreements	28,514,983	44,017,958
Principal repayments of repurchase agreements		(55,266,696)	(25,094,829)
Principal repayments of repurchase agreements and related fees				Principal repayments of repurchase agreements and related fees	(27,502,795)	(55,266,696)
Net change in due from counterparties and collateral held payable on repurchase agreements	Net change in due from counterparties and collateral held payable on repurchase agreements	(311,732)	—	Net change in due from counterparties and collateral held payable on repurchase agreements	(7,953)	(311,732)
Payments of deferred costs		(40)	(21)
Payments of deferred offering costs				Payments of deferred offering costs	(86)	(40)
Payments of dividends	Payments of dividends	(74,841)	(57,972)	Payments of dividends	(27,365)	(74,841)
Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	(11,588,052)	3,422,876	Net cash provided by (used in) financing activities	1,138,197	(11,588,052)
Net change in cash, cash equivalents and restricted cash	Net change in cash, cash equivalents and restricted cash	75,477	(52,110)	Net change in cash, cash equivalents and restricted cash	186,451	75,477
Cash, cash equivalents and restricted cash, beginning of period	Cash, cash equivalents and restricted cash, beginning of period	289,502	135,617	Cash, cash equivalents and restricted cash, beginning of period	392,584	289,502
Cash, cash equivalents and restricted cash, end of period	Cash, cash equivalents and restricted cash, end of period	364,979	83,507	Cash, cash equivalents and restricted cash, end of period	579,035	364,979
Supplement Disclosure of Cash Flow Information	Supplement Disclosure of Cash Flow Information			Supplement Disclosure of Cash Flow Information
Interest paid	Interest paid	131,074	109,392	Interest paid	3,985	131,074
Non-cash Investing and Financing Activities Information	Non-cash Investing and Financing Activities Information			Non-cash Investing and Financing Activities Information
Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities	Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities	(149,648)	62,496	Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities	981	(149,648)
Dividends declared not paid	Dividends declared not paid	93,590	60,433	Dividends declared not paid	24,888	93,590
Increase in Agency CMBS purchase commitments	Increase in Agency CMBS purchase commitments	410,654	90,291	Increase in Agency CMBS purchase commitments	0	410,654
Net change in investment related receivable (payable) excluding Agency CMBS purchase commitments	Net change in investment related receivable (payable) excluding Agency CMBS purchase commitments	(760,217)	(4,959)	Net change in investment related receivable (payable) excluding Agency CMBS purchase commitments	(271)	(760,217)
Offering costs not paid	Offering costs not paid	(273)	(413)	Offering costs not paid	(334)	(273)
Net change in repurchase agreements, not settled	Net change in repurchase agreements, not settled	(625)	—	Net change in repurchase agreements, not settled	0	(625)
Change in foreign currency translation adjustment on other investments				Change in foreign currency translation adjustment on other investments	(609)	(480)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Organization and Business Operations

Invesco Mortgage Capital Inc. (the "Company" or "we") is a Maryland corporation primarily focused on investing in, financing and managing ~~residential and commercial~~ mortgage-backed securities ("MBS") and other mortgage-related assets. We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. ("Invesco"), a leading independent global investment management firm. We conduct our business through IAS Operating Partnership LP (the "Operating Partnership") and have 1 operating segment.

We ~~have historically invested~~currently invest in:

•Residential mortgage-backed securities ("RMBS") that are guaranteed by a U.S. government agency such as the Government National Mortgage Association ("Ginnie Mae"), or a federally chartered corporation such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively "Agency RMBS");

•Commercial mortgage-backed securities ~~(“CMBS”~~("CMBS") that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency CMBS");

•RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency RMBS");

•Commercial mortgage loans; and

•Other real estate-related financing agreements.

We have also historically invested in:

•CMBS that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively "Agency CMBS");

•~~RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency RMBS");~~

•~~CMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency CMBS");~~

•Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises ("GSE CRT"); and

•Residential ~~and commercial~~ mortgage ~~loans; and~~loans.

•~~Other real estate-related financing agreements.~~We conduct our business through IAS Operating Partnership L.P. (the "Operating Partnership") and have 1 operating segment. We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. ("Invesco"), a leading independent global investment management firm.

We elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain our REIT qualification, we are generally required to distribute at least 90% of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the "Investment Company" definition under the Investment Company Act of ~~1940.~~

~~During the three months ended March 31, 2020, we experienced unprecedented market conditions~~1940, as a result of the global COVID-19 pandemic that resulted in a material adverse change in our financial condition. We recorded a $1.6 billion net loss attributable to stockholders and our stockholders' equity declined from $2.9 billion as of December 31, 2019 to $1.4 billion as of March 31, 2020.

Due to significant spread widening in both Agency and non-Agency securities, we received an unusually high number of margin calls from counterparties in the latter half of March 2020. We were unable to meet margin calls as of March 23, 2020 and were not in compliance with the terms of our various borrowings arrangements as of March 31, 2020 as described in Note 7 - "Borrowings". To generate liquidity and reduce leverage, we sold MBS and GSE CRTs for cash proceeds of $16.2 billion and repaid $11.2 billion of our repurchase agreements during the quarter ended March 31, 2020. Our investment portfolio decreased from $21.9 billion as of December 31, 2019 to $8.1 billion as of March 31, 2020 primarily due to these asset sales. We also terminated our entire interest rate swap portfolio as our exposure to interest rate risk decreased as we sold Agency assets.

We have continued to focus on generating liquidity and reducing leverage in the second quarter of 2020. Between April 1, 2020 and May 31, 2020, we sold additional MBS and GSE CRTs with a fair value of $6.2 billion at March 31, 2020 for cash proceeds of $5.9 billion and our loan participation interest for cash proceeds of $21.6 million. Our investment portfolio decreased from $8.1 billion as of March 31, 2020 to approximately $1.6 billion, excluding cash and Agency CMBS purchase commitments, as of May 31, 2020 primarily due to these asset sales. We repaid all of our repurchase agreements and $512.5 million of Federal Home Loan Bank of Indianapolis "FHLBI" secured loans with proceeds from these asset sales and the return of cash margin previously pledged on our repurchase agreements. As of the filing date of this Quarterly Report, the balance of our secured loans is $837.5 million~~. For further details of events between March 31, 2020 and the filing date of this Quarterly Report see Note 15 - "Subsequent Events"~~amended (the "1940 Act").

~~Table of Contents~~

While the Federal Reserve has taken a number of proactive measures to bolster liquidity in the second quarter of 2020, we expect market conditions for the mortgage REIT industry to continue to be challenging due to the uncertainty around the duration and ultimate impact of the COVID-19 pandemic. ~~The COVID-19 pandemic caused our support personnel to transition to a remote workforce beginning in March 2020 and resulted in delays in receiving information from~~ ~~our custodian and various counterparties and clearing certain sales trades. In turn, this delayed the filing of this Quarterly Report.~~ Our Manager has provided our investment team and support personnel with access to all systems necessary to fulfill their responsibilities and are in constant communication with one another and our external professional advisors.

Note 2 – Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

Certain disclosures included in our Annual Report on Form 10-K are not required to be included on an interim basis in our quarterly reports on Form 10-Q. We have condensed or omitted these disclosures. Therefore, this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, ~~2019.~~2020.

Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. ~~GAAP~~GAAP") and consolidate the financial statements of the Company and our controlled subsidiaries. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement of our financial condition and results of operations for the periods presented.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in ~~the~~our condensed consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income ~~recognition~~ on mortgage-backed and credit risk transfer securities and allowances for credit losses. Actual results may differ from those estimates.

Table of Contents

Significant Accounting Policies

There have been no changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, ~~2019 other than as discussed below.~~

~~Mortgage-Backed and Credit Risk Transfer Securities~~

~~Allowances for Credit Losses on Available-For-Sale Securities~~

~~We are not required to measure expected credit losses~~ ~~for~~ ~~situations in which historic credit loss information~~, ~~adjusted for current conditions and reasonable and supportable~~ ~~forecasts~~, results in an expectation that nonpayment of the amortized cost basis is zero. We consider our Agency portfolio to have zero loss expectation because (i) there have been no historical credit losses, (ii) full and timely payment of principal and interest is guaranteed by the GSEs and (iii) the yields, while not risk free, generally trade based on prepayment and liquidity risk as opposed to credit risk. Our available-for-sale GSE CRTs are hybrid financial instruments consisting of a debt host contract and an embedded credit derivative. The embedded credit derivative is carried at fair value with changes in fair value recorded in earnings.

~~For non-Agency RMBS and non-Agency CMBS, we use a discounted cash flow method to estimate and recognize an allowance for credit losses.~~ ~~We calculate t~~he allowance for credit losses as the difference between prepayment adjusted contractual cash flows without credit losses and expected cash flows discounted at the effective interest rate used to recognize interest income on the investment. In developing an expectation of credit losses, we use internal models that analyze the loans underlying each investment and evaluate factors including, but not limited to, delinquency status, loan-to-value ratios, borrower credit scores, occupancy status and geographic concentration. We place reliance on these internal models in determining credit quality.

~~We record an~~ ~~allowance for credit losses as a contra-asset~~ ~~on the condensed consolidated balance sheets~~ ~~and a provision for credit losses in the condensed consolidated statements of operations~~. C~~redit losses~~ ~~are accreted~~ ~~into earnings over time at the effective interest rate used to recognize interest income.~~ S~~ubsequent favorable or adverse changes in the amount of expected credit losses~~ ~~are recognized~~ ~~immediately in earnings. If the allowance for credit losses has been reduced to zero,we reflect~~ ~~the remaining favorable changes as a prospective adjustment to the effective interest rate of the investment.~~ ~~The allowance for credit losses is limited~~ to the amount by which the investment’s amortized cost exceeds fair value. When the allowance for credit losses is limited, the effective interest rate used to recognize interest income and accrete credit losses is prospectively adjusted. ~~We do not record an~~ ~~allowance for credit losses when an investment’s fair value exceeds its amortized cost.~~ R~~ecoveries of amounts previously written off relating to improvements in cash flows~~ ~~are recognized~~ in ~~earnings~~ ~~when received.~~

~~Table of Contents~~

~~We record provisions for credit losses, reductions in provisions for credit losses, accretion of credit losses, and recoveries of amounts previously written off within~~ g~~ain (loss) on investments, net in our condensed consolidated statements of operations.~~

~~When we determine that we intend to sell~~, ~~or more likely than not will be required to sell~~, ~~an available-for-sale security in an unrealized loss position~~ ~~before we recover its amortized cost~~, ~~we write off~~ ~~any allowance for credit losses and~~ ~~write down~~ ~~the investment’s amortized costto its fair value.~~ ~~We record the write off of the allowance for credit losses and write down of the available-for-sale security within~~g~~ain (loss) on investments, net in our condensed consolidated statements of operations.~~

We present accrued interest receivable separately from our investment portfolio on our condensed consolidated balance sheets. We do not estimate an allowance for credit losses on accrued interest receivable because we write off accrued interest receivable as a reduction to interest income if it is not received when due.

~~Interest Income Recognition~~

~~Mortgage-Backed Securities~~

Interest income on MBS is accrued based on the outstanding principal or notional balance of the securities and their contractual terms. Premiums or discounts are amortized or accreted into interest income over the life of the investment using the effective interest method.

Interest income on our MBS where we may not recover substantially all of our initial investment is based on estimated future cash flows. We estimate future expected cash flows at the time of purchase and determine the effective interest rate based on these estimated cash flows and our purchase price. Over the life of the investments, we update these estimated future cash flows and compute a revised yield based on the current amortized cost of the investment. In situations where an allowance for credit losses is limited by the fair value of the investment, we compute the yield as the rate that equates expected future cash flows to the current fair value of the investment. In estimating these future cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including but not limited to the rate and timing of principal payments (prepayments, repurchases, defaults and liquidations), the pass through or coupon rate, and interest rate fluctuations. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our estimate and our interest income. Changes in our original or most recent cash flow projections may result in a prospective change in interest income recognized on these securities, or the amortized cost of these securities. For non-Agency RMBS not of high credit quality, when actual cash flows vary from expected cash flows, the difference is recorded as an adjustment to the amortized cost of the security, ~~unless those changes relate to credit losses that will be reflected in an allowance for credit losses,~~ ~~and the security's yield is revised prospectively.~~

For Agency RMBS and Agency CMBS that cannot be prepaid in such a way that we would not recover substantially all of our initial investment, interest income recognition is based on contractual cash flows. We do not estimate prepayments in applying the effective interest method.

~~Fair Value Measurements~~

As of January 1, 2020, we report our commercial loan at fair value as determined by an independent pricing service. The pricing service values the loan using a discounted cash flow analysis. The yield used in the discounted cash flow analysis is determined by comparing the features of the loan to the interest rates and terms required by lenders in the new loan origination market for similar loans and the yield required by investors acquiring mezzanine loans in the secondary market and a comparison of current market and collateral conditions to those present at origination. We discontinued reporting our commercial loan at amortized cost because we elected the fair value option for this loan in connection with our adoption of the new guidance for reporting credit losses discussed below.

~~Accounting Pronouncements Recently Adopted~~

On January 1, 2020, we adopted the accounting guidance that changes how entities report credit losses for assets measured at amortized cost and available-for-sale securities. The new guidance significantly changes how entities measure credit losses for most financial assets, including loans, that are not measured at fair value through net income. The guidance replaces the existing “incurred loss” model with an “expected loss” model for instruments measured at amortized cost and requires entities to record credit allowances for available-for-sale debt securities rather than reduce the carrying amount, as they previously did under the other-than-temporary impairment model. The new guidance also simplifies the accounting model for purchased credit-impaired debt securities and loans and requires that entities record an adjustment to retained earnings on January 1, 2020 for the cumulative effect of adopting the new guidance. We were not required to record a cumulative effect adjustment to retained earnings because all of our purchased credit-impaired securities were in an unrealized gain position as of the implementation date.

The new guidance specifically excludes available-for-sale securities measured at fair value through net income. We elected the fair value option for all MBS purchased on or after September 1, 2016 and GSE CRTs purchased on or after August 24, 2015. Accordingly, the impact of the new guidance on accounting for our debt securities is limited to those securities we purchased prior to election of the fair value option and held on January 1, 2020. For further information on the composition of

~~Table of Contents~~

our investment portfolio see Note 4 - "Mortgage Backed and Credit Risk Transfer Securities". During the three months ended March 31, 2020, we recorded $78.8 million of impairment on non-Agency securities that we intend to sell or more likely than not will be required to sell before we recover the amortized cost basis of the security. We recorded the impairment within gain (loss) on investments, net in our condensed consolidated statements of operations. ~~As of March 31, 2020, we have not recorded a credit loss allowance on any of our securities.~~

We had one commercial loan as of December 31, 2019 that was measured at amortized cost. We implemented the new guidance for this loan by electing the fair value option and recording a cumulative effect adjustment to increase retained earnings by $342,000 on January 1, 2020. We recognized $1.7 million of unrealized losses on our commercial loan in our condensed consolidated statement of operations during the three months ended March 31, 2020.

Accounting Pronouncements Recently Issued

In ~~March 2020, new~~January 2021, the Financial Accounting Standards Board expanded existing accounting guidance ~~was issued~~ for evaluating the effects of reference rate reform on financial reporting. The new guidance ~~provides~~expands the temporary optional expedients and exceptions to U.S. GAAP for contract modifications, hedge accounting and other relationships that reference London Interbank Overnight Financing Rate ~~(LIBOR)~~("LIBOR") to apply to all derivative instruments affected by the market-wide change in the interest rates used for discounting, margining or ~~another reference rate that is expected~~contract price alignment (commonly referred to ~~be discontinued due to reference rate reform.~~as the discounting transition). The guidance can be applied as of January 1, 2020. We will evaluate our contracts that are eligible for modification relief and may ~~be adopted on or after March 12, 2020 and is only effective for~~apply the ~~period from March 12, 2020 through December 31, 2022.~~elections prospectively as needed. We ~~have not yet adopted this guidance and~~ are currently evaluating what impact the guidance will have on our consolidated financial statements.

Note 3 – Variable Interest Entities ("VIEs")

Our maximum risk of loss in VIEs in which we are not the primary beneficiary at March 31, ~~2020~~2021 is presented in the table below.


$ in thousands	$ in thousands	Carrying Amount	Company's Maximum Risk of Loss	$ in thousands	Carrying Amount	Company's Maximum Risk of Loss
Non-Agency CMBS	Non-Agency CMBS	2,869,051	2,869,051	Non-Agency CMBS	91,250	91,250
Non-Agency RMBS	Non-Agency RMBS	568,081	568,081	Non-Agency RMBS	10,574	10,574
Investments in unconsolidated ventures	Investments in unconsolidated ventures	21,088	21,088	Investments in unconsolidated ventures	15,766	15,766
Total	Total	3,458,220	3,458,220	Total	117,590	117,590

Refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities" and Note 5 - "Other Assets" for additional details regarding these investments.

Table of Contents

Note 4 – Mortgage-Backed and Credit Risk Transfer Securities

~~As discussed in Note 1 - "Organization and Business Operations",~~During the first half of 2020, we ~~sold MBS and GSE CRTs for cash proceeds of $16.2 billion during the three months ended March 31, 2020 to generate liquidity and reduce leverage given~~experienced unprecedented market conditions as a result of the ~~global COVID-19 pandemic. Between April 1, 2020~~COVID-19 pandemic and ~~May 31, 2020, we~~ sold ~~additional~~a substantial portion of our MBS and GSE ~~CRTs with a fair value of $6.2 billion as of~~ ~~March 31, 2020 as discussed~~CRT portfolio to generate liquidity and reduce leverage. We resumed investing in ~~Note 15 - "Subsequent Events".~~Agency RMBS in July 2020.

The following tables summarize our MBS ~~and GSE CRT~~ portfolio by asset type as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.


March 31, 2020
March 31, 2021									March 31, 2021
$ in thousands	$ in thousands	Principal/ Notional Balance	Unamortized Premium (Discount)	Amortized Cost	Unrealized Gain/ (Loss), net	Fair Value	Period- end Weighted Average Yield ⁽¹⁾		$ in thousands	Principal/ Notional Balance	Unamortized Premium (Discount)	Amortized Cost	Allowance for Credit Losses	Unrealized Gain/ (Loss), net	Fair Value	Period- end Weighted Average Yield (1)
Agency RMBS:	Agency RMBS:								Agency RMBS:
15 year fixed-rate		67,123	767	67,890	3,276	71,166	3.29	%

30 year fixed-rate	30 year fixed-rate	1,318,576	45,032	1,363,608	57,554	1,421,162	3.39	%	30 year fixed-rate	8,832,549	352,768	9,185,317	0	(187,399)	8,997,918	1.88	%
Hybrid ARM^*		2,557	—	2,557	115	2,672	3.28	%

Total Agency RMBS pass-through	Total Agency RMBS pass-through	1,388,256	45,799	1,434,055	60,945	1,495,000	3.39	%	Total Agency RMBS pass-through	8,832,549	352,768	9,185,317	0	(187,399)	8,997,918	1.88	%
Agency-CMO ⁽²⁾	Agency-CMO ⁽²⁾	532,411	(247,963)	284,448	16,087	300,535	3.29	%	Agency-CMO (2)	18,536	(18,536)	0	0	0	0	0	%
Agency CMBS⁽³⁾		2,070,199	32,398	2,102,597	175,430	2,278,027	2.90	%

Non-Agency CMBS ⁽⁴⁾	Non-Agency CMBS ⁽⁴⁾	3,889,234	(795,998)	3,093,236	(224,185)	2,869,051	6.13	%	Non-Agency CMBS ⁽⁴⁾	91,427	(4,914)	86,513	(830)	5,567	91,250	8.60	%
Non-Agency RMBS ⁽⁷⁾⁽⁵⁾	Non-Agency RMBS ⁽⁷⁾⁽⁵⁾	1,892,459	(1,340,469)	551,990	16,091	568,081	7.06	%	Non-Agency RMBS ⁽⁷⁾⁽⁵⁾	637,509	(627,312)	10,197	0	377	10,574	6.21	%
GSE CRT ⁽⁸⁾		682,183	13,360	695,543	(161,429)	534,114	3.25	%

Total	Total	10,454,742	(2,292,873)	8,161,869	(117,061)	8,044,808	4.53	%	Total	9,580,021	(297,994)	9,282,027	(830)	(181,455)	9,099,742	1.95	%

* Adjustable-rate mortgage ("ARM")

(1)Period-end weighted average yield is based on amortized cost as of March 31, ~~2020~~2021 and incorporates future prepayment and loss assumptions.

(2)Agency collateralized mortgage obligation ("Agency-CMO") ~~includes~~are interest-only securities ("Agency IO")~~, which represent 49.5% of principal/notional balance, 4.9% of amortized cost and 4.9% of fair value.~~.

(3)~~Includes Agency CMBS purchase commitments with~~Non-Agency RMBS is 65.3% fixed rate, 33.7% variable rate, and 1.0% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying Hybrid adjustable-rate mortgage ("ARM") loan coupons, while coupon payments on floating rate investments are based upon a ~~fair value of approximately $507.2 million.~~spread to a reference index.

(4)~~Non-Agency CMBS includes interest-only securities which represent 14.9%~~Of the total discount in non-Agency RMBS, $2.1 million is non-accretable (calculated using the principal/notional balance) based on estimated future cash flows of ~~principal/notional balance, 0.3% of amortized cost and 0.4% of fair value.~~the securities.

(5)Non-Agency RMBS includes interest-only securities ("non-Agency IO") which represent 98.5% of principal/notional balance, 48.3% of amortized cost and 37.7% of fair value.

Table of Contents


December 31, 2020
$ in thousands	Principal/Notional Balance	Unamortized Premium (Discount)	Amortized Cost	Allowance for Credit Losses	Unrealized Gain/ (Loss), net	Fair Value	Period- end Weighted Average Yield (1)
Agency RMBS:

30 year fixed-rate	7,635,107	391,644	8,026,751	0	24,115	8,050,866	1.86	%

Total Agency RMBS pass-through	7,635,107	391,644	8,026,751	0	24,115	8,050,866	1.86	%
Agency-CMO (2)	19,634	(19,634)	—	0	—	—	—	%

Non-Agency CMBS	112,549	(5,791)	106,758	(1,768)	4,593	109,583	9.40	%
Non-Agency RMBS (3)(4)(5)	790,627	(779,660)	10,967	0	766	11,733	7.83	%

Total	8,557,917	(413,441)	8,144,476	(1,768)	29,474	8,172,182	1.97	%

(1)Period-end weighted average yield is ~~61.9%~~based on amortized cost as of December 31, 2020 and incorporates future prepayment and loss assumptions.

(2)All Agency-CMO are Agency IO.

(3)Non-Agency RMBS is 67.3% fixed rate, ~~34.8%~~31.8% variable rate and ~~3.3%~~0.9% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying Hybrid ARM loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index.

~~(6)~~(4)Of the total discount in non-Agency RMBS, ~~$72.6~~$2.1 million is non-accretable ~~(calculated~~calculated using the principal/notional ~~balance)~~balance based on estimated future cash flows of the securities.

~~(7)~~(5)Non-Agency RMBS includes ~~interest-only securities ("~~non-Agency ~~IO")~~IO which represent ~~65.6%~~98.8% of principal/notional balance, ~~2.7%~~49.3% of amortized cost and ~~1.0%~~41.5% of fair value.

~~(8)~~GSE CRT weighted average yield excludes coupon interest associated with embedded derivatives not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net.

~~Table of Contents~~

December 31, 2019
$ in thousands Principal/Notional
Balance Unamortized
Premium
(Discount) Amortized
Cost Unrealized
Gain/
(Loss), net Fair
Value
Period-
end
Weighted
Average
Yield ⁽¹⁾
Agency RMBS:
15 year fixed-rate 280,426 1,666 282,092 10,322 292,414 3.34 %
30 year fixed-rate 9,911,339 308,427 10,219,766 304,454 10,524,220 3.62 %
Hybrid ARM 55,024 602 55,626 1,267 56,893 3.46 %
Total Agency RMBS pass-through 10,246,789 310,695 10,557,484 316,043 10,873,527 3.61 %
Agency-CMO ⁽²⁾
883,122 (467,840) 415,282 12,230 427,512 3.54 %
Agency CMBS ⁽³⁾
4,561,276 75,299 4,636,575 131,355 4,767,930 3.01 %
Non-Agency CMBS ⁽⁴⁾
4,464,525 (772,295) 3,692,230 131,244 3,823,474 5.16 %
Non-Agency RMBS ^(5)(6)(7)
2,340,119 (1,487,603) 852,516 103,155 955,671 6.98 %
GSE CRT ⁽⁸⁾
858,244 19,945 878,189 45,483 923,672 2.78 %
Total 23,354,075 (2,321,799) 21,032,276 739,510 21,771,786 3.85 %

~~(1)Period-end weighted average yield is based on amortized cost as of December 31, 2019 and incorporates future prepayment and loss assumptions.~~

~~(2)Agency collateralized mortgage obligation ("Agency-CMO") includes interest-only securities ("Agency IO"), which represent 56.3%~~ o~~f principal (notional) balance, 6.4%of amortized cost and 6.4% of fair value.~~

~~(3)Includes Agency CMBS purchase commitments with a fair value of approximately $96.2 million .~~

~~(4)Non-Agency CMBS includes interest-only securities which represent 13.1% of principal/notional balance, 0.3% of amortized cost and 0.3% of fair value.~~

~~(5)~~Non-Agency RMBS is 37.0% variable rate, 57.7% fixed rate, and 5.3% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying Hybrid ARM loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index.

~~(6)Of the total discount in non-Agency RMBS, $120.2 million is non-accretable (calculated using the principal/notional balance) based on estimated future cash flows of the securities.~~

~~(7)Non-Agency RMBS includes interest-only securities, which represent 56.2% of principal/notional balance, 1.9% of amortized cost and 1.3% of fair value.~~

The following table presents the fair value of our available-for-sale securities and securities accounted for under the fair value option by asset type as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. We have elected the fair value option for all of our RMBS interest-only securities and our MBS purchased on or after September 1, ~~2016 and our GSE CRTs purchased on or after August 24, 2015.~~2016. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, approximately ~~65% and 80%, respectively,~~99% of our MBS ~~and GSE CRTs~~ are accounted for under the fair value option.


		March 31, 2020					December 31, 2019						March 31, 2021		December 31, 2020
$ in thousands	$ in thousands	Available-for-sale Securities	Securities under Fair Value Option	Total Fair Value	Available-for-sale Securities	Securities under Fair Value Option	Total Fair Value	$ in thousands	Available-for-sale Securities	Securities under Fair Value Option	Total Fair Value	Available-for-sale Securities	Securities under Fair Value Option	Total Fair Value
Agency RMBS:	Agency RMBS:							Agency RMBS:
15 year fixed-rate		23,652	47,514	71,166	98,666	193,748	292,414

30 year fixed-rate	30 year fixed-rate	237,581	1,183,581	1,421,162	754,590	9,769,630	10,524,220	30 year fixed-rate	0	8,997,918	8,997,918	0	8,050,866	8,050,866
Hybrid ARM		2,672	—	2,672	31,522	25,371	56,893

Total RMBS Agency pass-through	Total RMBS Agency pass-through	263,905	1,231,095	1,495,000	884,778	9,988,749	10,873,527	Total RMBS Agency pass-through	0	8,997,918	8,997,918	0	8,050,866	8,050,866
Agency-CMO		144,405	156,130	300,535	146,733	280,779	427,512
Agency CMBS		—	2,278,027	2,278,027	—	4,767,930	4,767,930

Non-Agency CMBS	Non-Agency CMBS	1,765,868	1,103,183	2,869,051	2,150,991	1,672,483	3,823,474	Non-Agency CMBS	91,250	0	91,250	109,583	0	109,583
Non-Agency RMBS	Non-Agency RMBS	368,663	199,418	568,081	715,479	240,192	955,671	Non-Agency RMBS	6,943	3,631	10,574	7,267	4,466	11,733
GSE CRT		238,654	295,460	534,114	507,445	416,227	923,672

Total	Total	2,781,495	5,263,313	8,044,808	4,405,426	17,366,360	21,771,786	Total	98,193	9,001,549	9,099,742	116,850	8,055,332	8,172,182

The components of the carrying value of our MBS portfolio at March 31, 2021 and December 31, 2020 are presented below. Accrued interest receivable on our MBS portfolio, which is recorded within investment related receivable on our condensed consolidated balance sheets, was $17.5 million atMarch 31, 2021 (December 31, 2020: $15.4 million).


	March 31, 2021
$ in thousands	MBS	Interest-Only Securities	Total
Principal/notional balance	8,933,501	646,520	9,580,021
Unamortized premium	354,451	0	354,451
Unamortized discount	(10,852)	(641,593)	(652,445)
Allowance for credit losses	(830)	0	(830)
Gross unrealized gains (1)	8,297	102	8,399
Gross unrealized losses (1)	(188,816)	(1,038)	(189,854)
Fair value	9,095,751	3,991	9,099,742

119

Table of Contents

~~The components of the carrying value of our MBS and GSE CRT portfolio at March 31, 2020 and December 31, 2019 are presented below.~~

March 31, 2020
$ in thousands MBS and GSE CRT Securities Interest-Only Securities Total
Principal/notional balance 8,369,799 2,084,943 10,454,742
Unamortized premium 108,948 — 108,948
Unamortized discount (356,152) (2,045,669) (2,401,821)
Gross unrealized gains ⁽¹⁾
291,151 3,144 294,295
Gross unrealized losses ⁽¹⁾
(401,179) (10,177) (411,356)
Fair value 8,012,567 32,241 8,044,808


		December 31, 2019						December 31, 2020
$ in thousands	$ in thousands	MBS and GSE CRT Securities	Interest-Only Securities	Total	$ in thousands	MBS	Interest-Only Securities	Total
Principal/notional balance	Principal/notional balance	20,957,410	2,396,665	23,354,075	Principal/notional balance	7,757,491	800,426	8,557,917
Unamortized premium	Unamortized premium	440,503	—	440,503	Unamortized premium	391,644	0	391,644
Unamortized discount	Unamortized discount	(419,983)	(2,342,319)	(2,762,302)	Unamortized discount	(10,067)	(795,018)	(805,085)
Allowance for credit losses					Allowance for credit losses	(1,768)	0	(1,768)
Gross unrealized gains ⁽¹⁾	Gross unrealized gains ⁽¹⁾	807,324	4,782	812,106	Gross unrealized gains (1)	34,539	103	34,642
Gross unrealized losses ⁽¹⁾	Gross unrealized losses ⁽¹⁾	(66,064)	(6,532)	(72,596)	Gross unrealized losses (1)	(4,527)	(641)	(5,168)
Fair value	Fair value	21,719,190	52,596	21,771,786	Fair value	8,167,312	4,870	8,172,182

(1)Gross unrealized gains and losses includes gains (losses) recognized in net income for securities accounted for as derivatives or under the fair value option as well as gains (losses) for available-for-sale securities which are recognized as adjustments to other comprehensive income. Realization occurs upon sale or settlement of such securities. Further detail on the components of our total gains (losses) on investments, net for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 is provided below ~~within~~in this Note 4.

The following table summarizes our MBS ~~and GSE CRT~~ portfolio according to estimated weighted average life classifications as of March 31, ~~2020~~2021 and December 31, ~~2019~~2020.


$ in thousands	$ in thousands	March 31, 2020	December 31, 2019	$ in thousands	March 31, 2021	December 31, 2020
Less than one year	Less than one year	320,834	268,536	Less than one year	29,223	22,112
Greater than one year and less than five years	Greater than one year and less than five years	3,638,676	7,836,620	Greater than one year and less than five years	149,120	5,303,917
Greater than or equal to five years	Greater than or equal to five years	4,085,298	13,666,630	Greater than or equal to five years	8,921,399	2,846,153
Total	Total	8,044,808	21,771,786	Total	9,099,742	8,172,182

~~Table of Contents~~

The following tables present the estimated fair value and gross unrealized losses of our MBS ~~and GSE CRTs~~ by length of time that such securities have been in a continuous unrealized loss position at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

March 31, ~~2020~~2021

Less than 12 Months 12 Months or More
Total ⁽¹⁾
$ in thousands Fair
Value Unrealized
Losses Number
of
Securities Fair
Value Unrealized
Losses Number
of
Securities Fair
Value Unrealized
Losses Number
of
Securities
Agency-CMO 3,278 (668) 11 2,201 (442) 7 5,479 (1,110) 18
Agency CMBS 194,960 (3,054) 7 — — — 194,960 (3,054) 7
Non-Agency CMBS 1,107,247 (234,156) 115 — — — 1,107,247 (234,156) 115
GSE CRT 534,114 (161,429) 44 — — — 534,114 (161,429) 44
Non-Agency RMBS 77,300 (11,590) 27 297 (17) 3 77,597 (11,607) 30
Total 1,916,899 (410,897) 204 2,498 (459) 10 1,919,397 (411,356) 214


	Less than 12 Months			12 Months or More			Total
$ in thousands	Fair Value	Unrealized Losses	Number of Securities	Fair Value	Unrealized Losses	Number of Securities	Fair Value	Unrealized Losses	Number of Securities
Agency RMBS:

30 year fixed-rate	8,592,854	(188,816)	93	0	0	0	8,592,854	(188,816)	93

Total Agency RMBS pass-through (1)	8,592,854	(188,816)	93	0	0	0	8,592,854	(188,816)	93




Non-Agency RMBS (2)	3,487	(1,014)	10	17	(24)	4	3,504	(1,038)	14
Total	8,596,341	(189,830)	103	17	(24)	4	8,596,358	(189,854)	107

(1)Fair value option has been elected for all Agency RMBS in an unrealized loss position.

(2)Fair value option has been elected for all non-Agency RMBS in an unrealized loss position.

Table of Contents

December 31, 2020


	Less than 12 Months			12 Months or More			Total
$ in thousands	Fair Value	Unrealized Losses	Number of Securities	Fair Value	Unrealized Losses	Number of Securities	Fair Value	Unrealized Losses	Number of Securities
Agency RMBS:

30 year fixed-rate	1,496,279	(4,108)	20	0	0	0	1,496,279	(4,108)	20

Total Agency RMBS pass-through (1)	1,496,279	(4,108)	20	0	0	0	1,496,279	(4,108)	20


Non-Agency CMBS (2)	27,069	(419)	1	0	0	0	27,069	(419)	1
Non-Agency RMBS (3)	2,681	(438)	6	1,612	(203)	7	4,293	(641)	13

Total	1,526,029	(4,965)	27	1,612	(203)	7	1,527,641	(5,168)	34

(1)Fair value option has been elected for all Agency RMBS in an unrealized loss position.

(2)Unrealized losses ~~relate~~on non-Agency CMBS are included in accumulated other comprehensive income. These losses are not reflected in an allowance for credit losses based on a comparison of discounted expected cash flows to ~~securities or embedded derivatives that are recorded at fair~~current amortized cost basis.

(3)Fair value ~~through earnings. There were 0 unrealize~~option has been elected for all non-Agency RMBS in an unrealized loss position.~~d losses on available-for-sale securities as~~

As of March 31, 2021 and December 31, 2020, ~~as those~~we have recorded an allowance for credit losses ~~were~~of $830,000 and $1.8 million, respectively, on a single non-Agency CMBS on our condensed consolidated balance sheets. We recorded asa $938,000 decrease in the provision for credit losses on our consolidated statement of operations during the three months ended March 31, 2021. We did not record any provisions for credit losses during the three months ended March 31, 2020. During the three months ended March 31, 2020, we recorded impairments of ~~the securities' amortized cost basis~~$78.8 million on our condensed consolidated statement of operations because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis.

~~December 31, 2019~~

Less than 12 Months 12 Months or More Total
$ in thousands Fair
Value Unrealized
Losses Number
of
Securities Fair
Value Unrealized
Losses Number
of
Securities Fair
Value Unrealized
Losses Number
of
Securities
Agency RMBS:
15 year fixed-rate 957 (1) 2 362 (3) 4 1,319 (4) 6
30 year fixed-rate 255,649 (207) 3 34,009 (256) 5 289,658 (463) 8
Hybrid ARM 434 (2) 1 1,524 (46) 3 1,958 (48) 4
Total Agency RMBS pass-through ⁽¹⁾
257,040 (210) 6 35,895 (305) 12 292,935 (515) 18
Agency-CMO ⁽²⁾
67,875 (1,194) 15 6,155 (1,513) 13 74,030 (2,707) 28
Agency CMBS ⁽³⁾
1,743,800 (50,521) 58 — — — 1,743,800 (50,521) 58
Non-Agency CMBS ⁽⁴⁾
203,129 (2,783) 19 101,021 (11,425) 7 304,150 (14,208) 26
Non-Agency RMBS ⁽⁵⁾
26,283 (3,935) 14 12,199 (636) 2 38,482 (4,571) 16
GSE CRT⁽⁶⁾
77,044 (74) 4 — — — 77,044 (74) 4
Total 2,375,171 (58,717) 116 155,270 (13,879) 34 2,530,441 (72,596) 150

~~(1)Includes Agency RMBS with~~ The following table presents a ~~fair value~~roll-forward of ~~$271.3 million for which the fair value option has been elected. These securities have unrealized losses of $268,000.~~

~~(2)Includes Agency IO with fair value of $11.1 million for which the fair value option has been elected. These Agency IO have unrealized losses of $2.3 million.~~

~~(3)Fair value option has been elected for all Agency CMBS that are in an unrealized loss position.~~

~~(4)Includes non-Agency CMBS with a fair value of $181.5 million for which the fair value option has been elected. These securities have unrealized losses of $2.8 million.~~

~~(5)~~Includes non-Agency RMBS and non-Agency IO with a fair value of $17.6 million and $8.5 million, respectively, for which the fair value option has been elected. These securities have unrealized losses of $261,000 and $3.7 million, respectively.

~~(6)Fair value option has been elected for all GSE CRT that are in an unrealized loss position.~~

~~On January 1, 2020, we adopted accounting guidance that requires us to estimate an~~our allowance for credit losses on available-for-sale securities in unrealized loss positions. As of March 31, 2020, there was no allowance for credit losses recorded because we did not hold any available-for-sale securities that were in unrealized loss positions. We did not record any provisions for credit losses on our condensed consolidated statement of operations during the three months ended March 31, 2020. We recorded impairments of $78.8 million on our condensed consolidated statement of operations during the three months ended March 31, 2020 because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis. We still held these securities as of March 31, 2020.

~~Table of Contents~~

~~Prior to January 1, 2020, we assessed our investment securities for other-than-temporary impairment~~ ("OTTI") on a quarterly basis. When the fair value of an investment was less than its amortized cost at the balance sheet date of the reporting period for which impairment was assessed, the impairment was designated as either "temporary" or "other-than-temporary." This analysis included a determination of estimated future cash flows through an evaluation of the characteristics of the underlying loans and the structural features of the investment. Underlying loan characteristics reviewed included, but were not limited to, delinquency status, loan-to-value ratios, borrower credit scores, occupancy status and geographic concentration.

~~The following table summarizes OTTI included in earnings for the three months ended March 2019:~~losses.

Three Months Ended March 31,

$ in thousands

2021

~~2019~~Beginning allowance for credit losses

~~RMBS interest-only securities~~(1,768)

~~1,463~~

~~Non-Agency RMBS~~ ⁽¹⁾

~~313~~

Additional increases or decreases to the allowance for credit losses on securities that had an allowance recorded in a previous period

938

~~Total~~Ending allowance for credit losses

~~1,776~~ (830)

~~(1)~~
~~Amounts disclosed relate to credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.~~

OTTI on RMBS interest-only securities was recorded as a reclassification from an unrealized to realized loss within gain (loss) on investments, net on the condensed consolidated statements of operations because we account for these securities under the fair value option.

The following table summarizes the components of our total gain (loss) on investments, net for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.


		Three Months Ended March 31,				Three Months Ended March 31,
$ in thousands	$ in thousands	2020	2019	$ in thousands	2021	2020
Gross realized gains on sale of investments	Gross realized gains on sale of investments	328,128	1,202	Gross realized gains on sale of investments	201	328,128
Gross realized losses on sale of investments	Gross realized losses on sale of investments	(332,413)	(12,317)	Gross realized losses on sale of investments	(117,048)	(332,413)
Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis		(78,834)	—
Other-than-temporary impairment losses		—	(1,776)
Net unrealized gains and losses on MBS accounted for under the fair value option		(514,503)	280,039
Net unrealized gains and losses on GSE CRT accounted for under the fair value option		(152,369)	1,234
Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis and other impairments				Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis and other impairments	0	(78,834)

Net unrealized gains and losses on MBS and GSE CRT accounted for under the fair value option				Net unrealized gains and losses on MBS and GSE CRT accounted for under the fair value option	(211,912)	(666,872)
Net unrealized gains and losses on commercial loan and loan participation interest	Net unrealized gains and losses on commercial loan and loan participation interest	(5,492)	—	Net unrealized gains and losses on commercial loan and loan participation interest	(3,098)	(5,492)

Total gain (loss) on investments, net	Total gain (loss) on investments, net	(755,483)	268,382	Total gain (loss) on investments, net	(331,857)	(755,483)

The following tables present components of interest income recognized on our MBS and GSE CRT portfolio for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020. GSE CRT interest income excludes coupon interest associated with embedded derivatives of $4.7 million for the three months ended March 31, 2020 ~~(2019: $5.4 million)~~ that iswas recorded as realized and unrealized credit derivative income (loss), net.

~~For the three months ended March 31, 2020~~

$ in thousands Coupon
Interest Net (Premium
Amortization)/Discount
Accretion Interest
Income
Agency RMBS 105,878 (20,913) 84,965
Agency CMBS 33,995 (1,666) 32,329
Non-Agency CMBS 42,218 5,058 47,276
Non-Agency RMBS 10,760 2,698 13,458
GSE CRT 8,507 (1,750) 6,757
Other 751 — 751
Total 202,109 (16,573) 185,536

1411

Table of Contents

For the three months ended March 31, ~~2019~~2021


$ in thousands	$ in thousands	Coupon Interest	Net (Premium Amortization)/Discount Accretion	Interest Income	$ in thousands	Coupon Interest	Net (Premium Amortization)/Discount Accretion	Interest Income
Agency RMBS	Agency RMBS	119,726	(12,194)	107,532	Agency RMBS	49,555	(12,484)	37,071
Agency CMBS		10,471	(531)	9,940

Non-Agency CMBS	Non-Agency CMBS	38,830	3,031	41,861	Non-Agency CMBS	1,305	878	2,183
Non-Agency RMBS	Non-Agency RMBS	14,267	3,922	18,189	Non-Agency RMBS	624	(450)	174
GSE CRT		8,596	(1,178)	7,418

Other	Other	552	—	552	Other	6	0	6
Total	Total	192,442	(6,950)	185,492	Total	51,490	(12,056)	39,434

For the three months ended March 31, 2020


$ in thousands	Coupon Interest	Net (Premium Amortization)/Discount Accretion	Interest Income
Agency RMBS	105,878	(20,913)	84,965
Agency CMBS	33,995	(1,666)	32,329
Non-Agency CMBS	42,218	5,058	47,276
Non-Agency RMBS	10,760	2,698	13,458
GSE CRT	8,507	(1,750)	6,757
Other	751	0	751
Total	202,109	(16,573)	185,536

Note 5 – Other Assets

The following table summarizes our other assets as of March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:


$ in thousands	$ in thousands	March 31, 2020	December 31, 2019	$ in thousands	March 31, 2021	December 31, 2020
FHLBI stock		74,250	74,250
Loan participation interest		21,577	44,654

Commercial loan, held-for-investment	Commercial loan, held-for-investment	22,577	24,055	Commercial loan, held-for-investment	20,000	23,098
Investments in unconsolidated ventures	Investments in unconsolidated ventures	21,088	21,998	Investments in unconsolidated ventures	15,766	16,408
Prepaid expenses and other assets	Prepaid expenses and other assets	1,501	1,223	Prepaid expenses and other assets	1,124	1,657
Total	Total	140,993	166,180	Total	36,890	41,163

~~IAS Services LLC,~~In March 2021, we agreed to extend the contractual maturity of our ~~wholly-owned subsidiary, is required~~commercial loan investment from February 2021 to ~~purchase~~February 2022 at the request of the borrower. The borrower continues to make current interest payments on the loan and ~~hold Federal Home Loan Bank~~posted additional cash reserves in connection with the loan modification. The loan had a principal balance of ~~Indianapolis ("FHLBI") stock as a condition of membership in the FHLBI. The stock is recorded at cost.~~

~~We have a participation interest in a secured loan collateralized by mortgage servicing rights that bears interest at a floating rate based on LIBOR plus a spread.The weighted average asset yield for the participation interest was 6.32%~~$23.9 million as of March 31, ~~2020~~2021 and ~~5.82% as of~~ December 31, ~~2019. We recorded an unrealized loss of $3.8 million on the participation interest in the three months ended March 31,~~ 2020 and ~~0 unrealized gain or loss in the three months ended March 31, 2019~~. ~~We sold our participation interest for $21.6 million on April 1, 2020.~~

~~We have an investment in a commercial loan that matures in February 2021. The loan had~~ a weighted average coupon rate of ~~10.08%~~8.62% as of March 31, ~~2020~~2021 and ~~10.19%~~8.65% as of December 31, ~~2019. As discussed in Note 2- "Summary of Significant Accounting Policies", we elected~~2020. We account for this investment using the fair value option for this loan on January 1, 2020 and recorded a cumulative effect adjustment to increase retained earnings by $342,000 on January 1, 2020. We recorded an unrealized loss on this loan of $1.7 million in the three months ended March 31, 2020 based on a discounted cash flow valuation prepared by an independent pricing service. We previously reported this loan at amortized cost on our condensed consolidated balance sheet.option.

We have invested in unconsolidated ventures that are managed by an affiliate of our Manager. The unconsolidated ventures invest in our target assets. Refer to Note 14 - "Commitments and Contingencies" for additional details regarding our commitments to these unconsolidated ventures.

1512

Table of Contents

Note 6 – Borrowings

We ~~finance~~have historically financed the majority of our investment portfolio through repurchase agreements and secured loans. We fully repaid our secured loans during the year ended December 31, 2020. The following tables summarize certain characteristics of our borrowings at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. Refer to Note 7 - "Collateral Positions" for collateral pledged and held under our repurchase ~~agreements and secured loans.~~agreements.

$ in thousands March 31, 2020
Weighted
Weighted Average
Average Remaining
Amount Interest Maturity
Outstanding Rate (days)
Repurchase Agreements:
Agency RMBS 1,571,471 1.40 % 13
Agency CMBS 1,622,054 1.37 % 18
Non-Agency CMBS 1,833,234 2.16 % 8
Non-Agency RMBS 549,868 2.22 % 7
GSE CRT 692,081 2.15 % 11
Loan participation interest 19,038 2.50 % 149
Total Repurchase Agreements 6,287,746 1.77 % 13
Secured Loans 1,350,000 1.29 % 1839
Total Borrowings 7,637,746 1.69 % 335

$ in thousands

March 31, 2021

Weighted

Average

Remaining

Amount

Interest

Maturity

Outstanding

Rate

(days)

Repurchase Agreements - Agency RMBS

8,240,887

0.15

Total Borrowings

8,240,887

0.15

$ in thousands December 31, 2019
Weighted
Weighted Average
Average Remaining
Amount Interest Maturity
Outstanding Rate (days)
Repurchase Agreements:
Agency RMBS 9,666,964 1.95 % 46
Agency CMBS 4,246,359 1.95 % 43
Non-Agency CMBS 2,041,968 2.71 % 14
Non-Agency RMBS 790,412 2.65 % 16
GSE CRT 753,110 2.70 % 13
Loan participation interest 33,490 3.22 % 240
Total Repurchase Agreements 17,532,303 2.11 % 39
Secured Loans 1,650,000 1.93 % 1587
Total Borrowings 19,182,303 2.09 % 172

$ in thousands

December 31, 2020

Weighted

Average

Remaining

Amount

Interest

Maturity

Outstanding

Rate

(days)

Repurchase Agreements - Agency RMBS

7,228,699

0.21

Total Borrowings

7,228,699

0.21

~~Table of Contents~~

~~The following table shows the aggregate amount of maturities of our outstanding borrowings:~~


~~$ in thousands~~			~~As of~~
~~Borrowings maturing within:~~			~~March 31, 2020~~
~~4/1/2020 - 3/31/2021~~ ⁽¹⁾			~~6,387,746~~
~~4/1/2021 - 3/31/2022~~			—
~~4/1/2022 - 3/31/2023~~			—
~~4/1/2023 - 3/31/2024~~			—
~~4/1/2024 - 3/31/2025~~			—
~~Thereafter~~ ⁽¹⁾			~~1,250,000~~
~~Total~~			~~7,637,746~~

~~(1)~~As discussed in Note 15 - "Subsequent Events", in April 2020 FHLBI accelerated the repayment date of our $1.35 billion of secured loans that were outstanding because we were not in compliance with all of the financial covenants of our secured loan agreements at March 31, 2020. We repaid $512.5 million of our secured loans between April 1, 2020 and May 31, 2020. The remaining balance of our secured loans of $837.5 million is due by December 2020.

Repurchase Agreements

~~As discussed in Note 1 - “Organization and Business Operations”,~~In the first half of 2020, we experienced unprecedented market conditions as a result of the COVID-19 pandemic. We received an unusually high number of margin calls from our repurchase agreement counterparties during March 2020 following significant spread widening in both Agency and non-Agency securities. WeAs a result, we were unable to meet margin calls ~~as of March 23, 2020~~ and were not in compliance with all of the financial covenants of our repurchase agreements as of March 31, 2020. ~~Certain~~While certain of our repurchase agreement counterparties ~~entered into forbearance discussions with us during the period between March 23, 2020 and March 31, 2020 and~~ permitted our repurchase agreements to remain outstanding while we were not in ~~compliance.~~

~~In addition, between March 23, 2020 and March 31, 2020, certain of our~~compliance, other counterparties seized and sold securities that we had posted as collateral for our repurchase agreements. ~~We recorded early termination~~As of May 7, 2020, we repaid all of our repurchase agreements that may have been in default. Gains and ~~legal fees paid to our counterparties that were~~losses associated with the termination of these repurchase agreements during the three months ended March 31, 2020 are reported as ~~a loss~~net gain (loss) on extinguishment of debt in our condensed consolidated statement of operations.

We ~~repaid~~resumed financing the purchase of Agency RMBS with repurchase agreements in July 2020. These repurchase agreements generally bear interest at a contractually agreed upon rate and have maturities of approximately one to three months. Repurchase agreements are accounted for as secured borrowings since we maintain effective control of the financed assets. The repurchase agreements are subject to certain financial covenants. We were in compliance with all of ~~our repurchase agreements as of May 7, 2020 as discussed in Note 15 - “Subsequent Events”.~~

~~Our repurchase agreement collateral pledged ratio (MBS, GSE CRTs and a loan participation interest pledged as collateral/amount outstanding) was 106%~~these covenants as of March 31, ~~2020 (December 31, 2019: 109%).~~2021.

Secured Loans

~~As of March~~During the year ended December 31, 2020, IAS Services LLC, ~~had $1.35 billion in~~our former wholly-owned captive insurance subsidiary, fully repaid its outstanding secured loans from the FHLBI. These secured loans have floating rates that are based on the three-month FHLB swap rate plus a spread. For the three months ended March 31, 2020, IAS Services LLC had weighted average borrowingsFederal Home Loan Bank of ~~$1.48 billion with a weighted average borrowing rate of 1.83% and a weighted average maturity of 5.0 years.~~

We were not in compliance with all of the financial covenants of our secured loan agreements as of March 31, 2020. As a result, the FHLBI modified the terms of our secured loans and accelerated the repayment date of our secured loans in the second quarter of 2020 as discussed in Note 15 - "Subsequent Events"Indianapolis ("FHLBI").

1713

Table of Contents

Note 7 - Collateral Positions

The following table summarizes the fair value of collateral that we pledged and held under our repurchase agreements, ~~secured loans,~~ interest rate swaps, ~~and~~ currency forward contracts and to-be-announced securities forward contracts ("TBAs") as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. Refer to Note 2 - "Summary of Significant Accounting Policies - Fair Value Measurements" of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2019~~2020 for a description of how we determine fair value. Agency RMBS ~~CMBS and GSE CRT~~ collateral pledged is included in mortgage-backed ~~and credit risk transfer~~ securities ~~on our condensed consolidated balance sheets. Loan participation interest collateral pledged is included in other assets~~ on our condensed consolidated balance sheets. Cash collateral pledged on ~~secured loans,~~ centrally cleared interest rate swaps and currency forward contracts is classified as restricted cash on our condensed consolidated balance sheets. Cash collateral pledged on repurchase agreements and TBAs accounted for as derivatives is classified as due from counterparties on our condensed consolidated balance sheets.

Agency CMBS purchase commitments that are recorded as mortgage-backed and credit risk transfer securities on our condensed consolidated balance sheets cannot be pledged as collateral until these securities settle. We held approximately $507.2 million and $96.2 million of these securities as of March 31, 2020 and December 31, 2019, respectively.

Cash collateral held ~~on repurchase agreements~~ that is not restricted for use is included in cash and cash equivalents on our condensed consolidated balance sheets and the liability to return the collateral is included in collateral held payable. Non-cash collateral held is only recognized if the counterparty defaults or if we sell the pledged collateral. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, we did not recognize any non-cash collateral held on our condensed consolidated balance sheets.

~~Table of Contents~~


$ in thousands	As of
Collateral Pledged	March 31, 2021	December 31, 2020
Repurchase Agreements:
Agency RMBS	8,641,007	7,614,935





Cash	6,736	700
Total repurchase agreements collateral pledged	8,647,743	7,615,635





Interest Rate Swaps, Currency Forward Contracts and TBAs:

Cash	4,704	378
Restricted cash	380,678	244,573
Total interest rate swaps, currency forward contracts and TBAs collateral pledged	385,382	244,951

Total collateral pledged:
Agency RMBS	8,641,007	7,614,935
Cash	11,440	1,078
Restricted cash	380,678	244,573
Total collateral pledged	9,033,125	7,860,586

	As of
Collateral Held	March 31, 2021	December 31, 2020
Repurchase Agreements:
Cash	0	1,916
Non-cash collateral	0	4,226
Total repurchase agreements collateral held	0	6,142
Interest Rate Swaps, Currency Forward Contracts and TBAs:
Cash	1,337	1,630

Total interest rate swaps, currency forward contracts and TBAs collateral held	1,337	1,630

Total collateral held:
Cash	1,337	3,546
Non-cash collateral	0	4,226
Total collateral held	1,337	7,772

$ in thousands As of
Collateral Pledged March 31, 2020 December 31, 2019
Repurchase Agreements:
Agency RMBS 1,699,937 10,187,555
Agency CMBS 1,736,097 4,446,384
Non-Agency CMBS 1,862,472 2,549,841
Non-Agency RMBS 606,289 943,176
GSE CRT 719,639 918,117
Loan participation interest 21,577 44,654
Cash 394,424 32,568
Total repurchase agreements collateral pledged 7,040,435 19,122,295
Secured Loans:
Agency RMBS 298,361 621,471
Non-Agency CMBS 1,096,812 1,276,418
Restricted cash 221,368 600
Total secured loans collateral pledged 1,616,541 1,898,489
Interest Rate Swaps and Currency Forward Contracts:
Agency RMBS — 189,780
Restricted cash 320 116,395
Total interest rate swaps and currency forward contracts collateral pledged 320 306,175
Total collateral pledged:
Mortgage-backed and credit risk transfer securities 8,019,607 21,132,742
Loan participation interest 21,577 44,654
Cash 394,424 32,568
Restricted cash 221,688 116,995
Total collateral pledged ⁽¹⁾
8,657,296 21,326,959
As of
Collateral Held March 31, 2020 December 31, 2019
Repurchase Agreements:
Cash 50,135 10
Non-cash collateral — 181
Total repurchase agreements collateral held 50,135 191
Interest Rate Swaps:
Cash — 160
Total interest rate swap collateral held — 160
Total collateral held:
Cash 50,135 170
Non-cash collateral — 181
Total collateral held 50,135 351

~~(1)~~Includes pledged securities of $534.5 million sold but not settled as of March 31, 2020 that are recorded as an investment related receivable on our condensed consolidated balance sheet. Securities associated with unsettled trades remain legally pledged until the related repurchase agreement is repaid. There were 0 securities pledged as collateral associated with unsettled trades as of December 31, 2019.

1914

Table of Contents

Repurchase Agreements

Collateral pledged with our repurchase agreement counterparties is segregated in our books and records. The repurchase agreement counterparties have the right to resell and repledge the collateral posted but have the obligation to return the pledged collateral, or substantially the same collateral if agreed to by us, upon maturity of the repurchase agreement. Under the repurchase agreements, the respective lender retains the contractual right to mark the underlying collateral to fair value. We would be required to provide additional collateral orto fund margin calls if the value of pledged assets declined.

~~Secured Loans~~

~~The ability~~ We intend to ~~borrow from the FHLBI is subject to our continued creditworthiness, pledging~~maintain a level of sufficient eligible collateral to secure advances, and compliance with FHLBI and FHFA rules. Collateral pledged with the FHLBI is held in trust for the benefit of the FHLBI and is not commingled with our other assets. The FHLBI does not have the right to resell or repledge collateral posted unless an event of default occurs. The FHLBI retains the right to mark the underlying collateral for FHLBI advances to fair value as determined by the FHLBI in its sole discretion. IAS Services LLC would be required to provide additional collateralliquidity that will enable us to meet margin ~~calls if the value of~~calls.

Our repurchase agreement collateral pledged ~~assets declines. See Note 15 - "Subsequent Events" for a discussion of the status of our FHLBI secured loans~~ratio (MBS pledged as collateral/amount outstanding) was 105% as of ~~the filing date of this Quarterly Report.~~March 31, 2021 (December 31, 2020: 105%).

Interest Rate Swaps

~~All~~As of ~~the~~March 31, 2021 and December 31, 2020, all of our interest rate swaps ~~that we entered into during the three months ended March 31, 2020~~ were centrally cleared by a registered clearing organization such as the Chicago Mercantile Exchange ~~(“CME”~~("CME") and LCH Limited ~~(“LCH”~~("LCH") through a Futures Commission Merchant ~~(“FCM”~~("FCM"). We are required to pledge initial margin and daily variation margin for our centrally cleared interest rate swaps that is based on the fair value of our contracts as determined by our FCM. Collateral pledged with our FCM is segregated in our books and records and can be in the form of cash or securities. Daily variation margin for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. Our FCM agreements include cross default provisions. ~~We were not a party to any interest rate swaps as of March 31, 2020.~~

TBAs and Currency Forward Contracts

Our TBAs and currency forward ~~contract provides~~contracts provide for bilateral collateral pledging based on market value as determined by our ~~counterparty.~~counterparties. Collateral pledged with our TBA and currency forward ~~counterparty~~counterparties is segregated in our books and records and can be in the form of cash or securities. Our ~~counterparty has~~counterparties have the right to repledge the collateral posted ~~but has~~and have the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the ~~currency forward contract~~contracts changes.

Note 8 – Derivatives and Hedging Activities

The following table summarizes changes in the notional amount of our derivative instruments during ~~2020:~~2021:


$ in thousands	$ in thousands	Notional Amount as of December 31, 2019	Additions	Settlement, Termination, Expiration or Exercise	Notional Amount as of March 31, 2020	$ in thousands	Notional Amount as of December 31, 2020	Additions	Settlement, Termination, Expiration or Exercise	Notional Amount as of March 31, 2021
Interest Rate Swaps(1)	Interest Rate Swaps(1)	14,000,000	93,675,000	(107,675,000)	—	Interest Rate Swaps(1)	6,300,000	500,000	(500,000)	6,300,000
Interest Rate Swaptions						Interest Rate Swaptions	0	1,000,000	(1,000,000)	0
Currency Forward Contracts						Currency Forward Contracts	33,084	16,850	(33,084)	16,850

Currency Forward Contracts		23,111	22,738	(23,111)	22,738
Credit Derivatives		464,966	—	(211,282)	253,684

TBA Purchase Contracts						TBA Purchase Contracts	1,700,000	7,350,000	(7,050,000)	2,000,000
TBA Sale Contracts						TBA Sale Contracts	0	(7,550,000)	7,050,000	(500,000)
Total	Total	14,488,077	93,697,738	(107,909,393)	276,422	Total	8,033,084	1,316,850	(1,533,084)	7,816,850

(1)Notional amount as of March 31, 2021 excludes $1.3 billion of interest rate swaps with forward start dates.

Refer to Note 7 - "Collateral Positions" for further information regarding our collateral pledged to and received from our derivative counterparties.

Interest Rate Swaps

Our repurchase agreements are usually settled on a short-term basis ranging from one to six months. At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time. ~~In addition, our secured loans have floating interest rates. As such, we are exposed to changing interest rates.~~ Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposures to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. ~~Interest~~Under the terms of our interest rate ~~swaps involve making~~swap contracts, we make fixed-rate payments to a counterparty in exchange for the receipt of variable-rate amounts over the life of the agreements without exchange of the underlying notional amount.

Amounts recorded in accumulated other comprehensive income ("AOCI") before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed

~~Table of Contents~~

consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements. We reclassified ~~$10.1~~$5.4 million as a decrease (March 31, ~~2019: $5.9~~2020: $10.1 million as a decrease) to interest expense for the three months ended March 31, ~~2020.~~2021. We increased the amount of gains and losses

Table of Contents

reclassified as a decrease to interest expense during the three months ended March 31, 2020 by $4.2 million because it iswas probable that the original forecasted repurchase agreement transactions ~~will~~would not occur by the end of the originally specified time period. During the next 12 months, we estimate that ~~$19.1~~$21.8 million will be reclassified as a decrease to interest expense, repurchase agreements. As of March 31, ~~2020, $65.8~~2021, $46.7 million (December 31, ~~2019: $75.9~~2020: $52.1 million) of unrealized gains on discontinued cash flow hedges, net are still included in accumulated other comprehensive income and will be reclassified as a decrease to interest expense, repurchase agreements over a period of time through December 15, 2023.

~~We did 0t have any interest rate swaps outstanding as~~As of March 31, ~~2020. As of~~2021 and December 31, ~~2019,~~2020, we had interest rate swaps with the following maturities outstand~~ing:~~ing, excluding interest rate swaps with forward start dates:

$ in thousands As of December 31, 2019
Maturities
Notional Amount⁽¹⁾
Weighted Average Fixed Pay Rate Weighted Average Receive Rate Weighted Average Years to Maturity
2020 1,900,000 1.67 % 1.84 % 0.6
2021 2,500,000 1.40 % 1.77 % 1.3
2022 800,000 1.53 % 1.91 % 2.9
2023 2,400,000 1.44 % 1.72 % 3.9
2024 900,000 1.49 % 1.76 % 4.8
Thereafter 5,500,000 1.44 % 1.78 % 9.5
Total 14,000,000 1.47 % 1.79 % 5.2


$ in thousands	As of March 31, 2021
Maturities	Notional Amount (1)	Weighted Average Fixed Pay Rate		Weighted Average Receive Rate		Weighted Average Years to Maturity

3 to 5 years	2,250,000	0.20	%	0.11	%	3.9
5 to 7 years	1,775,000	0.43	%	0.11	%	6.5
7 to 10 years	2,275,000	0.60	%	0.11	%	8.9

Total	6,300,000	0.41	%	0.11	%	6.5


$ in thousands	As of December 31, 2020
Maturities	Notional Amount (2)	Weighted Average Fixed Pay Rate		Weighted Average Receive Rate		Weighted Average Years to Maturity

3 to 5 years	2,250,000	0.20	%	0.15	%	4.2
5 to 7 years	1,775,000	0.43	%	0.15	%	6.7
7 to 10 years	2,275,000	0.60	%	0.15	%	9.2

Total	6,300,000	0.41	%	0.15	%	6.7

(1)Notional amount includes ~~$10.7~~$6.3 billion of interest rate swaps that received variable payments based on 1-month LIBOR ~~and $3.3~~as of March 31, 2021.

(2)Notional amount includes $6.3 billion of interest rate swaps that received variable payments based on ~~3-month~~1-month LIBOR as of December 31, ~~2019.~~2020.

~~Futures~~As of March 31, 2021, we held $1.3 billion notional amount of interest rate swaps with forward start dates that will receive interest based on 1-month LIBOR with a weighted average maturity of 21.3 years and a weighted average fixed pay rate of 1.37%. We did not hold any interest rate swaps with forward start dates as of December 31, 2020.

Swaptions and Currency Forward Contracts

We periodically purchase ~~or sell U.S. Treasury futures contracts~~interest rate swaptions to help mitigate the potential impact of ~~changes~~increases or decreases in interest rates on the performance of our ~~investment portfolio. We recognize realized~~Agency RMBS portfolio (referred to as "convexity risk"). The interest rate swaptions provide us the option to enter into interest rate swap agreements for a predetermined notional amount, stated term and ~~unrealized gains~~pay and ~~losses associated with~~receive interest rates in the ~~purchases or sales U.S. Treasury futures contracts~~future. The premium paid for interest rate swaptions is reported as a derivative asset in our condensed consolidated balance sheets. The premium is valued at an amount equal to the fair value of the swaption that would have the effect of closing the position adjusted for nonperformance risk, if any. The difference between the premium and the fair value of the swaption is reported in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. ~~We did not have any futures contract outstanding as~~If an interest rate swaption expires unexercised, the loss on the interest rate swaption would equal the premium paid. If we sell or exercise an interest rate swaption, the realized gain or loss on the interest rate swaption would equal the difference between the cash or the fair value of ~~March 31, 2020~~the underlying interest rate swap received and ~~December 31, 2019.~~the premium paid.

We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our investments denominated in foreign currencies. We recognize realized and unrealized gains and losses associated with the purchases or sales of currency forward contracts in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. As of March 31, ~~2020,~~2021, we had ~~$22.7~~$16.9 million (December 31, ~~2019: $23.1~~2020: $33.1 million) of notional amount of currency forward contracts related to an investment in an unconsolidated venture denominated in Euro.

Table of Contents

Credit Derivatives

Our GSE CRTs purchased prior to August 24, 2015 ~~are~~were accounted for as hybrid financial instruments consisting of a debt host contract and an embedded credit derivative. Embedded derivatives associated with GSE CRTs ~~are~~were recorded within mortgage-backed and credit risk transfer securities, at fair value, on the condensed consolidated balance sheets. At

TBAs

We primarily use TBAs that we do not intend to physically settle on the contractual settlement date as an alternative means of investing in and financing Agency RMBS. The following table summarizes certain characteristics of our TBAs accounted for as derivatives as of March 31, ~~2020~~2021 and December 31, ~~2019, terms of the GSE CRT embedded derivatives are:~~2020.

$ in thousands March 31, 2020 December 31, 2019
Fair value amount (29,772) 10,281
Notional amount 253,684 464,966
Maximum potential amount of future undiscounted payments 253,684 464,966

~~Table of Contents~~


$ in thousands	As of March 31, 2021
	Notional Amount	Implied Cost Basis	Implied Market Value	Net Carrying Value
TBA purchase contracts	2,000,000	2,054,000	2,049,727	(4,273)
TBA sales contracts	(500,000)	(505,934)	(504,844)	1,090
Net TBA derivatives	1,500,000	1,548,066	1,544,883	(3,183)


$ in thousands	As of December 31, 2020
	Notional Amount	Implied Cost Basis	Implied Market Value	Net Carrying Value
TBA purchase contracts	1,700,000	1,772,211	1,782,104	9,893

Net TBA derivatives	1,700,000	1,772,211	1,782,104	9,893

Tabular Disclosure of the Effect of Derivative Instruments on the Balance Sheet

The table below presents the fair value of our derivative financial instruments, as well as their classification on the condensed consolidated balance sheets as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.

$ in thousands

Derivative Assets

Derivative Liabilities

Derivative Assets

Derivative Liabilities

As of March 31, 2020

As of December 31, 2019

As of March 31, 2020

As of December 31, 2019

As of March 31, 2021

As of December 31, 2020

As of March 31, 2021

As of December 31, 2020

Balance
Sheet

Fair Value

Balance
Sheet

Fair Value

Balance
Sheet

Fair Value

Balance
Sheet

Fair Value

Interest Rate Swaps Asset

—

18,533

Interest Rate Swaps Liability

—

Interest Rate Swaps Asset

15,545

Interest Rate Swaps Liability

5,537

Currency Forward Contracts

—

Currency Forward Contracts

302

352

Currency Forward Contracts

558

111

Currency Forward Contracts

807

TBAs

1,090

9,893

TBAs

4,273

Total Derivative Assets

—

18,533

Total Derivative Liabilities

302

352

Total Derivative Assets

17,193

10,004

Total Derivative Liabilities

4,273

6,344

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The ~~tables~~table below ~~present~~presents the effect of our credit derivatives on the condensed consolidated statements of operations for the three months ended March 31, ~~2020 and 2019.~~2020.

$ in thousands

Three months ended March 31, 2020

Derivative
not designated as
hedging instrument

Realized gain (loss), net

GSE CRT embedded derivative coupon interest

Unrealized gain (loss), net

Realized and unrealized credit derivative income (loss), net

GSE CRT Embedded Derivatives

2,283

4,718

(40,053)

(33,052)

$ in thousands Three months ended March 31, 2019
Derivative
not designated as
hedging instrument Realized gain (loss), net GSE CRT embedded derivative coupon interest Unrealized gain (loss), net Realized and unrealized credit derivative income (loss), net
GSE CRT Embedded Derivatives — 5,350 2,534 7,884

2217

Table of Contents

The following tables summarizes the effect of interest rate swaps, ~~futures~~interest rate swaptions, currency forward contracts and ~~currency forward contracts~~TBAs reported in gain (loss) on derivative instruments, net on the condensed consolidated statements of operations for the three months ended March 31, ~~2020~~2021 and ~~2019:~~2020:


$ in thousands	$ in thousands	Three Months Ended March 31, 2020								$ in thousands	Three Months Ended March 31, 2021
Derivative not designated as hedging instrument	Derivative not designated as hedging instrument	Realized gain (loss) on derivative instruments, net	Contractual net interest income (expense)	Unrealized gain (loss), net	Gain (loss) on derivative instruments, net	Derivative not designated as hedging instrument	Realized gain (loss) on derivative instruments, net	Contractual net interest income (expense)	Unrealized gain (loss), net		Gain (loss) on derivative instruments, net
Interest Rate Swaps	Interest Rate Swaps	(904,704)	11,924	(18,532)	(911,312)	Interest Rate Swaps	327,527	(4,549)	21,081		344,059

Interest Rate Swaptions						Interest Rate Swaptions	(553)	0	0		(553)
Currency Forward Contracts	Currency Forward Contracts	484	—	49	533	Currency Forward Contracts	(539)	0	1,255		716

TBAs						TBAs	(44,185)	0	(13,076)		(57,261)
Total	Total	(904,220)	11,924	(18,483)	(910,779)	Total	282,250	(4,549)	9,260		286,961


$ in thousands	$ in thousands	Three Months Ended March 31, 2019								$ in thousands	Three Months Ended March 31, 2020
Derivative not designated as hedging instrument	Derivative not designated as hedging instrument	Realized gain (loss) on derivative instruments, net	Contractual net interest income (expense)	Unrealized gain (loss), net	Gain (loss) on derivative instruments, net	Derivative not designated as hedging instrument	Realized gain (loss) on derivative instruments, net	Contractual net interest income (expense)	Unrealized gain (loss), net		Gain (loss) on derivative instruments, net
Interest Rate Swaps	Interest Rate Swaps	(165,884)	4,509	12,991	(148,384)	Interest Rate Swaps	(904,704)	11,924	(18,532)		(911,312)
Futures Contracts		(66,688)	—	12,944	(53,744)

Currency Forward Contracts	Currency Forward Contracts	185	—	483	668	Currency Forward Contracts	484	0	49		533

Total	Total	(232,387)	4,509	26,418	(201,460)	Total	(904,220)	11,924	(18,483)		(910,779)

2318

Table of Contents

Note 9 – Offsetting Assets and Liabilities

Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of offset under master netting arrangements (or similar agreements) in the event of default or in the event of bankruptcy of either party to the transactions. Assets and liabilities subject to such arrangements are presented on a gross basis in the condensed consolidated balance sheets.

The following tables present information about the assets and liabilities that are subject to master netting agreements (or similar agreements) and can potentially be offset on our condensed consolidated balance sheets at March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. The daily variation margin payment for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. ~~Our~~As of March 31, 2021, our derivative asset of ~~$18.5~~$15.5 million as(December 31, 2020: derivative liability of ~~December 31, 2019~~$5.5 million) related to centrally cleared interest rate swaps is not included in the table below as a result of this characterization of daily variation margin.

As of March 31, ~~2020~~2021


					Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets								Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets
$ in thousands	$ in thousands	Gross Amounts of Recognized Assets (Liabilities)	Gross Amounts Offset in the Balance Sheets	Net Amounts of Assets (Liabilities) Presented in the Balance Sheets	Financial Instruments ⁽²⁾	Cash Collateral (Received) Pledged	Net Amount	$ in thousands	Gross Amounts of Recognized Assets (Liabilities)	Gross Amounts Offset in the Balance Sheets	Net Amounts of Assets (Liabilities) Presented in the Balance Sheets	Financial Instruments	Cash Collateral (Received) Pledged	Net Amount
Assets								Assets
Derivatives (1) (2)								Derivatives (1) (2)	1,648	0	1,648	(445)	(1,203)	0
Total Assets								Total Assets	1,648	0	1,648	(445)	(1,203)	0

Liabilities	Liabilities							Liabilities
Derivatives ⁽¹⁾⁽²⁾		(302)	—	(302)	—	302	—
Derivatives (1) (2)								Derivatives (1) (2)	(4,273)	0	(4,273)	445	3,828	0
Repurchase Agreements ⁽³⁾	Repurchase Agreements ⁽³⁾	(6,287,746)	—	(6,287,746)	6,287,746	—	—	Repurchase Agreements (3)	(8,240,887)	0	(8,240,887)	8,240,887	0	0
Secured Loans ⁽⁴⁾		(1,350,000)	—	(1,350,000)	1,350,000	—	—

Total Liabilities	Total Liabilities	(7,638,048)	—	(7,638,048)	7,637,746	302	—	Total Liabilities	(8,245,160)	0	(8,245,160)	8,241,332	3,828	0

As of December 31, ~~2019~~2020


					Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets								Gross Amounts Not Offset with Financial Assets (Liabilities) in the Balance Sheets
$ in thousands	$ in thousands	Gross Amounts of Recognized Assets (Liabilities)	Gross Amounts Offset in the Balance Sheets	Net Amounts of Assets (Liabilities) Presented in the Balance Sheets	Financial Instruments ⁽²⁾	Cash Collateral (Received) Pledged	Net Amount	$ in thousands	Gross Amounts of Recognized Assets (Liabilities)	Gross Amounts Offset in the Balance Sheets	Net Amounts of Assets (Liabilities) Presented in the Balance Sheets	Financial Instruments	Cash Collateral (Received) Pledged	Net Amount
Assets								Assets
Derivatives (1) (2)								Derivatives (1) (2)	10,004	0	10,004	(111)	(1,630)	8,263
Total Assets								Total Assets	10,004	0	10,004	(111)	(1,630)	8,263

Liabilities	Liabilities							Liabilities
Derivatives ⁽¹⁾⁽²⁾		(352)	—	(352)	—	320	(32)
Derivatives (1) (2)								Derivatives (1) (2)	(807)	0	(807)	111	610	(86)
Repurchase Agreements ⁽³⁾	Repurchase Agreements ⁽³⁾	(17,532,303)	—	(17,532,303)	17,532,303	—	—	Repurchase Agreements (3)	(7,228,699)	0	(7,228,699)	7,228,699	0	0
Secured Loans ⁽⁴⁾		(1,650,000)	—	(1,650,000)	1,650,000	—	—

Total Liabilities	Total Liabilities	(19,182,655)	—	(19,182,655)	19,182,303	320	(32)	Total Liabilities	(7,229,506)	0	(7,229,506)	7,228,810	610	(86)

(1)Amounts represent ~~collateral pledged that is available to~~derivative assets and derivative liabilities which could potentially be offset against ~~liability balances associated with currency forward contracts.~~other derivative assets, derivative liabilities and cash collateral pledged or received.

(2)~~The fair value of securities pledged as initial margin against our centrally cleared swaps was $189.8 million as of December 31, 2019.~~ Cash collateral pledged by us on our currency forward contracts, TBAs and centrally cleared interest rate swaps was ~~$320,000~~$385.4 million and ~~$116.4~~$245.0 million as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. Cash collateral pledged on our centrally cleared interest rate swaps is settled against the fair value of these swaps and is therefore excluded from the tables above. We held cash collateral on our derivatives of ~~$160,000~~$1.3 million and $1.6 million at March 31, 2021 and December 31, ~~2019.~~2020, respectively.

(3)The fair value of securities pledged against our borrowing under repurchase agreements was ~~$6.6~~$8.6 billion and ~~$19.1~~$7.6 billion at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively. We pledged cash collateral of ~~$394.4~~$6.7 million and ~~held cash collateral of $50.1 million~~$700,000 under repurchase agreements as of March 31, ~~2020.~~

~~(4)The fair value of securities pledged against IAS Services LLC's borrowings under secured loans was $1.4 billion and $1.9 billion at March 31, 2020~~2021 and December 31, ~~2019,~~2020, respectively. We ~~pledged~~held cash collateral ~~against secured loans~~ of ~~$221.4~~$1.9 million ~~and $600,000~~under repurchase agreements as of December 31, 2020. We did 0t hold cash collateral under repurchase agreements as of March 31, ~~2020 and December 31, 2019, respectively.~~2021.

2419

Table of Contents

Note 10 – Fair Value of Financial Instruments

A three-level valuation hierarchy exists for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The three levels are defined as follows:

•Level 1 Inputs – Quoted prices for identical instruments in active markets.

•Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

•Level 3 Inputs – Instruments with primarily unobservable value drivers.

The following tables present our assets and liabilities measured at fair value on a recurring basis.


		March 31, 2020									March 31, 2021
		Fair Value Measurements Using:									Fair Value Measurements Using:
$ in thousands	$ in thousands	Level 1	Level 2	Level 3	NAV as a practical expedient ⁽³⁾	Total at Fair Value	$ in thousands	Level 1	Level 2	Level 3	NAV as a practical expedient (2)	Total at Fair Value
Assets:	Assets:						Assets:
Mortgage-backed and credit risk transfer securities ⁽¹⁾⁽²⁾		—	8,074,580	(29,772)	—	8,044,808
Mortgage-backed securities (1)							Mortgage-backed securities (1)	0	9,099,742	0	—	9,099,742

Derivative assets							Derivative assets	0	17,193	0	—	17,193
Other assets ⁽⁴⁾⁽³⁾	Other assets ⁽⁴⁾⁽³⁾	—	—	44,154	21,088	65,242	Other assets ⁽⁴⁾⁽³⁾	0	0	20,000	15,766	35,766
Total assets	Total assets	—	8,074,580	14,382	21,088	8,110,050	Total assets	0	9,116,935	20,000	15,766	9,152,701
Liabilities:	Liabilities:						Liabilities:
Derivative liabilities	Derivative liabilities	—	302	—	—	302	Derivative liabilities	0	4,273	0	—	4,273
Total liabilities	Total liabilities	—	302	—	—	302	Total liabilities	0	4,273	0	—	4,273


		December 31, 2019									December 31, 2020
		Fair Value Measurements Using:									Fair Value Measurements Using:
$ in thousands	$ in thousands	Level 1	Level 2	Level 3	NAV as a practical expedient ⁽³⁾	Total at Fair Value	$ in thousands	Level 1	Level 2	Level 3	NAV as a practical expedient (2)	Total at Fair Value
Assets:	Assets:						Assets:
Mortgage-backed and credit risk transfer securities ⁽¹⁾⁽²⁾		—	21,761,505	10,281	—	21,771,786
Mortgage-backed securities (1)							Mortgage-backed securities (1)	0	8,172,182	0	—	8,172,182
Derivative assets	Derivative assets	—	18,533	—	—	18,533	Derivative assets	0	10,004	0	—	10,004
Other assets ⁽⁴⁾⁽³⁾	Other assets ⁽⁴⁾⁽³⁾	—	—	44,654	21,998	66,652	Other assets ⁽⁴⁾⁽³⁾	0	0	23,098	16,408	39,506
Total assets	Total assets	—	21,780,038	54,935	21,998	21,856,971	Total assets	0	8,182,186	23,098	16,408	8,221,692
Liabilities:	Liabilities:						Liabilities:
Derivative liabilities	Derivative liabilities	—	352	—	—	352	Derivative liabilities	0	6,344	0	—	6,344
Total liabilities	Total liabilities	—	352	—	—	352	Total liabilities	0	6,344	0	—	6,344

(1)For more detail about the fair value of our MBS, ~~and GSE CRTs,~~ refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities."

(2)Our GSE CRTs purchased prior to August 24, 2015 are accounted for as hybrid financial instruments with an embedded derivative. The hybrid financial instruments consist of debt host contracts classified as Level 2 and embedded derivatives classified as Level 3. As of March 31, 2020, the embedded derivative is a liability of $29.8 million. As of December 31, 2019, the net embedded derivative asset position of $10.3 million includes $19.5 million of embedded derivatives in an asset position and $9.2 million of embedded derivatives in a liability position.

~~(3)~~Investments in unconsolidated ventures are valued using the net asset value ("NAV") as a practical expedient and are not subject to redemption, although investors may sell or transfer their interest at the approval of the general partner of the underlying funds. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the weighted average remaining term of our investments in unconsolidated ventures was ~~1.9~~1.2 years ~~for both periods.~~and 1.5 years, respectively.

~~(4)~~(3)Includes ~~$21.6~~$20.0 million and ~~$44.7 million of a loan participation interest as of March 31, 2020 and December 31, 2019, respectively and $22.6~~$23.1 million of a commercial loan as of March 31, ~~2020.~~2021 and December 31, 2020, respectively. We ~~elected~~value the ~~fair value option for our commercial~~ loan ~~as of January 1, 2020 and valued it~~ based on a third party ~~appraisal as of March 31, 2020. We sold the loan participation interest on April 1, 2020 and valued it at its sales price as of March 31, 2020.~~appraisal.

2520

Table of Contents

The following table shows a reconciliation of the beginning and ending fair value measurements of our GSE CRT embedded derivatives, which we have valued utilizing Level 3 inputs:

Three Months Ended March 31,
$ in thousands 2020 2019
Beginning balance 10,281 22,771
Sales and settlements (2,283) —
Total net credit derivative gains (losses) included in net income:
Realized credit derivative gains (losses), net 2,283 —
Unrealized credit derivative gains (losses), net (40,053) 2,534
Ending balance (29,772) 25,305


									Three Months Ended March 31,
$ in thousands									2020
Beginning balance									10,281


Sales and settlements									(2,283)
Total net credit derivative gains (losses) included in net income:
Realized credit derivative gains (losses), net									2,283
Unrealized credit derivative gains (losses), net (1)									(40,053)
Ending balance									(29,772)

(1)Includes $37.6 million of unrealized losses attributable to GSE CRT embedded derivatives still held as of March 31, 2020.

The following table shows a reconciliation of the beginning and ending fair value measurements of our loan participation interest, which we have valued utilizing Level 3 inputs:

Three Months Ended March 31,
$ in thousands 2020 2019
Beginning balance 44,654 54,981
Purchases/Advances — 577
Repayments (19,269) (1,731)
Total net unrealized losses included in net income:
Unrealized losses (3,808) —
Ending balance 21,577 53,827


									Three Months Ended March 31,
$ in thousands									2020
Beginning balance									44,654

Repayments									(19,269)

Total net unrealized losses included in net income:
Unrealized losses									(3,808)
Ending balance									21,577

Unrealized losses on our loan participation interest ~~are~~were included in gain (loss) on investments, net in our condensed consolidated statements of operations.

The following table shows a reconciliation of the beginning balance of our commercial loan ~~at amortized cost~~ and ending balance at fair value, which we have valued utilizing Level 3 inputs:


			~~Three Months Ended March 31,~~
~~$ in thousands~~			~~2020~~
~~Beginning balance, at amortized cost~~			~~24,055~~
~~Cumulative effect of adoption of new accounting principle~~			~~342~~
~~Repayments~~			~~(136)~~
~~Total net unrealized losses included in net income:~~
~~Unrealized losses~~			~~(1,684)~~
~~Ending balance, at fair value~~			~~22,577~~


	Three Months Ended March 31,	Three Months Ended March 31,
$ in thousands	2021	2020
Beginning balance	23,098	24,055
Cumulative effect of adoption of new accounting principle	0	342
Repayments	0	(136)
Total net unrealized losses included in net income:
Unrealized losses	(3,098)	(1,684)
Ending balance	20,000	22,577

Unrealized losses on our commercial loan are included in gain (loss) on investments, net in our condensed consolidated statements of operations.

~~The following tables summarize significant unobservable inputs used in~~ We elected the fair value ~~measurement of~~option for our ~~GSE CRT embedded derivatives:~~

~~Fair Value at~~

~~Valuation~~

~~Unobservable~~

~~Weighted~~

~~$ in thousands~~

~~March 31, 2020~~

~~Technique~~

~~Input~~

~~Range~~

~~Average~~

~~GSE CRT Embedded Derivatives~~

~~(29,772)~~

~~Market Comparables, Vendor Pricing~~

~~Weighted average life~~

~~1.1 - 4.1 years~~

~~3.0 years~~

~~Fair Value at~~

~~Valuation~~

~~Unobservable~~

~~Weighted~~

~~$ in thousands~~

~~December 31, 2019~~

~~Technique~~

~~Input~~

~~Range~~

~~Average~~

~~GSE CRT Embedded Derivatives~~

~~10,281~~

~~Market Comparables, Vendor Pricing~~

~~Weighted average life~~

~~1.1 - 4.2 years~~

~~2.9 years~~

~~Table of Contents~~

~~These significant unobservable inputs change according to market conditions and security performance. We estimate~~commercial loan on January 1, 2020 when we implemented the weighted average life of GSE CRTs in order to identify GSE corporate debt with a similar maturity. We obtain our weighted average life estimates from a third party provider. Although weighted average life is a significant input, changes in weighted average life may not have an explicit directional impact on the fair value measurement.new accounting guidance for how entities report credit losses for assets measured at amortized cost.

The following table summarizes the significant unobservable input used in the fair value measurement of our commercial loan:

Fair Value at

Valuation

Unobservable

Fair Value at

Valuation

Unobservable

$ in thousands

March 31, 2020

Technique

Input

Rate

$ in thousands

March 31, 2021

Technique

Input

Rate

Commercial Loan

22,577

Discounted Cash Flow

Discount rate

16.4

Commercial Loan

20,000

Discounted Cash Flow

Discount rate

29.4

Fair Value at

Valuation

Unobservable

$ in thousands

December 31, 2020

Technique

Input

Rate

Commercial Loan

23,098

Discounted Cash Flow

Discount rate

29.9

Table of Contents

The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the condensed consolidated balance sheets at March 31, ~~2020~~2021 and December 31, ~~2019:~~2020:

March 31, 2020 December 31, 2019
$ in thousands Carrying
Value Estimated
Fair Value Carrying
Value Estimated
Fair Value
Financial Assets
Commercial loan, held-for-investment ⁽¹⁾
N/A N/A 24,055 24,397
FHLBI stock 74,250 74,250 74,250 74,250
Total 74,250 74,250 98,305 98,647
Financial Liabilities
Repurchase agreements 6,287,746 6,284,295 17,532,303 17,534,344
Secured loans 1,350,000 1,350,000 1,650,000 1,650,000
Total 7,637,746 7,634,295 19,182,303 19,184,344

~~(1)We elected the fair value option for our commercial loan on January 1, 2020.~~


	March 31, 2021		December 31, 2020
$ in thousands	Carrying Value	Estimated Fair Value	Carrying Value	Estimated Fair Value
Financial Liabilities
Repurchase agreements	8,240,887	8,240,959	7,228,699	7,228,719
Total	8,240,887	8,240,959	7,228,699	7,228,719

The following describes our methods for estimating the fair value for financial instruments not carried at fair value on the condensed consolidated balance sheets.

•The estimated fair value of our commercial loan, held-for-investment, included in "Other assets" on our condensed consolidated balance sheet as of December 31, 2019, is a Level 3 fair value measurement. The fair value was determined by an independent pricing service using a discounted cash flow analysis.

•The estimated fair value of FHLBI stock, included in "Other assets" on our condensed consolidated balance sheets, is a Level 3 fair value measurement. FHLBI stock may only be sold back to the FHLBI at its discretion at par. As a result, the cost of the FHLBI stock approximates its fair value.

•The estimated fair value of repurchase agreements is a Level 3 fair value measurement based on an expected present value technique. This method discounts future estimated cash flows using rates we determined best reflect current market interest rates that would be offered for repurchase agreements with similar characteristics and credit quality.

•The estimated fair value of secured loans is a Level 3 fair value measurement. The secured loans have floating rates based on an index plus a spread and the spread is typically consistent with those demanded in the market. Accordingly, the interest rates on these secured loans are at market, and thus the carrying amount approximates fair value.

~~Table of Contents~~

Note 11 – Related Party Transactions

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 we delegate to it. Under the terms of our management agreement, our Manager and its affiliates provide us with our management team, including our officers and appropriate support personnel. Each of our officers is an employee of our Manager or one of its affiliates. We do not have any employees. Our Manager is not obligated to dedicate any of its employees exclusively to us, nor is our Manager obligated to dedicate any specific portion of time to our business. During the three months ended March 31, ~~2020,~~2021, we reimbursed our Manager $242,000 (March 31, ~~2019: $183,000)~~2020: $242,000) for costs of support ~~personnel that are fully dedicated to our business.~~personnel.

We have invested ~~$2.6~~$1.9 million ~~as of March 31, 2020 (December 31, 2019: $154.0 million)~~ in money market or mutual funds managed by affiliates of our ~~Manager.~~Manager as of December 31, 2020. The investments are reported as cash and cash equivalents on our condensed consolidated balance sheets as they are highly liquid and have original or remaining maturities of three months or less when purchased. We did not have any investments in money market of mutual funds managed by affiliates of our Manager as of March 31, 2021.

Management Fee ~~Expense~~

~~Effective October 1, 2019, our~~Our management fee is equal to 1.50% of our stockholders' equity per annum. For purposes of calculating the management fee, stockholders' equity is calculated as average month-end stockholders' equity for the prior calendar quarter as determined in accordance with U.S. GAAP. Stockholders' equity may exclude one-time events due to changes in U.S. GAAP and certain non-cash items upon ~~approval by a majority of our independent directors.~~

Prior to October 1, 2019, we paid our Manager a management fee equal to 1.50% of our stockholders’ equity per annum. The fee was calculated and payable quarterly in arrears. For purposes of calculating the management fee, stockholders’ equity was equal to the sum of the net proceeds from all issuances of equity securities since inception including proceeds from the issuance of operating partnership units to an affiliate of our Manager, plus retained earnings at the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in then current or prior periods), less any amount paid to repurchase common stock since inception. Stockholders' equity excluded (i) any unrealized gains, losses or other items that did not affect realized net income (regardless of whether such items were included in other comprehensive income or loss, or in net income); (ii) cumulative net realized losses that are not attributable to permanently impaired investments and that related to the investments for which market movement was accounted for in other comprehensive income; provided, however, that such adjustment did not exceed cumulative unrealized net gains in other comprehensive income; (iii) one-time events pursuant to changes in U.S. GAAP; and (iv) certain non-cash items after discussions between our Manager and our independent directors and approval by a majority of our independent directors.

We do not pay any management fees on our investments in unconsolidated ventures that are managed by an affiliate of our Manager.

Expense Reimbursement

We are required to reimburse our Manager for operating expenses incurred on our behalf, including directors and officers insurance, accounting services, auditing and tax services, filing fees, and miscellaneous general and administrative costs. Our reimbursement obligation is not subject to any dollar limitation.

The following table summarizes the costs incurred on our behalf by our Manager for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.


		Three Months Ended March 31,				Three Months Ended March 31,
$ in thousands	$ in thousands	2020	2019	$ in thousands	2021	2020
Incurred costs, prepaid or expensed	Incurred costs, prepaid or expensed	2,214	1,604	Incurred costs, prepaid or expensed	1,157	2,214
Incurred costs, charged against equity as a cost of raising capital	Incurred costs, charged against equity as a cost of raising capital	62	320	Incurred costs, charged against equity as a cost of raising capital	77	62
Total incurred costs, originally paid by our Manager	Total incurred costs, originally paid by our Manager	2,276	1,924	Total incurred costs, originally paid by our Manager	1,234	2,276

~~Termination Fee~~

If we terminate our management agreement, we owe our Manager a termination fee equal to 3 times the sum of our average annual management fee during the 24-month period before termination, calculated as of the end of the most recently completed fiscal quarter.

2822

Table of Contents

Note 12 – Stockholders’ Equity

Preferred Stock

Holders of our Series A Preferred Stock are entitled to receive dividends at an annual rate of 7.75% of the liquidation preference of $25.00 per share or $1.9375 per share per annum. Dividends are cumulative and payable quarterly in arrears.

Holders of our Series B Preferred Stock are entitled to receive dividends at an annual rate of 7.75% of the liquidation preference of $25.00 per share or $1.9375 per share per annum until December 27, 2024. After December 27, 2024, holders are entitled to receive dividends at a floating rate equal to three-month LIBOR plus a spread of 5.18% of the $25.00 liquidation preference per annum. Dividends are cumulative and payable quarterly in arrears.

Holders of our Series C Preferred Stock are entitled to receive dividends at an annual rate of 7.50% of the liquidation preference of $25.00 per share or $1.875 per share per annum until September 27, 2027. After September 27, 2027, holders are entitled to receive dividends at a floating rate equal to three-month LIBOR plus a spread of 5.289% of the $25.00 liquidation preference per annum. Dividends are cumulative and payable quarterly in arrears.

As of July ~~27,~~ 2017, we have the option to redeem shares of our Series A Preferred Stock for $25.00 per share, plus any accumulated and unpaid dividends through the date of redemption. We have the option to redeem shares of our Series B Preferred Stock after December 27, 2024 and shares of our Series C Preferred Stock after September 27, 2027 for $25.00 per share, plus any accumulated and unpaid dividends through the date of the redemption. Shares of Series B and Series C Preferred Stock are not redeemable, convertible into or exchangeable for any other property or any other securities of the Company ~~prior to~~before those times, except under circumstances intended to preserve our qualification as a REIT or upon the occurrence of a change in control.

~~In March 2019, we entered into an equity distribution agreement with a placement agent under which we~~We may sell up to 7,000,000 shares of our preferred stock from time to time in at-the-market or privately negotiated ~~transactions.~~transactions under an equity distribution agreement with a placement agent. These shares are registered with the SEC under our shelf registration statement (as amended and/or supplemented). We have not sold any shares of preferred stock under ~~this~~ equity distribution ~~agreement through the filing date of this Quarterly Report.~~agreements.

Common Stock

On February ~~6, 2020,~~4, 2021, we completed a public offering of ~~20,700,000~~27,600,000 shares of common stock at the price of ~~$16.78~~$3.75 per share. Total net proceeds were approximately ~~$347.0~~$103.1 million after deducting ~~estimated~~ offering ~~costs.~~expenses.

WeAs of March 31, 2021, we may sell up to ~~17,000,000~~22,060,000 shares of our common stock from time to time in at-the-market or privately negotiated transactions under an equity distribution agreement with a placement agent. These shares are registered with the SEC under our shelf registration statement (as amended and/or supplemented). During the three months ended March 31, ~~2020,~~2021, we ~~did not issue any~~sold 15,550,000 shares ~~of common stock~~ under ~~the~~our equity distribution ~~agreement.~~agreement for proceeds of $57.8 million, net of approximately $831,000 in commissions and fees. During the three months ended March 31, ~~2019~~2020, we ~~issued 572,000~~did not sell any shares of common stock under ~~the~~ equity distribution ~~agreement for proceeds of $9.1 million, net of approximately $193,000 in commissions and fees.~~agreements.

Share Repurchase Program

During the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, we did 0t repurchase any shares of our common stock. As of March 31, ~~2020,~~2021, we had authority to purchase 18,163,982 shares of our common stock through our share repurchase program.

~~Share-Based Compensation~~

We recognized compensation expense of approximately $113,000 (March 31, 2019: $113,000) related to awards to our independent directors under our 2009 Equity Incentive Plan ("our Incentive Plan") for the three months ended March 31, 2020. During the three months ended March 31, 2020 and 2019, we issued 6,170 shares and 7,065 shares of common stock, respectively, to our independent directors.

We recognized compensation expense of approximately $18,000 (March 31, 2019: $19,000) for the three months ended March 31, 2020 for restricted stock units awarded to employees of our Manager and its affiliates under our Incentive Plan. At March 31, 2020, there was approximately $155,000 of total unrecognized compensation cost related to restricted stock unit awards that is expected to be recognized over a period of up to 48 months, with a weighted-average remaining vesting period of 22 months.

2923

Table of Contents

~~The following table summarizes the activity related to restricted stock units awarded to employees of our Manager and its affiliates for the three months ended March 31, 2020.~~

Three Months Ended March 31,
2020
Restricted Stock Units
Weighted Average Grant Date Fair Value ⁽¹⁾
Unvested at the beginning of the period 12,520 $ 12.84
Shares granted during the period 2,996 16.08
Shares vested during the period (4,844) 14.82
Unvested at the end of the period 10,672 $ 12.85

~~(1)The grant date fair value of restricted stock awards is based on the closing market price of our common stock at the grant date.~~

Accumulated Other Comprehensive Income

The following tables present the components of total other comprehensive income (loss), net and accumulated other comprehensive income ("AOCI") for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020. The tables exclude gains and losses on MBS and GSE CRTs that are accounted for under the fair value option.


		Three Months Ended March 31, 2020								Three Months Ended March 31, 2021
$ in thousands	$ in thousands	Equity method investments	Available-for-sale securities	Derivatives and hedging	Total	$ in thousands	Equity method investments	Available-for-sale securities	Derivatives and hedging	Total
Total other comprehensive income (loss)	Total other comprehensive income (loss)					Total other comprehensive income (loss)
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net	Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net	—	(186,605)	—	(186,605)	Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net	—	981	—	981
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net		—	36,957	—	36,957

Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense	Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense	—	—	(10,067)	(10,067)	Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense	—	—	(5,368)	(5,368)
Currency translation adjustments on investment in unconsolidated venture	Currency translation adjustments on investment in unconsolidated venture	480	—	—	480	Currency translation adjustments on investment in unconsolidated venture	609	—	—	609
Total other comprehensive income (loss)	Total other comprehensive income (loss)	480	(149,648)	(10,067)	(159,235)	Total other comprehensive income (loss)	609	981	(5,368)	(3,778)

AOCI balance at beginning of period	AOCI balance at beginning of period	(645)	213,701	75,907	288,963	AOCI balance at beginning of period	499	5,993	52,113	58,605
Total other comprehensive income (loss)	Total other comprehensive income (loss)	480	(149,648)	(10,067)	(159,235)	Total other comprehensive income (loss)	609	981	(5,368)	(3,778)

AOCI balance at end of period	AOCI balance at end of period	(165)	64,053	65,840	129,728	AOCI balance at end of period	1,108	6,974	46,745	54,827

~~Table of Contents~~


		Three Months Ended March 31, 2019								Three Months Ended March 31, 2020
$ in thousands	$ in thousands	Equity method investments	Available-for-sale securities	Derivatives and hedging	Total	$ in thousands	Equity method investments	Available-for-sale securities	Derivatives and hedging	Total
Total other comprehensive income (loss)	Total other comprehensive income (loss)					Total other comprehensive income (loss)
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net	Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net	—	52,349	—	52,349	Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net	—	(186,605)	—	(186,605)
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net	Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net	—	10,147	—	10,147	Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net	—	36,957	—	36,957
Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense	Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense	—	—	(5,851)	(5,851)	Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense	—	—	(10,067)	(10,067)
Currency translation adjustments on investment in unconsolidated venture	Currency translation adjustments on investment in unconsolidated venture	(276)	—	—	(276)	Currency translation adjustments on investment in unconsolidated venture	480	—	—	480
Total other comprehensive income (loss)	Total other comprehensive income (loss)	(276)	62,496	(5,851)	56,369	Total other comprehensive income (loss)	480	(149,648)	(10,067)	(159,235)

AOCI balance at beginning of period	AOCI balance at beginning of period	513	120,664	99,636	220,813	AOCI balance at beginning of period	(645)	213,701	75,907	288,963
Total other comprehensive income (loss)	Total other comprehensive income (loss)	(276)	62,496	(5,851)	56,369	Total other comprehensive income (loss)	480	(149,648)	(10,067)	(159,235)

AOCI balance at end of period	AOCI balance at end of period	237	183,160	93,785	277,182	AOCI balance at end of period	(165)	64,053	65,840	129,728

Amounts recorded in AOCI before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining original life of the interest rate swap agreements.

3124

Table of Contents

Dividends

On March 24, 2020, we announced that we would delay the payment of quarterly dividends on our common and preferred stock to preserve liquidity until we could more accurately assess the impact of volatile market conditions related to the COVID-19 pandemic. We had declared a cash dividend of $0.50 per share on our common stock on March 17, 2020 that was to be paid on April 28, 2020 to all stockholders of record as of March 30, 2020; a cash dividend of $0.4844 per share on our Series A Preferred Stock on March 17, 2020 that was to be paid on April 27, 2020 to stockholders of record as of April 1, 2020; a cash dividend of $0.4844 per share on our Series B Preferred Stock on February 18, 2020 that was to be paid on March 27, 2020 to stockholders of record as of March 5, 2020 and a cash dividend of $0.46875 per share on our Series C Preferred Stock on February 18, 2020 that was to be paid on March 27, 2020 to stockholders of record as of March 5, 2020. On May 9, 2020, our board of directors approved payment of the previously declared preferred dividends in cash and payment of our common stock dividend in a combination of cash and shares of our common stock as ~~described in Note 15 - "Subsequent Events".~~

The table below summarizes the dividends we declared during the three months ended March 31, ~~2020~~2021 and ~~2019:~~2020:

$ in thousands, except per share amounts

Dividends Declared

$ in thousands, except per share amounts

Dividends Declared

Series A Preferred Stock

Per Share

In Aggregate

Date of Payment

Series A Preferred Stock

Per Share

In Aggregate

Date of Payment

2021

February 19, 2021

0.4844

2,713

April 26, 2021

2020

March 17, 2020

0.4844

2,713

May 22, 2020

March 17, 2020

0.4844

2,713

May 22, 2020

2019

March 18, 2019

0.4844

2,713

April 25, 2019

$ in thousands, except per share amounts

Dividends Declared

$ in thousands, except per share amounts

Dividends Declared

Series B Preferred Stock

Per Share

In Aggregate

Date of Payment

Series B Preferred Stock

Per Share

In Aggregate

Date of Payment

2020

February 18, 2020

0.4844

3,003

May 22, 2020

2021

February 19, 2021

0.4844

3,003

March 29, 2021

2019

2020

February 14, 2019

0.4844

3,003

March 27, 2019

February 18, 2020

0.4844

3,003

May 22, 2020

$ in thousands, except per share amounts

Dividends Declared

$ in thousands, except per share amounts

Dividends Declared

Series C Preferred Stock

Per Share

In Aggregate

Date of Payment

Series C Preferred Stock

Per Share

In Aggregate

Date of Payment

2020

February 18, 2020

0.46875

5,391

May 22, 2020

2021

February 19, 2021

0.46875

5,391

March 29, 2021

2019

2020

February 14, 2019

0.46875

5,391

March 27, 2019

February 18, 2020

0.46875

5,391

May 22, 2020

$ in thousands, except per share amounts

Dividends Declared

$ in thousands, except per share amounts

Dividends Declared

Common Stock

Per Share

In Aggregate

Date of Payment

Common Stock

Per Share

In Aggregate

Date of Payment

2021

March 26, 2021

0.09

22,176

April 27, 2021

2020

March 17, 2020

0.50

82,483

June 30, 2020

March 17, 2020

0.50

82,483

June 30, 2020

2019

March 18, 2019

0.45

57,720

April 26, 2019

On May 9, 2020, our Board of Directors approved payment of our common stock dividend that was declared on March 17, 2020 in a combination of cash and shares of our common stock. Stockholders had the opportunity to elect payment of the dividend all in cash or all in common shares, subject to a limit of 10% or approximately $8.2 million of cash in the aggregate (excluding any cash paid in lieu of issuing fractional shares). On June 30, 2020, we paid the dividend through the issuance of 16,338,511 shares of common stock and the payment of approximately $8.2 million in cash. The number of shares included in the dividend was calculated based on the $4.5435 volume weighted average trading price of our common stock on the New York Stock Exchange on June 17, 18 and 19, 2020.

3225

Table of Contents

Note 13 – Earnings (Loss) per Common Share

Earnings (loss) per share for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 is computed as follows:

Three Months Ended March 31,

In thousands except per share amounts

2020

2019

In thousands, except per share amounts

2021

2020

Numerator (Income)

Basic Earnings:

Net income (loss) available to common stockholders

(1,627,299)

127,683

Net income (loss) available to common stockholders

(20,382)

(1,627,299)

Denominator (Weighted Average Shares)

Basic Earnings:

Shares available to common stockholders

156,771

121,098

Shares available to common stockholders

223,955

156,771

Effect of dilutive securities:

Restricted stock awards

—

Dilutive Shares

156,771

121,110

Dilutive Shares

223,955

156,771

Earnings (loss) per share:

Net income (loss) per share:

Net income (loss) attributable to common stockholders

Basic

(10.38)

1.05

Basic

(0.09)

(10.38)

Diluted

(10.38)

1.05

Diluted

(0.09)

(10.38)

The following potential weighted average common shares were excluded from diluted earnings per share for the three months ended March 31, 2021 and 2020 as the effect would be antidilutive: 12,385 and 12,065 for restricted stock ~~awards.~~awards, respectively.

Note 14 – Commitments and Contingencies

Commitments and Contingencies

Commitments and contingencies may arise in the ordinary course of business. Our material off-balance sheet commitments as of March 31, ~~2020~~2021 are discussed below.

As discussed in Note 5 - "Other Assets", we have invested in unconsolidated ventures that are sponsored by an affiliate of our Manager. The unconsolidated ventures are structured as partnerships, and we invest in the partnerships as a limited partner. The entities are structured such that capital commitments are to be drawn down over the life of the partnership as investment opportunities are identified. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, our undrawn capital and purchase commitments were ~~$6.4~~$6.7 million and ~~$6.5~~$6.8 million, respectively.

As discussed in Note 5 - "Other Assets", we invested in a loan participation interest in a secured loan. We had an unfunded commitment to provide future financing for this loan participation interest of $49.6 million as of March 31, 2020. We sold our loan participation interest on April 1, 2020 for $21.6 million in cash and no longer have any future financing commitments related to this loan participation interest.

Note 15 – Subsequent Events

~~Sales of Investments and Repayment of Debt~~

Due to the ongoing impact of the COVID-19 pandemic and resulting disruption in the financial markets, we took various actions during the second quarter of 2020 to manage our investment portfolio and generate liquidity. Between April 1, 2020 and May 31, 2020, we sold additional MBS and GSE CRTs with a fair value of $6.2 billion at March 31, 2020 for cash proceeds of $5.9 billion and our loan participation interest for cash proceeds of $21.6 million. We repaid all of our repurchase agreements and $512.5 million of FHLBI secured loans with proceeds from these asset sales and the return of cash margin previously pledged on our repurchase agreements.

In April 2020, FHLBI modified the terms of our secured loans because we were not in compliance with all of the financial covenants of our secured loan agreements as of March 31, 2020. The modified loan terms require repayment of our secured loans by December 2020 but allow for repayment at any time without penalty. We intend to repay our secured loans by December 2020 with proceeds from sales of mortgage-backed securities that are collateralizing our secured loans. We determined that the modification of our loan ~~terms was a troubled debt restructuring that did not impact the accounting for our secured loans. The balance of our secured loans is $837.5 million as of the filing date of this Quarterly Report.~~

~~Table of Contents~~

As discussed in Note 5 - "Other Assets," IAS Services LLC is required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured loans from the FHLBI. FHLBI redeemed a portion of our stock in connection with the repayment ~~of our secured loans discussed above. The balance of our FHLBI stock is $37.7 million as of the filing date of this Quarterly Report.~~

~~Portfolio Update~~

As of May 31, 2020, we have a total investment portfolio, excluding cash and Agency CMBS purchase commitments, of approximately $1.6 billion consisting of 92% commercial credit investments, 7% residential credit investments, and 1% Agency mortgage-backed securities; approximately $540 million of the investment portfolio is unencumbered. Our portfolio has not materially changed between May 31, 2020 and the filing date of this Quarterly Report, and we are not a party to any interest rate swap contracts as of the filing date of this Quarterly Report.

Between April 1, 2020 and May 31, 2020, we repaid the outstanding balance of our repurchase agreements (approximately $6.3 billion as of March 31, 2020). In addition, we repaid $512.5 million of our secured loans, reducing the outstanding balance of our secure~~d loans to $837.5 million as of the filing date of this Quarterly Report.~~

~~As of May 31, 2020, we have a cash balance of $327.8 million, approximately $55.3 million of which is posted with FHLBI as collateral for our remaining secured loans.~~

~~Dividends~~

On May 9, 2020, our board of directors approved payment of the previously declared dividend of $0.50 per share of common stock (the "first quarter common stock dividend"). The first quarter common stock dividend will be paid on June 30, 2020 in a combination of cash and shares of the Company's common stock to stockholders of record as of May 21, 2020. The amount of cash paid to shareholders, other than cash paid in lieu of fractional shares, will not exceed 10% of the aggregate amount of the dividend. Shares issued in connection with our common stock dividend will be reflected in earnings per share prospectively. We recorded our first quarter common stock dividend as a reduction of retained earnings of $82.5 million in the three months ended March 31, 2020.

On May 9, 2020, our board of directors also approved payment of the previously declared accumulated dividends on our Series A, Series B and Series C Preferred Stock described above. We paid our preferred dividends that were in arrears on May 22, 2020.

We declared the following dividends on ~~our~~May 4, 2021: a Series ~~B and Series C~~A Preferred Stock dividend of $0.4844 per share payable on ~~May 9, 2020~~July 26, 2021 to our stockholders of record as of ~~June 5, 2020:~~July 1, 2021, a Series B Preferred Stock dividend of $0.4844 per share payable on June ~~29, 2020~~28, 2021 to our stockholders of record as of June 5, 2021 and a Series C Preferred Stock dividend of $0.46875 per share payable on June ~~29, 2020.~~

~~We declared the following dividends on~~28, 2021 to our ~~common stock and Series A Preferred Stock on June 17, 2020: a common stock dividend of $0.02 per share payable on July 28, 2020 to~~ stockholders of record as of ~~July 6, 2020 and a Series A Preferred Stock dividend of $0.4844 per share payable on July 27, 2020 to stockholders of record as of July 1, 2020.~~June 5, 2021.

3426

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In this quarterly report on Form 10-Q, or this ~~“Quarterly~~"Quarterly Report,”" we refer to Invesco Mortgage Capital Inc. and its consolidated subsidiaries as ~~“we,” “us,” “our~~"we," "us," "our Company,”" or ~~“our,”~~"our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, Invesco Advisers, Inc., as our ~~“Manager,”~~"Manager," and we refer to the indirect parent company of our Manager, Invesco Ltd. together with its consolidated subsidiaries (which does not include us), as ~~“Invesco.”~~"Invesco."

The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in Item 1 of this Report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the ~~“SEC”~~"SEC").

Forward-Looking Statements

We make forward-looking statements in this Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the ~~“Exchange Act”~~"Exchange Act"), and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, investment strategies, financial condition, liquidity, results of operations, plans and objectives. When we use the words ~~“believe,” “expect,” “anticipate,” “estimate,” “plan,” “intend,” “project,” “forecast”~~"believe," "expect," "anticipate," "estimate," "plan," "intend," "project," "forecast" or similar expressions and future or conditional verbs such as ~~“will,” “may,” “could,” “should,”~~"will," "may," "could," "should," and ~~“would,”~~"would," and any other statement that necessarily depends on future events, we intend to identify forward-looking ~~statements.~~statements, although not all forward-looking statements may contain such words. Factors that could cause actual results to differ from those expressed in our forward-looking statements include, but are not limited to:

•~~Ongoing~~ongoing spread and economic and operational impact of the COVID-19 ~~pandemic;~~

pandemic, including but not limited to, the impact on the value, volatility, availability, financing and liquidity of mortgage assets;

•our business and investment strategy;

•our investment portfolio and expected investments;

•our projected operating results;

•general volatility of financial markets and effects of governmental responses, including actions and initiatives of the U.S. governmental agencies and changes to U.S. government policies in response to the COVID-19 pandemic, mortgage loan forbearance and modification programs, actions and initiatives of foreign governmental agencies and central banks, monetary policy actions of the Federal Reserve, including actions relating to its agency mortgage-backed securities portfolio ~~and the continuation of re-investment of principal payments,~~ and our ability to respond to and comply with such actions, initiatives and changes;

•the availability of financing sources, including our ability to obtain additional financing arrangements and the terms of such arrangements;

•financing and advance rates for our target assets;

•changes to our expected leverage;

•our expected book value per common share;

•our intention and ability to pay dividends;

•interest rate mismatches between our target assets and our borrowings used to fund such investments;

•the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs;

•our ability to maintain sufficient liquidity to meet our short-term liquidity needs;

•changes in the credit rating of the U.S. government;

•changes in interest rates and interest rate spreads and the market value of our target assets;

•changes in prepayment rates on our target assets;

•the impact of any deficiencies in ~~foreclosure practices~~loss mitigation of third parties and related uncertainty in the timing of collateral disposition;

•our reliance on third parties in connection with services related to our target assets;

3527

Table of Contents

•disruption of our information technology ~~system;~~systems;

•the impact of potential data security breaches or other cyber-attacks or other disruptions;

•effects of hedging instruments on our target assets;

•rates of default or decreased recovery rates on our target assets;

•modifications to whole loans or loans underlying securities;

•the degree to which our hedging strategies may or may not protect us from interest rate ~~volatility~~ and foreign currency exchange ~~rate;~~rate volatility;

•the degree to which derivative contracts expose us to contingent liabilities;

•counterparty defaults;

•compliance with financial covenants in our financing arrangements;

•changes in governmental regulations, zoning, insurance, eminent domain and tax law and rates, and similar matters and our ability to respond to such changes;

•our ability to maintain our qualification as a real estate investment trust for U.S. federal income tax purposes;

•our ability to maintain our exception from the definition of ~~“investment company”~~"investment company" under the Investment Company Act of 1940, as amended (the ~~“1940 Act”~~"1940 Act");

•availability of investment opportunities in mortgage-related, real estate-related and other securities;

•availability of U.S. Government Agency guarantees with regard to payments of principal and interest on securities;

•the market price and trading volume of our capital stock;

•availability of qualified personnel offrom our ~~Manager;~~Manager and our Manager's continued ability to find and retain such personnel;

•the relationship with our Manager;

•estimates relating to taxable income and our ability to continue to make distributions to our stockholders in the future;

•estimates relating to fair value of our target assets and loan loss reserves;

•our understanding of our competition;

•changes to generally accepted accounting principles in the United States of America (“("U.S. ~~GAAP”~~GAAP");

•the adequacy of our disclosure controls and procedures and internal controls over financial reporting; and

•market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described under the headings ~~“Risk~~"Risk Factors,~~” “Management’s~~" "Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations" and ~~“Business.”~~"Business." If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible 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.

Table of Contents

Executive Summary

We are a Maryland corporation primarily focused on investing in, financing and managing ~~residential and commercial~~ mortgage-backed securities ("MBS") and ~~mortgage loans.~~other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our ~~investors,~~stockholders, primarily through dividends and secondarily through capital appreciation. To achieve this objective, we ~~have historically invested~~currently invest in the following:

•Residential mortgage-backed securities ("RMBS") that are guaranteed by a U.S. government agency such as the Government National Mortgage Association ("Ginnie Mae") or a federally chartered corporation such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively "Agency RMBS");

~~Table of Contents~~

•Commercial mortgage-backed securities ("CMBS") that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency CMBS");

•RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency RMBS");

•To-be-announced securities forward contracts ("TBAs") to purchase Agency RMBS;

•Commercial mortgage loans; and

•Other real estate-related financing arrangements.

We have also historically invested in:

•CMBS that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Freddie Mac or Fannie Mae (collectively "Agency CMBS");

•~~RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency RMBS");~~

•~~CMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency CMBS");~~

•Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises ("GSE CRT"); and

•Residential ~~and commercial~~ mortgage ~~loans; and~~

•~~Other real estate-related financing arrangements.~~loans.

We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"), an indirect wholly-owned subsidiary of Invesco Ltd. ("Invesco").

We have elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain our REIT qualification, we are generally required to distribute at least 90% of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the definition of "Investment Company" under the 1940 Act. ~~We are externally managed and advised by Invesco Advisers, Inc., our Manager, which is an indirect, wholly-owned subsidiary of Invesco Ltd.~~

During the quarter ended March 31, 2020, we experienced unprecedented market conditions as a result of the global COVID-19 pandemic. Due to significant spread widening in both Agency and non-Agency securities, we received an unusually high number of margin calls from counterparties. On March 23, 2020, we notified our financing counterparties that we were not in a position to fund the margin calls we received on March 23, 2020, and that we did not expect to be in a position to fund the anticipated volume of future margin calls under our financing arrangements in the near term as a result of market disruptions created by the COVID-19 pandemic. We engaged third party financial and legal advisors to assist us in restructuring our debt with our financing counterparties. To generate liquidity and reduce leverage,we sold MBS and GSE CRTs for cash proceeds of $16.2 billion and repaid $11.2 billion of our repurchase agreements during the quarter ended March 31, 2020. We also terminated our entire interest rate swap portfolio as our exposure to interest rate risk decreased as we sold Agency assets.

We have continued to focus on generating liquidity and reducing leverage in the second quarter of 2020. As of May 31, 2020, we have a cash balance of $327.8 million, approximately $55.3 million of which is posted with FHLBI as collateral for our remaining secured loans. Between April 1, 2020 and May 31, 2020, we sold additional MBS and GSE CRTs with a fair value of $6.2 billion at March 31, 2020 for cash proceeds of $5.9 billion and our loan participation interest for cash proceeds of $21.6 million. As of May 31, 2020, we have a total investment portfolio, excluding cash and Agency CMBS purchase commitments, of approximately $1.6 billion consisting of 92% commercial credit investments, 7% residential credit investments, and 1% Agency mortgage-backed securities. Approximately $540 million of our investment portfolio is unencumbered. We have elected to hold our remaining non-Agency CMBS and GSE CRTs for a period of time given our view that these investments could benefit from actions taken by the federal government to stimulate the economy and the market for these securities. Our investment portfolio has not materially changed between May 31, 2020 and the filing date of this Quarterly Report. In addition, we have not entered into any interest rate swap contracts during the second quarter as of the filing date of this Quarterly Report

Between April 1, 2020 and May 31, 2020, we repaid the outstanding balance of our repurchase agreements (approximately $6.3 billion as of March 31, 2020). In addition, we repaid $512.5 million of our secured loans, reducing the outstanding balance of our secured loans to $837.5 million as of the filing date of this Quarterly Report.

We also paid our dividends that were in arrears on our Series A Preferred, Series B Preferred, and Series C Preferred Stock on May 22, 2020. We will pay our first quarter 2020 common stock dividend of $0.50 per share on June 30, 2020 in a combination of cash and common shares. In addition, on June 17, 2020, we declared a second quarter 2020 common stock cash dividend of $0.02 per common share that will be paid on July 28, 2020.

While the Federal Reserve (the “Fed”) has taken a number of proactive measures to bolster liquidity in the second quarter of 2020, we expect market conditions for the mortgage REIT industry to continue to be challenging. We believe our current cash balances and cash flows from operations will meet our near-term liquidity requirements. Our secured loans are due by December 2020, and we intend to repay our secured loans with proceeds from sa~~les of non-Agency CMBS assets that are currently collateralizing these loans.~~

~~Table of Contents~~

In the near-term, we intend to deploy capital into attractive opportunities in Agency securities and seek to finance these securities with prudent levels of debt. Further, we will evaluate potential credit investments that do not rely on short-term or mark-to-market financing. To further strengthen our balance sheet and position ourselves for future investment opportunities, we have explored and will continue to explore additional sources of financing including issuances of debt and equity securities and other forms of long-term financing arrangements. However, no assurance can be given that we will be able to access any additional sources of financing.

Market Conditions

Macroeconomic factors that affect our business include interest rate spread premiums, governmental policy initiatives, monetary policy initiatives, residential and commercial real estate prices, credit availability, consumer personal income and spending, corporate earnings, employment conditions, financial conditions and inflation.

~~During~~Financial conditions eased during the first quarter, ~~of 2020~~as equities and ~~continuing into~~most credit sectors continued to react favorably to an uptick in economic activity brought on by the ~~second quarter, financial markets experienced significant volatility as a result of~~massive government stimulus in response to the COVID-19 ~~pandemic. On March 11, 2020, the World Health Organization characterized COVID-19~~pandemic as ~~a pandemic, and on March 13, 2020 a national emergency in the United States was declared. Economic activity has been severely impacted~~well as the ~~pandemic resulted~~successful rollout of vaccines. Equities began the year in ~~stay-at-home orders~~positive territory, with the S&P 500 and ~~widespread business shutdowns.~~the NASDAQ gaining 5.8% and 2.8%, respectively. The ~~precipitous decline~~employment picture continued to improve during the quarter, as gains in ~~business~~nonfarm payrolls averaged 539,000 per month, and the unemployment rate fell to 6.0% from 6.7% at year-end. Consumer activity ~~has substantially increased unemployment levels~~was mixed during the quarter, as consumer confidence measures continued to rise but spending and ~~driven a sharp contraction~~retail sales numbers were very volatile. With the rollout of vaccinations continuing, we remain cautiously optimistic about near-term gains in ~~GDP to levels not seen in decades. Reactions to~~economic activity, particularly given the ~~impacts~~amount of ~~the pandemic led to swift and severe financial market dislocations~~anticipated government stimulus.

The yield curve steepened dramatically during the first ~~quarter.~~

~~During~~quarter as inflation fears drove interest rates at the ~~first~~long end of the curve higher. The yield on the 10 year Treasury bond rose 83 basis points to 1.74%, while the yield on the 2 year Treasury note rose only 4 basis points to 0.16%. The short end of the yield curve remains pinned close to zero as the Federal Open Market Committee ("FOMC") targets the lower bound, the futures market has begun to price in increases to the Federal Funds rate beginning late next year. The consumer price index ("CPI") was 2.6% at quarter-end, up from 1.4% at year-end, while the CPI excluding food and energy was flat for the quarter. Commodity prices rose sharply during the quarter, with West Texas Intermediate ("WTI") crude recording a 21.7% increase and the ~~significant dislocation~~Commodity Research Bureau ("CRB") commodity index gaining 10.2%. Breakeven rates on inflation-protected Treasuries continued to increase as investors price in the ~~financial markets caused, among other things, credit spread widening, a marked decrease in interest rates~~potential impact of the recent stimulus measures and ~~unprecedented illiquidity in Agency and non-Agency MBS trading and financing markets. We expect this volatility~~positive growth expectations. The inflation rate implied by 2 year U.S. Treasury inflation-protected securities ("TIPS") rose 65 basis points to ~~persist in~~2.66%, while the ~~near term due~~5 year breakeven rate rose 64 basis points to ~~the continued uncertainty around the~~2.60%.

Table of Contents

The COVID-19 pandemic ~~duration and ultimate impact. Further, we expect the COVID-19 pandemic to~~has negatively ~~impact~~impacted most commercial real estate ~~markets.~~property types. The lodging and retail ~~property markets are likely to experience~~sectors have been the ~~greatest impact~~most impacted due to travel restrictions and ~~a sharp slowdown~~accelerated growth in ~~discretionary consumption.~~e-commerce. In the retail sector, ~~despite long-term leases,~~many tenants ~~that~~ are ~~not open for business may find~~finding it difficult to meet rent obligations and, ~~may forego~~in some instances, are foregoing payments or ~~seek relief in the months ahead.~~seeking forbearance relief. Real estate loans ~~are likely to experience increased~~have experienced growing delinquencies and ~~defaults,~~are at greater risk of default which could impact the fundamental performance of some of our investments.

~~The Fed responded to the COVID-19 pandemic with a series of measures aimed at returning~~ stability to the financial markets and fostering economic recovery. These measures included cutting the federal funds target rate by 150 basis points to 0%-0.25% on March 15, 2020 and committing to purchases of U.S. Treasuries and Agency MBS. These actions helped improve Agency RMBS and Agency Despite fundamental challenges, CMBS liquidity and, eventually, market prices. Additionally, on March 23, 2020, the Fed announced it would purchase debt issued by U.S. investment grade rated companies and established the Term Asset-Backed Securities Loan Facility (“TALF”) to support the flow of credit to consumers and businesses. Initially, the TALF provided financing for asset-backed securities collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration. Subsequently, the Fed expanded the TALF to cover secondary market triple-A rated conduit non-Agency CMBS. Since their inclusion, triple-A rated non-Agency CMBS has recorded some recovery of the spread widening experienced in March. We expect this trend to continue as investors look to capitalize on favorable financing made available by the Fed. We also believe bonds rated below triple-A have the potential to benefit from increased investor demand as more senior bonds experience price appreciation.

In addition to the Fed purchases and facilities mentioned above, the repurchase financing markets for high-quality assets such as Treasuries and Agency RMBS continued to be supported by substantial Fed action in the form of upsized open market operations, both in the overnight and term markets. These facilities were established in late 2019 and were significantly increasedrisk premiums contracted in the first quarter due to a modest new issuance supply and continued investor demand.

While residential real estate fundamentals deteriorated significantly at the onset of ~~2020.~~

~~The U.S. Congress has also responded to~~the pandemic, low mortgage rates and tight housing supply have driven a significant recovery. Demographic trends and changes in housing preferences shaped by the COVID-19 pandemic have combined with improved affordability to generate robust demand, especially for single family homes. This strength is also reflected in home price appreciation, which has accelerated rapidly over the past three quarters. Meanwhile, credit spreads on residential mortgage backed securities have largely recovered the widening that occurred at the onset of the pandemic.

Nevertheless, many individual homeowners have been adversely impacted by the economic consequences of the COVID-19 pandemic. The U.S. government has responded by passing ~~three rounds~~a number of fiscal stimulus measures ~~the most notable being the $2.2 trillion Coronavirus Aid, Relief,~~ and ~~Economic Security Act (“CARES Act”), which included~~ relief ~~measures~~programs for households and businesses directly or indirectly impacted by the virus. The CARES Act includes provisions for COVID-19 related temporary forbearance on federally backed mortgage loans, which allows borrowers of loans guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae to suspend making principal and interest payments for a period of up to 360 days if they are facing hardship. Following the temporary forbearance period, mortgage servicers have to provide several options to impacted borrowers, including a repayment schedule or loan modification, depending on the borrowers’ circumstances. We believe that stimulus payments and the provision of borrower relief including forbearance and loan modifications has and will continue to substantially reduce borrower defaults and loan losses relative to levels that would have likely occurred without these actions.

~~Despite~~Lower coupon Agency mortgages underperformed during the ~~unprecedented measures discussed above, market conditions continue~~quarter, as robust issuance and higher interest rate volatility offset continued strong demand via the Federal Reserve and commercial banks. Prepayment speeds remained elevated during the quarter, reflecting the low mortgage rate environment that was prevalent in the second half of 2020 and into 2021. Expectations for future prepayment speeds have declined, reflecting higher mortgage rates at quarter-end. These lowered speed expectations led to ~~be challenging~~lower premiums on specified pool Agency collateral, as investors are less willing to pay for ~~asset classes that have not been directly targeted by government intervention. While~~protection against higher speeds as mortgage rates rise. The dollar roll environment remained favorable, despite weakening modestly over the ~~markets~~quarter. Although relatively tight valuations and increased volatility represent headwinds for Agency RMBS, slowing prepayment speeds and ~~Agency CMBS have largely recovered in response to large-scale purchases~~continued demand from the Federal Reserve support the sector.

As we move into the second quarter, investors are focused on the pace of the recovery and the implementation of COVID-19 vaccines. Concerns around the potential for inflationary pressures, brought on by the ~~Fed,~~unprecedented stimulus and anticipated sharp economic recovery also remain. Our expectation is that growth in the ~~markets for non-Agency CMBS, non-Agency RMBS and GSE CRTs have yet to fully recover~~U.S. will remain robust as the ~~ultimate impact~~economy continues to reopen over the course of the ~~COVID-19 pandemic on these credit assets remains unclear.~~

~~Table of Contents~~

year, and that inflation will remain subdued in the near-term.

Proposed Changes to LIBOR

In 2017, the U.K. Financial Conduct Authority (the ~~“FCA”~~"FCA"), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021. This announcement indicates that the continuation of LIBOR will not be guaranteed after 2021. The Alternative Reference Rates Committee ~~(“ARRC”~~("ARRC"), which was convened by the Federal Reserve Board and the New York Fed to help ensure a successful transition from LIBOR, has proposed that the Secured Overnight Financing Rate ~~(“SOFR”~~("SOFR") is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. Further, on March 5, 2021, the FCA announced that December 31, 2021 will be the cessation date for 1-week & 2-month tenors of USD-LIBOR. The FCA also set June 30, 2023 as the cessation date for the other five tenors (overnight, 1-month, 3-month, 6-month and 12-month) of USD-LIBOR. Additionally, this FCA announcement constitutes an index cessation event under the International Swaps and Derivatives Association Inc.’s ("ISDA") IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol, as well as the ARRC’s fallback language for non-consumer cash products, giving the market clarity on the spread adjustments to alternative reference rate based fallbacks for all EUR-, CHF-, GBP-, JPY- and USD-LIBOR settings.

On April 6, 2021, New York State (NYS) put into law legislation to help address challenges surrounding legacy LIBOR contracts that have no effective means to transition away from LIBOR and to incentivize the selection of SOFR-based fallback rates in other contracts. The law applies to existing USD-LIBOR contracts governed by NYS law that use LIBOR as a benchmark and contain no fallback provisions or contain fallback provisions that result in a benchmark replacement that is based in any way on any LIBOR value. For these in scope contracts, the NYS law provides that on and after "LIBOR Replacement Date" (the date that USD LIBOR ceases to be published or to be representative), USD-LIBOR is replaced by operation of law with the relevant SOFR-based rate plus the spread adjustment recommended for that contract type by the US Federal Reserve or the ARRC, and any LIBOR-based fallback provisions are permanently overridden. Additionally, the law applies to existing USD LIBOR contracts governed by NYS law that contain fallback provisions that permit or require a party to select a benchmark replacement that is based in any way on any LIBOR value or otherwise in its discretion. For such contracts, the law authorizes and safe harbors the selection by such party of the relevant SOFR-based rate plus the spread

Table of Contents

adjustment recommended for that contract type by the Federal Reserve or the ARRC to apply on and after the "LIBOR Replacement Date".

SOFR is an overnight rate unlike LIBOR which is a forward-looking term rate, making SOFR an inexact replacement for LIBOR. There is currently no perfect way to create robust, forward-looking, SOFR term rates. Note that the ARRC has announced that they will not recommend a forward-looking SOFR term rate by mid-2021, as previously announced, due to insufficient development of the SOFR derivatives markets. Market participants are still considering how various types of financial instruments and securitization vehicles should react to a discontinuation of LIBOR. It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time ~~and it is possible that not all of our assets and liabilities will transition~~or to the same alternative reference rate, in each case increasing the difficulty of hedging. Switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a ~~spread. Industry organizations are attempting to structure the~~ spread ~~calculation in an objective manner, but~~and there is no assurance that ~~all asset types or securitization vehicles~~the spread adjustments will ~~use~~avoid negative financial impacts on our portfolio at the ~~same spread. We and other market participants have less experience understanding and modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty~~time of ~~investing, hedging, and risk management.~~transition.

We have material contracts that are indexed to LIBOR and are monitoring this activity and evaluating the related risks. However, it is not possible to predict the effect of any of these developments, and any future initiatives to regulate, reform or change the manner of administration of LIBOR could result in adverse consequences to the rate of interest payable and receivable on, market value of and market liquidity for LIBOR-based financial instruments.

We do not currently intend to amend our 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock or our 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock to change the existing USD-LIBOR cessation fallback language. Our ~~Manager is finalizing its global assessment~~Series B and Series C Preferred Stock each become callable at the time the stock begins to pay a USD-LIBOR-based rate. Should we choose to call the Series B or Series C Preferred Stock in order to avoid a dispute over the results of ~~exposure in relation~~the USD-LIBOR fallbacks for that class, we may be forced to our LIBOR-based instruments and benchmarks and is prioritizing the mitigation of risks associated with the forecasted changes to financial instruments and performance benchmarks referencing existing LIBOR rates.raise additional funds at an unfavorable time.

In October 2019, the IRS and Treasury proposed regulations that are expected to provide taxpayers relief from adverse impacts resulting from the transition away from LIBOR to an alternative reference rate. The proposed regulations make clear that a change in the reference rate (and associated alterations to payment terms) of a financial instrument is generally not considered a taxable event, provided the fair value of the modified instrument is substantially equivalent to the fair value of the unmodified instrument.

The Financial Accounting Standards Board has also issued accounting guidance that provides optional expedients and exceptions to contracts, hedging relationships and other transactions impacted by LIBOR transition if certain criteria are met. The guidance ~~is effective for all entities~~can be applied as of ~~March 12, 2020 through December 31, 2022.~~January 1, 2020. We will evaluate our contracts that are eligible for modification relief and may apply the elections prospectively as needed. We are currently evaluating what impact the guidance will have on our consolidated financial statements.

3931

Table of Contents

Investment Activities

As previously discussed, the COVID-19 pandemic caused unprecedented market disruption in the three months ended March 31, 2020. To raise liquidity and reduce leverage, we sold MBS and GSE CRTs for cash proceeds of $16.2 billion. Our equity allocation and investment portfolio composition as of March 31, 2020 were directly impacted by these sales as detailed in the tables below.

The table below shows the ~~allocation of our stockholders' equity as of March 31, 2020, December 31, 2019 and March 31, 2019:~~

As of
$ in thousands March 31, 2020 December 31, 2019 March 31, 2019
Agency RMBS 30 % 44 % 45 %
Agency CMBS 20 % 16 % 5 %
Commercial Credit ⁽¹⁾
38 % 28 % 32 %
Residential Credit ⁽²⁾
12 % 12 % 18 %
Total 100 % 100 % 100 %

~~(1)Commercial credit includes non-Agency CMBS, Multifamily GSE CRTs, commercial loans and investments in unconsolidated ventures.~~

~~(2)Residential credit includes non-Agency RMBS, Single Family GSE CRTs and a loan participation interest.~~

~~The table below shows the breakdown~~composition of our investment portfolio as of March 31, ~~2020,~~2021, December 31, ~~2019~~2020 and March 31, ~~2019:~~2020:


		As of						As of
$ in thousands	$ in thousands	March 31, 2020	December 31, 2019	March 31, 2019	$ in thousands	March 31, 2021	December 31, 2020	March 31, 2020
Agency RMBS:	Agency RMBS:				Agency RMBS:
30 year fixed-rate, at fair value	30 year fixed-rate, at fair value	1,421,162	10,524,220	12,716,636	30 year fixed-rate, at fair value	8,997,918	8,050,866	1,421,162
15 year fixed-rate, at fair value	15 year fixed-rate, at fair value	71,166	292,414	352,102	15 year fixed-rate, at fair value	—	—	71,166
Hybrid ARM, at fair value	Hybrid ARM, at fair value	2,672	56,893	179,925	Hybrid ARM, at fair value	—	—	2,672
Agency CMO, at fair value	Agency CMO, at fair value	300,535	427,512	327,151	Agency CMO, at fair value	—	—	300,535
Agency CMBS, at fair value	Agency CMBS, at fair value	2,278,027	4,767,930	2,001,553	Agency CMBS, at fair value	—	—	2,278,027
Non-Agency CMBS, at fair value	Non-Agency CMBS, at fair value	2,869,051	3,823,474	3,455,806	Non-Agency CMBS, at fair value	91,250	109,583	2,869,051
Non-Agency RMBS, at fair value	Non-Agency RMBS, at fair value	568,081	955,671	1,186,896	Non-Agency RMBS, at fair value	10,574	11,733	568,081
GSE CRT, at fair value	GSE CRT, at fair value	534,114	923,672	907,529	GSE CRT, at fair value	—	—	534,114
Loan participation interest, at fair value	Loan participation interest, at fair value	21,577	44,654	53,827	Loan participation interest, at fair value	—	—	21,577
Commercial loan, at amortized cost		22,577	24,055	24,454
Commercial loan, at fair value					Commercial loan, at fair value	20,000	23,098	22,577
Investments in unconsolidated ventures	Investments in unconsolidated ventures	21,088	21,998	24,129	Investments in unconsolidated ventures	15,766	16,408	21,088
Total investment portfolio		8,110,050	21,862,493	21,230,008
Subtotal					Subtotal	9,135,508	8,211,688	8,110,050
TBAs, at implied cost basis (1)					TBAs, at implied cost basis (1)	1,548,066	1,772,211	—
Total investment portfolio, including TBAs					Total investment portfolio, including TBAs	10,683,574	9,983,899	8,110,050

(1)TBAs that we do not intend to physically settle on the contractual settlement date are accounted for as derivative financial instruments and recorded on our consolidated balance sheets at net carrying value, which represents the difference between the fair market value and the implied cost basis of the TBAs. Refer to Note 8 "Derivatives and Hedging Activities" in Part I. Item 1 of this report on Form 10-Q.

To capitalize on the sharp increase in interest rates and lower valuations on investment opportunities during the three months ended March 31, 2021, we sold $5.5 billion of lower yielding Agency RMBS and purchased $7.0 billion of higher yielding Agency RMBS. Purchases were funded with proceeds from the sales, paydowns of securities and by leveraging proceeds from the issuance of common stock.

As of March 31, 2021, our holdings of 30 year fixed-rate Agency RMBS represented approximately 84% of our total investment portfolio, including TBAs, versus 81% as of December 31, 2020 and 18% as of March 31, 2020. We sold substantially all of our Agency RMBS portfolio in the first half of 2020 to generate liquidity and reduce leverage. We resumed investing in 30 year fixed-rate Agency RMBS in July 2020 and began investing in TBAs in the third quarter of 2020. Our Agency RMBS holdings as of March 31, 2021 consisted primarily of specified pools with coupon distributions as shown in the table below.


$ in thousands	Fair Value	Percentage
2.0%	4,135,167	46.0	%
2.5%	4,255,013	47.2	%
3.0%	607,738	6.8	%
Total Agency RMBS	8,997,918	100.0	%

Our purchases of Agency RMBS have been primarily focused on specified pools with prepayment protection, as low mortgage rates and a robust housing market have increased borrower incentives to prepay their mortgage loans. We seek to mitigate the negative impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that diminish borrower incentive to prepay, such as a lower loan balance, higher loan-to-value ("LTV") ratio, lower FICO score, higher percentage of non-owner occupied loans (investment and vacation properties) and newly originated loans. In addition, we focus a significant amount of purchases in specified pools that have higher geographic concentrations in states that exhibit slower prepayments such as New York, Florida and Texas.

4032

Table of Contents

~~Prior to disruption~~We invest in ~~the financial markets caused by the COVID-19 pandemic, we purchased $4.3 billion~~TBAs as an alternative means of ~~fixed rate~~investing in and financing Agency RMBS, $435.5 million of Agency CMBS, $56.6 million of non-Agency CMBS and $99.0 million of GSE CRTs during the three months ended March 31, 2020. We funded these purchases by leveraging the proceeds of our February 2020 common stock issuance and with cash proceeds from paydowns and sales of securities.

RMBS. As of March 31, ~~2020, our holdings~~2021, the implied cost basis of ~~30 year fixed-rate Agency RMBS~~TBAs represented approximately ~~18%~~14% of our total investment portfolio versus ~~48%~~18% as of December 31, ~~2019 and 60% as of March 31, 2019. We have historically focused our purchases~~2020. Our investments consist of 30 year ~~fixed-rate~~ Agency RMBS ~~on specified pools priced at modest pay-ups~~TBAs with coupons that range from 2.0% to ~~generic~~2.5% in conventional and Ginnie Mae collateral. We maintain a meaningful allocation to TBAs given attractive implied financing rates in the Agency RMBS ~~because~~TBA dollar roll market. Implied financing rates in the dollar roll market were substantially below those ~~securities have characteristics that reduce prepayment risk.~~available in the repurchase market due to the magnitude and persistence of the Federal Reserve's MBS purchase program, which began to increase holdings in March of 2020. We ~~hold approximately $10.1 million~~expect the purchase program to continue in 2021, as the Federal Reserve views the program as a key component of its stated objectives.

We sold all of our Agency ~~RMBS as~~CMBS holdings during the first half of ~~May 31,~~ 2020.

~~As of March 31, 2020, our holdings of~~ Agency CMBS represented approximately 28% of our ~~total~~ investment portfolio ~~versus 22% as of December 31, 2019 and 9%~~ as of March 31, ~~2019. Our Agency CMBS holdings as of March 31, 2020 include approximately $507.2 million (December 31, 2019: $96.2 million; March 31, 2019: $221.9 million) of Agency CMBS purchase commitments.~~2020. We ~~have~~ historically focused our Agency CMBS investments in ~~Agency CMBS~~securities issued by Freddie Mac, Fannie Mae and Ginnie Mae that ~~have~~had characteristics that ~~reduce~~reduced prepayment risk. Our hedging costs for Agency CMBS are relatively low because they are less sensitive to interest rate risk given limited extension beyond initial expected maturity dates and underlying loan prepayment protection. We hold approximately $192.4 million of Agency CMBS as of May 31, 2020, including $191.6 million of Agency CMBS purchase commitments. We have sold our Agency CMBS holdings as of the filing date of this Quarterly Report.

Our investments that have credit exposure include non-Agency CMBS, non-Agency RMBS, GSE CRTs, a commercial real estate loan, and a loan participation interest. Rather than relying on the rating agencies, we utilize proprietary models as well as third party applications to quantify and monitor the credit risk associated with these holdings. Our analysis generally begins at the underlying asset level, where we gather detailed information on loan, borrower, and property characteristics that inform our expectations for future performance. In addition to base case cash flow projections, we perform a range of scenario stresses to gauge the sensitivity of returns to potential deviations in underlying asset behavior. We perform this detailed credit analysis at the time of initial purchase and regularly throughout the holding period of each investment.

As of March 31, 2021 and December 31, 2020 our holdings of non-Agency CMBS represented approximately ~~35%~~1% of our total investment portfolio, including TBAs, versus ~~17% as of December 31, 2019 and 16%~~35% as of March 31, ~~2019.~~2020. Our non-Agency CMBS portfolio is collateralized by loans secured by various property types located across the United States including office, retail, multifamily, industrial warehouses and hotels. The largest property geographic locations are in Texas, California, New York, ~~California, Texas, Florida~~Illinois and ~~Illinois as detailed in the tables below. The majority~~Florida. Most of our non-Agency CMBS portfolio is comprised of ~~fixed rate credits~~fixed-rate securities that are rated investment grade by a nationally recognized statistical rating ~~organization. The remainder of our assets were originated during and after 2017. We hold approximately $1.5 billion of non-Agency CMBS as of May 31, 2020. Over 87%~~organization. Approximately 68% of non-Agency CMBS are rated single-A (or equivalent) or higher by a nationally recognized statistical rating organization as of ~~May~~March 31, ~~2020.~~2021. Further, ~~over 75%~~approximately 49% of non-Agency CMBS are rated double-A (or equivalent) or higher by a nationally recognized statistical rating organization as of ~~May~~March 31, ~~2020.~~2021.

As of March 31, 2021 and December 31, 2020, our holdings of non-Agency RMBS represented ~~approximately 7%~~less than 1% of our total investment portfolio, including TBAs, versus ~~4% as of December 31, 2019 and 6%~~7% as of March 31, ~~2019.~~2020. We ~~primarily hold~~historically held non-Agency RMBS securities collateralized by prime and Alt-A ~~loans. In addition, we have~~loans and invested in re-securitizations of real estate mortgage investment conduit ("Re-REMIC") RMBS and securitizations of reperforming mortgage ~~loans that we expect to provide attractive risk adjusted returns.~~ loans.

We did not hold ~~approximately $13.2 million~~ ~~of non-Agency RMBS as of May 31, 2020.~~

~~As of March 31, 2020, our holdings of~~any GSE CRTs ~~represented approximately 7% of our total investment portfolio versus 4% as of December 31, 2019 and 4%~~ as of March 31, ~~2019.~~2021 or December 31, 2020. Our holdings of GSE CRT represented approximately 7% as of March 31, 2020. GSE CRTs are unsecured general obligations of the GSEs that are structured to provide credit protection to the issuer with respect to defaults and other credit events within pools of mortgage loans ~~secured by single family properties~~ that collateralize ~~Agency RMBS~~MBS issued and guaranteed by the GSEs ("Single Family GSE CRT") or within pools of mortgage loans secured by multifamily properties that collateralize Agency CMBS issued and guaranteed by the GSEs ("Multifamily GSE CRT"). The majority of our GSE CRT holdings are concentrated in 2013 and 2014 vintages, where reference loans have significant embedded home price appreciation. GSE CRTs have the added benefit of paying a floating rate coupon that reduces our need to hedge interest rate risk. We hold approximately $94.7 million of GSE CRTs as of May 31, 2020.

We had funded $25.4 million of a participation interest in a secured loan collateralized by mortgage servicing rights associated with Fannie Mae, Freddie Mac, and Ginnie Mae loans as of March 31, 2020. We sold our loan participation interest on April 1, 2020.

~~Table of Contents~~

GSEs.

As of March 31, ~~2020,~~2021, we held an investment in one commercial real estate mezzanine loan that ~~matures~~is due in ~~2021~~2022 and has a loan-to-value ratio of approximately ~~68.3%~~78.9%. ~~We continue to hold this investment as of the filing date of this Quarterly Report.~~

As of March 31, ~~2020,~~2021, we held investments in two unconsolidated ventures that are managed by an affiliate of our Manager. The unconsolidated ventures invest in our target assets. ~~We continue to hold these investments as of the filing date of this Quarterly Report.~~

~~Portfolio Characteristics~~

~~The table below illustrates the vintage distribution of our non-Agency RMBS, GSE CRT and non-Agency CMBS portfolio as of March 31, 2020 as a percentage of the fair value:~~

2003-2007 2008-2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total
Prime 13.3 % 0.1 % — % — % 17.6 % 6.8 % — % 0.5 % — % 23.3 % 11.0 % — % 72.6 %
Alt-A 15.4 % — % — % — % — % — % — % — % — % — % — % — % 15.4 %
Re-REMIC ⁽¹⁾
0.9 % 5.9 % 2.5 % 1.8 % 0.8 % — % — % — % — % — % — % — % 11.9 %
Subprime/RPL 0.1 % — % — % — % — % — % — % — % — % — % — % — % 0.1 %
Total Non-Agency RMBS 29.7 % 6.0 % 2.5 % 1.8 % 18.4 % 6.8 % — % 0.5 % — % 23.3 % 11.0 % — % 100.0 %
GSE CRT — % — % — % — % 15.2 % 24.7 % 4.8 % 21.9 % 3.1 % 4.5 % 14.9 % 10.9 % 100.0 %
Non-Agency CMBS — % 2.0 % 14.1 % 11.9 % 10.7 % 32.0 % 7.1 % 5.3 % 7.5 % 5.1 % 3.6 % 0.7 % 100.0 %

~~(1)Reflects the year in which the re-securitizations were issued. The vintage distribution of the securities that collateralize our Re-REMIC investments is 0.4% for 2006, and 99.6% for 2007.~~

~~The tables below represent the geographic concentration of the underlying collateral for our non-Agency RMBS, GSE CRT and non-Agency CMBS portfolio as of March 31, 2020.The geographic markets that we invest in have been and continue to be severely impacted by the ongoing COVID-19 pandemic.~~

Non-Agency RMBS
State Percentage GSE CRT
State Percentage Non-Agency CMBS
State Percentage
California 44.2 % California 16.5 % New York 15.3 %
New York 8.7 % Texas 7.0 % California 14.5 %
Florida 6.5 % Florida 5.5 % Texas 8.7 %
New Jersey 3.3 % New York 4.5 % Florida 6.1 %
Colorado 3.1 % Illinois 3.8 % Illinois 4.8 %
Washington 3.1 % Virginia 3.7 % New Jersey 3.9 %
Virgina 3.0 % Washington 3.5 % Pennsylvania 3.4 %
Massachusetts 2.7 % New Jersey 3.2 % Virginia 3.2 %
Texas 2.7 % Colorado 3.2 % Michigan 3.1 %
Maryland 2.5 % Pennsylvania 3.1 % Ohio 3.1 %
Other 20.2 % Other 46.0 % Other 33.9 %
Total 100.0 % Total 100.0 % Total 100.0 %

Financing and Other Liabilities

We have historically used repurchase agreements to finance the majority of our target assets and expect to continue to use repurchase agreements to finance Agency investments in the future. Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that have historically moved in close relationship to LIBOR. As

We also used secured loans from the FHLBI to finance a portion of ~~March 31, 2020, we had entered into repurchase agreements totaling $6.3 billion (December 31, 2019: $17.5 billion) that were secured by~~ our ~~mortgage-backed and credit risk transfer securities and an~~ investment ~~in a loan participation interest.~~portfolio. We repaid ~~all of~~ our ~~repurchase agreements as of May 7,~~secured loans during 2020 with proceeds from ~~asset~~ sales ~~and~~of assets that collateralized the ~~return of cash margin previously pledged on~~secured loans. We terminated our ~~repurchase agreements.~~

~~Our wholly-owned subsidiary, IAS Services LLC, is a member of the Federal Home Loan Bank of Indianapolis ("FHLBI") and has borrowed funds from the~~membership in FHLBI in the ~~form~~third quarter of ~~secured loans. As of March 31, 2020, IAS Services LLC had $1.35 billion in outstanding secured loans that are due by December~~ 2020. ~~As of May 31, 2020, we reduced the balance of~~

4233

Table of Contents

our secured loans to $837.5 million. We intend to repay the remaining balance of our secured loans with proceeds from sales of assets collateralizing the secured loans. As discussed in Note 5 - "Other Assets," IAS Services LLC is required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured loans from the FHLBI. FHLBI redeemed a portion of our stock in connection with the repayment of our secured loans discussed above. The balance of our FHLBI stock is $37.7 million as of the filing date of this Quarterly Report.

The following table presents the amount of collateralized borrowings outstanding under repurchase agreements and secured loans as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter:

$ in thousands Collateralized borrowings under repurchase agreements and secured loans
Quarter Ended Quarter-end balance Average quarterly balance Maximum balance
March 31, 2019 18,474,387 17,229,809 18,474,387
June 30, 2019 18,725,065 19,019,503 19,365,413
September 30, 2019 19,722,032 19,535,263 19,898,863
December 31, 2019 19,182,303 19,842,868 20,377,801
March 31, 2020 7,637,746 16,673,939 23,132,234


$ in thousands	Collateralized borrowings under repurchase agreements and secured loans
Quarter Ended	Quarter-end balance	Average quarterly balance (1)	Maximum balance (2)
March 31, 2020	7,637,746	16,673,939	23,132,234
June 30, 2020	740,000	983,599	1,373,296
September 30, 2020	5,243,288	3,373,356	5,243,288
December 31, 2020	7,228,699	6,883,773	7,237,496
March 31, 2021	8,240,887	8,359,010	8,708,686

(1)Average quarterly balance for each period is based on month-end balances.

(2)Amount represents the maximum borrowings at month-end during each of the respective periods.

We have committed to invest up to ~~$125.1~~$125.4 million in unconsolidated ventures that are sponsored by an affiliate of our Manager. As of March 31, ~~2020,~~2021, $118.7 million of our commitment to these unconsolidated ventures has been called. We are committed to fund ~~$6.4~~$6.7 million in additional capital to fund future investments and cover future expenses should they occur.

Hedging Instruments

We enter into interest rate swap agreements that are designed to mitigate the effects of increases in interest rates for a portion of our borrowings. Under these swap agreements, we pay fixed interest rates and receive floating interest rates indexed off of one- or three-month LIBOR.

We actively manage our swap portfolio by terminating and entering into new swaps as the size and composition of our investment portfolio changes. During the three months ended March 31, ~~2020,~~2021, we terminated existing swaps with a notional amount of ~~$107.7 billion~~$500.0 million and entered into new swaps with a notional amount of ~~$93.7 billion~~$500.0 million to hedge repurchase agreement debt associated with purchases of Agency RMBS an~~d Agency CMBS securities.~~ ~~We terminated all of our remaining~~. Daily variation margin payment for interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in ~~March 2020 as we positioned~~ our ~~portfolio in response to unprecedented market conditions associated with the COVID-19 pandemic. Our exposure to interest rate risk decreased as we sold Agency assets and repaid borrowings.~~ condensed consolidated statement of operations. We realized a net ~~loss~~gain of ~~$904.7~~$327.5 million on interest rate swaps during the three months ended March 31, ~~2020~~2021 primarily due to ~~falling~~rising interest ~~rates in 2020.~~rates.

We enter into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on investments denominated in foreign currencies. As of March 31, ~~2020,~~2021, we had ~~€20.8~~€13.9 million or ~~$22.7~~$16.9 million (December 31, ~~2019: €20.8~~2020: €27.8 million or ~~$23.1~~$33.1 million) of notional amount of forward contracts denominated in Euro related to our investment in an unconsolidated venture. During the three months ended March 31, ~~2020,~~2021, we settled currency forward contracts of ~~€20.8~~€27.8 million or ~~$23.1~~$33.1 million (March 31, ~~2019: €20.3~~2020: €20.8 million or $23.1 million) in notional amount and realized a net ~~gain~~loss of ~~$484,000~~$539,000 (March 31, ~~2019: $185,000~~2020: $484,000 net gain).

Capital Activities

WeAs of March 31, 2021, we may sell up to ~~17,000,000~~22,060,000 shares of our common ~~stock and 7,000,000 shares of our preferred~~ stock from time to time in at-the-market or privately negotiated transactions under an equity distribution agreement with a placement agent. We sold 15,550,000 shares of common stock for proceeds of $57.8 million, net of approximately $831,000 in commissions and fees, under our equity distribution ~~agreements.~~agreement during the three months ended March 31, 2021. We did not sell any shares of common stock under ~~these~~equity distribution agreements during the ~~quarter~~three months ended March 31, 2020.

~~On February 18,~~For information on dividends declared during the three months ended March 31, 2021 and 2020, ~~we declared the following dividends:~~

•~~a dividend~~see Note 12 - "Stockholders' Equity" of ~~$0.4844 per share of Series B Preferred Stock. On March 24, 2020 we announced that we would delay the payment~~our condensed consolidated financial statements in Part I. Item 1 of this ~~dividend to preserve liquidity. On May 9, 2020 we announced that we would pay this dividend~~report on ~~May 22, 2020 to stockholders of record as of the close of business on March 5, 2020; and~~

~~Table of Contents~~

•a dividend of $0.46875 per share of Series C Preferred Stock. On March 24, 2020 we announced that we would delay the payment of this dividend to preserve liquidity. On May 9, 2020 we announced that we would pay this dividend on May 22, 2020 to stockholders of record as of the close of business on March 5, 2020.

~~On March 17, 2020, we declared the following dividends:~~

•a dividend of $0.50 per share of common stock. On March 24, 2020 we announced that we would delay the payment of this dividend to preserve liquidity. On May 9, 2020 we announced that we would pay this dividend on June 30, 2020 in a combination of cash and common shares to stockholders of record as of the close of business on May 21, 2020; and

•a dividend of $0.4844 per share of Series A Preferred Stock paid. On March 24, 2020 we announced that we would delay the payment of this dividend to preserve liquidity. On May 9, 2020, we announced that we would pay this dividend on May 22, 2020 to stockholders of record as of the close of business on April 1, 2020.

~~On May 9, 2020, we declared the following dividends:~~

•~~a dividend of $0.4844 per share of Series B Preferred Stock to be paid on June 29, 2020 to stockholders of record as of the close of business on June 5, 2020; and~~

•~~a dividend of $0.46875 per share of Series C Preferred Stock to be paid on June 29, 2020 to stockholders of record as of the close of business on June 5, 2020.~~

~~On June 17, 2020, we declared the following dividends:~~

•~~a dividend of $0.02 per share of common stock to be paid on July 28, 2020 to stockholders of record as of the close of business on July 6, 2020; and~~

•~~a dividend of $0.4844 per share of Series A Preferred Stock to be paid on July 27, 2020 to stockholders of record as of the close of business on July 1, 2020.~~Form 10-Q.

During the three months ended March 31, ~~2020,~~2021, we did not repurchase any shares of our common stock.

Table of Contents

Book Value per Common Share

We calculate book value per common share as follows:


		As of				As of
$ in thousands except per share amounts	$ in thousands except per share amounts	March 31, 2020	December 31, 2019	$ in thousands except per share amounts	March 31, 2021	December 31, 2020
Numerator (adjusted equity):	Numerator (adjusted equity):			Numerator (adjusted equity):
Total equity	Total equity	1,410,381	2,931,899	Total equity	1,481,932	1,367,158
Less: Liquidation preference of Series A Preferred Stock	Less: Liquidation preference of Series A Preferred Stock	(140,000)	(140,000)	Less: Liquidation preference of Series A Preferred Stock	(140,000)	(140,000)
Less: Liquidation preference of Series B Preferred Stock	Less: Liquidation preference of Series B Preferred Stock	(155,000)	(155,000)	Less: Liquidation preference of Series B Preferred Stock	(155,000)	(155,000)
Less: Liquidation preference of Series C Preferred Stock	Less: Liquidation preference of Series C Preferred Stock	(287,500)	(287,500)	Less: Liquidation preference of Series C Preferred Stock	(287,500)	(287,500)
Total adjusted equity	Total adjusted equity	827,881	2,349,399	Total adjusted equity	899,432	784,658

Denominator (number of shares):	Denominator (number of shares):			Denominator (number of shares):
Common stock outstanding	Common stock outstanding	164,966	144,256	Common stock outstanding	246,398	203,222

Book value per common share	Book value per common share	5.02	16.29	Book value per common share	3.65	3.86

Our book value per common share decreased ~~69.2%~~5.4% as of March 31, ~~2020~~2021 compared to December 31, ~~2019 primarily due~~2020 as higher interest rates and an increase in volatility led to ~~significant~~wider interest rate ~~spread widening~~spreads on our 30 year Agency RMBS holdings. In addition, a sharp increase in ~~both Agency~~mortgage rates and ~~non-Agency assets. In particular,~~reduced investor demand for prepayment protection resulted in lower valuation premiums ~~over generic collateral~~ on our Agency ~~MBS~~RMBS specified ~~pools decreased 2~~pools. The benchmark U.S. treasury rate rose 83 basis points to ~~4 points,~~1.74% as ~~rapid deleveraging in the sector, given its relative liquidity, impacted valuations. In addition, prices~~ of our credit holdings were severely impacted by the lack of liquidity and uncertainty surrounding the economic impact of the COVID-19 pandemic. Lastly, forced selling in order to fund margin calls was a significant detriment to book value as sales were executed at distressed levels. ”ReferMarch 31, 2021. Refer to Item 3. "Quantitative and Qualitative Disclosures About Market Risk" for interest rate risk and its impact on fair value.

~~Table of Contents~~

Critical Accounting Policies

There have been no significant changes to our critical accounting policies that are disclosed in our most recent Form 10-K for the year ended December 31, ~~2019 except as discussed in Note 2 - "Summary of Significant Accounting Polices" to our condensed consolidated financial statements included in Part I, Item 1 of this report on Form 10-Q.~~2020.

Recent Accounting Standards

See Part I, Item 1, Financial Statements Note 2 - "Accounting Pronouncements Recently ~~Adopted"~~Issued".

4535

Table of Contents

Results of Operations

The table below presents certain information from our condensed consolidated statements of operations for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.


		Three Months Ended March 31,			Three Months Ended March 31,
$ in thousands, except share data	$ in thousands, except share data	2020	2019	$ in thousands, except share data	2021	2020
Interest Income
Interest income				Interest income
Mortgage-backed and credit risk transfer securities	Mortgage-backed and credit risk transfer securities	185,536	185,492	Mortgage-backed and credit risk transfer securities	39,434	185,536
Commercial and other loans	Commercial and other loans	1,163	1,582	Commercial and other loans	576	1,163
Total interest income	Total interest income	186,699	187,074	Total interest income	40,010	186,699
Interest Expense
Interest expense				Interest expense
Repurchase agreements(1)	Repurchase agreements(1)	79,042	101,875	Repurchase agreements(1)	(1,660)	79,042
Secured loans	Secured loans	6,646	11,144	Secured loans	—	6,646
Total interest expense	Total interest expense	85,688	113,019	Total interest expense	(1,660)	85,688
Net interest income	Net interest income	101,011	74,055	Net interest income	41,670	101,011
Other Income (loss)
Other income (loss)				Other income (loss)
Gain (loss) on investments, net	Gain (loss) on investments, net	(755,483)	268,382	Gain (loss) on investments, net	(331,857)	(755,483)
(Increase) decrease in provision for credit losses				(Increase) decrease in provision for credit losses	938	—
Equity in earnings (losses) of unconsolidated ventures	Equity in earnings (losses) of unconsolidated ventures	170	692	Equity in earnings (losses) of unconsolidated ventures	(94)	170
Gain (loss) on derivative instruments, net	Gain (loss) on derivative instruments, net	(910,779)	(201,460)	Gain (loss) on derivative instruments, net	286,961	(910,779)
Realized and unrealized credit derivative income (loss), net	Realized and unrealized credit derivative income (loss), net	(33,052)	7,884	Realized and unrealized credit derivative income (loss), net	—	(33,052)
Net loss on extinguishment of debt		(4,806)	—
Net gain (loss) on extinguishment of debt				Net gain (loss) on extinguishment of debt	—	(4,806)
Other investment income (loss), net	Other investment income (loss), net	803	1,029	Other investment income (loss), net	(16)	803
Total other income (loss)	Total other income (loss)	(1,703,147)	76,527	Total other income (loss)	(44,068)	(1,703,147)
Expenses	Expenses			Expenses
Management fee – related party	Management fee – related party	10,953	9,534	Management fee – related party	4,884	10,953
General and administrative	General and administrative	3,103	2,258	General and administrative	1,993	3,103
Total expenses	Total expenses	14,056	11,792	Total expenses	6,877	14,056
Net income (loss)		(1,616,192)	138,790
Net income (loss) attributable to Invesco Mortgage Capital, Inc.				Net income (loss) attributable to Invesco Mortgage Capital, Inc.	(9,275)	(1,616,192)

Dividends to preferred stockholders	Dividends to preferred stockholders	11,107	11,107	Dividends to preferred stockholders	11,107	11,107
Net income (loss) attributable to common stockholders	Net income (loss) attributable to common stockholders	(1,627,299)	127,683	Net income (loss) attributable to common stockholders	(20,382)	(1,627,299)
Earnings (loss) per share:
Net income (loss) per share:				Net income (loss) per share:
Net income (loss) attributable to common stockholders	Net income (loss) attributable to common stockholders			Net income (loss) attributable to common stockholders
Basic	Basic	(10.38)	1.05	Basic	(0.09)	(10.38)
Diluted	Diluted	(10.38)	1.05	Diluted	(0.09)	(10.38)
Weighted average number of shares of common stock:	Weighted average number of shares of common stock:			Weighted average number of shares of common stock:
Basic	Basic	156,771,279	121,097,686	Basic	223,954,989	156,771,279
Diluted	Diluted	156,771,279	121,109,259	Diluted	223,954,989	156,771,279

4636

Table of Contents

Interest Income and Average Earning Asset Yields

The table below presents information related to our average earning assets and earning asset yields for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.

Three Months Ended March 31,
$ in thousands 2020 2019
Average Earning Assets ⁽¹⁾:
Agency RMBS:
15 year fixed-rate, at amortized cost 232,551 371,228
30 year fixed-rate, at amortized cost 8,422,795 11,780,005
Hybrid ARM, at amortized cost 35,768 243,813
Agency - CMO, at amortized cost 365,936 291,914
Agency CMBS, at amortized cost 3,543,594 1,129,227
Non-Agency CMBS, at amortized cost 3,552,164 3,361,132
Non-Agency RMBS, at amortized cost 751,090 1,084,721
GSE CRT, at amortized cost 876,341 808,296
Loan participation interest 33,545 54,763
Commercial loans, at amortized cost 23,965 27,375
Average earning assets 17,837,749 19,152,474
Average Earning Asset Yields ⁽²⁾:
Agency RMBS:
15 year fixed-rate 3.74 % 3.50 %
30 year fixed-rate 3.75 % 3.38 %
Hybrid ARM 4.35 % 3.48 %
Agency - CMO 3.74 % 3.56 %
Agency CMBS 3.65 % 3.52 %
Non-Agency CMBS 5.32 % 4.98 %
Non-Agency RMBS 7.17 % 6.71 %
GSE CRT ⁽³⁾
3.11 % 3.67 %
Loan participation interest 5.95 % 6.14 %
Commercial loans 10.31 % 11.08 %
Average earning asset yields 4.19 % 3.91 %


	Three Months Ended March 31,
$ in thousands		2021		2020
Average earning assets (1)		9,330,134		17,837,749
Average earning asset yields (2)		1.72	%	4.19	%

(1)Average balances for each period are based on weighted month-end ~~average earning assets.~~balances.

(2)Average earning asset yields for the period were calculated by dividing interest income, including amortization of premiums and discounts, by ~~the~~ average ~~month-end~~ earning assets based on the amortized cost of the investments. All yields are annualized.

~~(3)~~GSE CRT average earning asset yields exclude coupon interest associated with embedded derivatives on securities not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net under U.S. GAAP.

Our primary source of income is interest earned on our investment portfolio. We had average earning assets of approximately ~~$17.8~~$9.3 billion for the three months ended March 31, ~~2020~~2021 (March 31, ~~2019: $19.2~~2020: $17.8 billion). Average earning assets decreased for the three months ended March 31, 2021 compared to 2020 ~~primarily~~as we sold a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020 to generate liquidity and reduce leverage due to the ~~sale~~financial market disruption caused by the COVID-19 pandemic.

We earned total interest income of MBS and GSE CRTs for cash proceeds of $16.2 billion as previously discussed in the Executive Summary section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

~~Our average earning assets~~$40.0 million for the three months ended March 31, 2020 are not indicative of our future ability to generate interest income because the sales referred to above primarily occurred during the latter part of March 2020, and we sold additional MBS and GSE CRTs with a fair value of $6.2 billion as of March 31, 2020 for cash proceeds of $5.9 billion between April 1, 2020 and May 31, 2020.

~~Table of Contents~~

~~We earned total interest income of $186.7 million~~2021 (March 31, ~~2019: $187.1~~2020: $186.7 million) ~~for the three months ended March 31, 2020.~~. Our interest income includes coupon interest and net premium amortization on MBS and GSE CRTs as well as interest income on commercial and other loans as shown in the table below.


		Three Months Ended March 31,			Three Months Ended March 31,
$ in thousands	$ in thousands	2020	2019	$ in thousands	2021	2020
Interest Income	Interest Income			Interest Income
MBS and GSE CRT - coupon interest	MBS and GSE CRT - coupon interest	202,109	192,442	MBS and GSE CRT - coupon interest	51,490	202,109
MBS and GSE CRT - net premium amortization	MBS and GSE CRT - net premium amortization	(16,573)	(6,950)	MBS and GSE CRT - net premium amortization	(12,056)	(16,573)
MBS and GSE CRT - interest income	MBS and GSE CRT - interest income	185,536	185,492	MBS and GSE CRT - interest income	39,434	185,536
Commercial and other loans	Commercial and other loans	1,163	1,582	Commercial and other loans	576	1,163
Total interest income	Total interest income	186,699	187,074	Total interest income	40,010	186,699

MBS and GSE CRT interest income ~~increased $44,000~~decreased $146.1 million for the three months ended March 31, ~~2020~~2021 compared to ~~2019~~2020 primarily due to a ~~$9.7~~$150.6 million ~~increase~~decrease in coupon interest reflecting lower average earnings assets and a 28247 basis point ~~increase~~decrease in average earning asset yields. Average earnings asset yields ~~rose~~decreased due to ~~purchases~~a change in portfolio composition. Almost all of ~~30 year fixed-rate~~our investment portfolio (excluding TBAs) was invested in Agency RMBS ~~securities at higher yields. Higher coupon interest was offset by a $9.6 million increase~~as of March 31, 2021. For further details on the composition of our investment portfolio as of March 31, 2021 and 2020, see the discussion under Investment Activities above in ~~net premium amortization due to faster prepayment speeds driven by cuts in the federal funds interest rate over the past twelve months.~~this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Interest income on our commercial and other loans decreased ~~$419,000~~$587,000 during the three months ended March 31, 2021 compared to 2020 primarily due to ~~principal payments on commercial loans totaling $7.1 million~~the sale of our loan participation interest in ~~2019.~~April 2020.

Prepayment Speeds

Our RMBS ~~and~~portfolio (and previously our GSE CRT ~~portfolio~~portfolio) is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income. Expected future prepayment speeds ~~on our RMBS and GSE CRT portfolio~~ are estimated on a quarterly basis. Generally, in an environment of falling interest rates, prepayment speeds will increase as homeowners are more likely to prepay their existing mortgage and refinance into a lower borrowing rate. If the actual prepayment speed during the period is faster than estimated, the amortization on securities purchased at a premium to par value will be accelerated, resulting in lower interest income recognized. Conversely, for securities purchased at a discount to par value, interest income will be reduced in periods where prepayment speeds were slower than expected. The standard measure of prepayment speeds is the constant prepayment rate, also known as the conditional prepayment rate or "CPR". The table below provides the three month constant prepayment rate for our RMBS and GSE CRTs as of March 31, 2020, December 31, 2019, and March 31, 2019.

As of
March 31, 2020 December 31, 2019 March 31, 2019
15 year fixed-rate Agency RMBS 16.0 12.5 7.1
30 year fixed-rate Agency RMBS 11.9 18.1 4.9
Hybrid ARM Agency RMBS 1.6 28.7 15.7
Non-Agency RMBS 18.4 17.2 8.3
GSE CRT 15.6 20.1 6.6
Weighted average CPR 14.2 18.1 5.7

4837

Table of Contents

The following table presents net premium amortization recognized on our MBS and GSE CRT portfolio for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.


		Three Months Ended March 31,			Three Months Ended March 31,
$ in thousands, except share data		2020	2019
$ in thousands				$ in thousands	2021	2020
Agency RMBS	Agency RMBS	(20,913)	(12,194)	Agency RMBS	(12,484)	(20,913)
Agency CMBS	Agency CMBS	(1,666)	(531)	Agency CMBS	—	(1,666)
Non-Agency CMBS	Non-Agency CMBS	5,058	3,031	Non-Agency CMBS	878	5,058
Non-Agency RMBS	Non-Agency RMBS	2,698	3,922	Non-Agency RMBS	(450)	2,698
GSE CRT	GSE CRT	(1,750)	(1,178)	GSE CRT	—	(1,750)
Net (premium amortization) discount accretion	Net (premium amortization) discount accretion	(16,573)	(6,950)	Net (premium amortization) discount accretion	(12,056)	(16,573)

Net premium amortization ~~increased $9.6~~decreased $4.5 million for the three months ended March 31, ~~2020~~2021 compared to the same period in ~~2019~~2020 primarily due to ~~faster~~sales of assets purchased at premiums and slower prepayment speeds on Agency ~~RMBS. Higher premium amortization was partially offset by discount accretion on purchases of non-Agency CMBS over the last twelve months.~~RMBS purchased during 2020 and 2021.

Our interest income is subject to interest rate risk. Refer to Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more information relating to interest rate risk and its impact on our operating results.

Interest Expense and Cost of Funds

The table below presents the components of interest expense for the three months ended March 31, ~~2020~~2021 and ~~2019:~~2020:

Three Months Ended March 31,
$ in thousands 2020 2019
Interest Expense
Interest expense on repurchase agreement borrowings 89,109 107,726
Amortization of net deferred (gain) loss on de-designated interest rate swaps (10,067) (5,851)
Repurchase agreements interest expense 79,042 101,875
Secured loans 6,646 11,144
Total interest expense 85,688 113,019

We have historically entered into repurchase agreements to finance the majority of our target assets. These agreements are secured by our mortgage-backed and credit risk transfer securities. These agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that have historically moved in close relationship to LIBOR. At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time.


	Three Months Ended March 31,
$ in thousands		2021	2020
Interest Expense
Interest expense on repurchase agreement borrowings		3,708	89,109
Amortization of net deferred (gain) loss on de-designated interest rate swaps		(5,368)	(10,067)
Repurchase agreements interest expense		(1,660)	79,042
Secured loans		—	6,646

Total interest expense		(1,660)	85,688

Our interest expense on repurchase agreement borrowings decreased ~~$18.6~~$85.4 million for the three months ended March 31, ~~2020~~2021 compared to ~~2019~~2020 due to lower average borrowings and a lower average cost of funds reflecting decreases in the ~~federal funds~~Federal Funds interest rate. Average borrowings decreased primarily due to repayment of $11.2 billion of repurchase agreements with proceeds from asset sales due to financial market disruption caused by the COVID-19 pandemic as previously discussed in this Management's Discussion and Analysis of Financial Condition and Results of Operations. Average borrowings also decreased due to repayment of $300.0 million of secured loans in February 2020 due to a scheduled maturity.

Our repurchase agreement interest expense as reported in our condensed consolidated statement of operations includes amortization of net deferred gains and losses on de-designated interest rate swaps as summarized in the table above. Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $5.4 million during the three months ended March 31, 2021 and $10.1 million during the three months ended March 31, ~~2020 and $5.9 million during the three months ended March 31, 2019.~~2020. Amounts recorded in AOCI before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements. We increased the amount of gains and losses reclassified as a decrease to interest expense during the three months ended March 31, 2020 by $4.2 million because it iswas probable that the original forecasted repurchase agreement transactions ~~will~~would not occur by the end of the originally specified time period. During the next twelve months, we estimate that ~~$19.1~~$21.8 million of net deferred gains on de-designated interest rate swaps will be reclassified from other comprehensive income and recorded as a decrease to interest expense.

~~During~~We repaid our secured loans in the third quarter of 2020 and did not incur interest expense for secured loans during the three months ended March 31, ~~2020, interest expense for our secured loans decreased $4.5 million compared to the same period in 2019 due to lower borrowing rates and repayment of $300.0 million of secured loans in February 2020.~~

~~Table of Contents~~

~~Borrowing rates on our secured loans are based on the three-month FHLB swap rate plus a spread.~~2021. For the three months ended March 31, 2020, the weighted average borrowing rate on our secured loans was 1.83% ~~as compared to 2.70% for the three months ended March 31, 2019.~~.

Our total interest expense during the three months ended March 31, ~~2020~~2021 decreased ~~$27.3~~$87.3 million from the same period in ~~2019~~2020 primarily due to the ~~$23.1~~$92.0 million decrease in interest expense on repurchase agreements borrowings and secured loans in the ~~2020~~2021 period as discussed above.

Table of Contents

The table below presents information related to our borrowings and cost of funds for the three months ended March 31, ~~2020~~2021 and ~~2019:~~2020:

Three Months Ended March 31,
$ in thousands 2020 2019
Average Borrowings⁽¹⁾:
Agency RMBS ⁽²⁾
8,521,865 11,664,156
Agency CMBS
3,523,998 1,074,917
Non-Agency CMBS⁽²⁾
3,049,547 2,663,941
Non-Agency RMBS 689,249 886,554
GSE CRT 722,179 717,482
Loan participation interest 25,159 41,072
Total average borrowings 16,531,997 17,048,122
Maximum borrowings during the period ⁽³⁾
23,132,234 18,474,387
Average Cost of Funds ⁽⁴⁾:
Agency RMBS ⁽²⁾
2.30 % 2.59 %
Agency CMBS 2.17 % 2.64 %
Non-Agency CMBS⁽²⁾
2.34 % 3.24 %
Non-Agency RMBS 2.67 % 3.54 %
GSE CRT 2.54 % 3.49 %
Loan participation interest 3.52 % 4.15 %
Cost of funds 2.07 % 2.65 %
Effective cost of funds (non-GAAP measure) ⁽⁵⁾
2.02 % 2.68 %


	Three Months Ended March 31,
$ in thousands		2021		2020
Total average borrowings (1)		8,347,354		16,531,997
Maximum borrowings during the period (2)		8,708,686		23,132,234
Cost of funds (3)		(0.08)	%	2.07	%

(1)Average borrowings for each period are based on weighted month-end balances.

(2)~~Agency RMBS and non-Agency CMBS average borrowings and average cost of funds include borrowings under repurchase agreements and secured loans.~~

~~(3)~~Amount represents the maximum borrowings at month-end during each of the respective periods.

~~(4)~~(3)Average cost of funds is calculated by dividing annualized interest expense ~~excluding~~including amortization of net deferred gain (loss) on de-designated interest rate swaps by our average borrowings.

~~(5)For a reconciliation of cost of funds to effective cost of funds, see "Non-GAAP Financial Measures."~~

Total average borrowings decreased ~~$516.1 million~~$8.2 billion in the three months ended March 31, ~~2020~~2021 compared to ~~2019~~2020 primarily because we repaid ~~$11.2 billion of~~ repurchase agreements ~~and $300.0 million~~in the first half of 2020 with proceeds from asset sales due to the financial market disruption caused by the COVID-19 pandemic. Average borrowings also decreased because we repaid $1.65 billion of secured loans ~~in the three months ended March 31, 2020 as discussed above.~~during 2020. Our average cost of funds decreased 58215 basis points for three months ended March 31, ~~2020~~2021 versus ~~2019~~2020 primarily due to decreases in the ~~federal funds~~Federal Funds rate ~~over~~since the ~~past twelve months.~~

~~Our average borrowings for the three months ended March 31, 2020 are not indicative~~beginning of our future interest expense because we repaid the $11.2 billion of repurchase agreements referred to above during the latter part of March 2020. In addition, we repaid the balance of our repurchase agreements on May 7, 2020 and an additional $512.5 million of secured loans as of April 30, 2020.

~~Table of Contents~~

Net Interest Income

The table below presents the components of net interest income for the three months ended March 31, ~~2020~~2021 and ~~2019:~~2020:


		Three Months Ended March 31,					Three Months Ended March 31,
$ in thousands	$ in thousands	2020		2019		$ in thousands	2021		2020
Interest Income	Interest Income					Interest Income
Mortgage-backed and credit risk transfer securities	Mortgage-backed and credit risk transfer securities	185,536		185,492		Mortgage-backed and credit risk transfer securities	39,434		185,536
Commercial and other loans	Commercial and other loans	1,163		1,582		Commercial and other loans	576		1,163
Total interest income	Total interest income	186,699		187,074		Total interest income	40,010		186,699
Interest Expense	Interest Expense					Interest Expense
Interest expense on repurchase agreement borrowings	Interest expense on repurchase agreement borrowings	89,109		107,726		Interest expense on repurchase agreement borrowings	3,708		89,109
Amortization of net deferred (gain) loss on de-designated interest rate swaps	Amortization of net deferred (gain) loss on de-designated interest rate swaps	(10,067)		(5,851)		Amortization of net deferred (gain) loss on de-designated interest rate swaps	(5,368)		(10,067)
Repurchase agreements interest expense	Repurchase agreements interest expense	79,042		101,875		Repurchase agreements interest expense	(1,660)		79,042
Secured loans	Secured loans	6,646		11,144		Secured loans	—		6,646

Total interest expense	Total interest expense	85,688		113,019		Total interest expense	(1,660)		85,688
Net interest income	Net interest income	101,011		74,055		Net interest income	41,670		101,011
Net interest rate margin	Net interest rate margin	2.12	%	1.26	%	Net interest rate margin	1.80	%	2.12	%

Our net interest income, which equals interest income less interest expense, totaled ~~$101.0~~$41.7 million ~~(March 31, 2019: $74.1 million)~~ for the three months ended March 31, ~~2020.~~2021 (March 31, 2020: $101.0 million). The ~~increase~~decrease in net interest income for the three months ended March 31, ~~2020~~2021 was primarily due to ~~a lower cost~~the sale of ~~funds driven by cuts~~MBS and GSE CRTs in the ~~federal funds interest rate~~first half of 2020 as ~~discussed above.~~previously discussed.

Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds for the period, was ~~2.12% (March 31, 2019: 1.26%)~~1.80% for the three months ended March 31, ~~2020.~~2021 (March 31, 2020: 2.12%). The ~~increase~~decrease in net interest rate margin for the three months ended March 31, ~~2020~~2021 compared to the same period in ~~2019~~2020 was primarily due to the change in our portfolio composition, including related repurchase agreements borrowings, and decreases in the ~~federal funds~~Federal Funds rate ~~throughout 2019~~ that had a greater impact on our average cost of funds than on our average ~~earning~~ asset yields. Our cost of funds on all of our borrowings is influenced by changes in short term interest rates, whereas ~~approximately~~ ~~86% o~~fsubstantially all of the Company’s investments were ~~fixed rate~~fixed-rate assets as of March 31, ~~2020.~~2021.

Table of Contents

Gain (Loss) on Investments, net

The table below summarizes the components of gain (loss) on investments, net for the three months ended March 31, ~~2020~~2021 and ~~2019:~~2020:


		Three Months Ended March 31,			Three Months Ended March 31,
$ in thousands	$ in thousands	2020	2019	$ in thousands	2021	2020
Net realized gains (losses) on sale of investments	Net realized gains (losses) on sale of investments	(4,285)	(11,115)	Net realized gains (losses) on sale of investments	(116,847)	(4,285)
Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis		(78,834)	—
Other-than-temporary impairment losses		—	(1,776)
Net unrealized gains (losses) on MBS accounted for under the fair value option		(514,503)	280,039
Net unrealized gains (losses) on GSE CRT accounted for under the fair value option		(152,369)	1,234
Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis and other impairments				Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis and other impairments	—	(78,834)

Net unrealized gains (losses) on MBS and GSE CRT accounted for under the fair value option				Net unrealized gains (losses) on MBS and GSE CRT accounted for under the fair value option	(211,912)	(666,872)
Net unrealized gains (losses) on commercial loan and loan participation interest	Net unrealized gains (losses) on commercial loan and loan participation interest	(5,492)	—	Net unrealized gains (losses) on commercial loan and loan participation interest	(3,098)	(5,492)
Total gain (loss) on investments, net	Total gain (loss) on investments, net	(755,483)	268,382	Total gain (loss) on investments, net	(331,857)	(755,483)

~~As previously discussed, we experienced unprecedented market conditions as a result of the global COVID-19 pandemic during~~During the three months ended March 31, ~~2020. To generate liquidity and reduce leverage,~~2021, we sold MBS and GSE CRTs for cash proceeds of ~~$16.2~~$5.5 billion (March 31, ~~2019: $734.8 million)~~2020: $16.2 billion) and realized net losses of ~~$4.3~~$116.8 million (March 31, ~~2019:~~2020: net losses of ~~$11.1~~$4.3 million). We sold lower yielding Agency RMBS during the three months ended March 31, 2021 and purchased higher yielding Agency RMBS to capitalize on the sharp increase in interest rates and lower valuations on investment opportunities during the quarter. We sold securities during the three months ended March 31, 2020 to generate liquidity and reduce leverage in response to the financial market disruption caused by the COVID-19 pandemic. A portion of these sales were involuntary liquidations at significantly distressed market prices as certain of our repurchase agreement counterparties seized and sold our securities when we were unable to meet margin calls onin March ~~23,~~ 2020.

We did not record any impairment during the three months ended March 31, 2021 because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost basis. We recorded $78.8 million of impairment on non-Agency RMBS and CMBS securities during the three months ended March 31, 2020 because we intended to sell or more likely than not would be required to sell the securities before recovery of amortized cost ~~basis. We still held these securities as of March 31, 2020~~basis. ~~We assess our investment securities for credit losses~~

~~Table of Contents~~

and impairment on a quarterly basis. For additional information regarding our accounting policy for credit losses and impairment, refer to Note 2 – “Summary of Significant Accounting Policies” of our condensed consolidated financial statements included in Part I. Item 1. of this Quarterly Report.

We have elected the fair value option for all of ~~our RMBS interest-only securities,~~ our MBS purchased on or after September 1, 2016 and our GSE CRTs purchased on or after August 24, 2015. Before September 1, 2016, we had also elected the fair value option for our non-Agency RMBS interest-only securities. Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations and are reported as a component of gain (loss) on investments, net. As of March 31, ~~2020, $5.3~~2021, $9.0 billion (December 31, ~~2019: $17.4~~2020: $8.1 billion) or ~~65%~~99% (December 31, ~~2019: 80%~~2020: 99%) of our MBS and GSE CRT are accounted for under the fair value option. Our percentage of MBS and GSE CRTs accounted for under the fair value option declined as of March 31, 2020 due to sales of securities accounted for under the fair value option during the three months ended March 31, 2020.

We recorded net unrealized losses on our MBS and GSE CRT portfolio accounted for under the fair value option of ~~$514.5~~$211.9 million in the three months ended March 31, ~~2020~~2021 compared to net unrealized ~~gains~~losses of ~~$280.0~~$666.9 million in the three months ended March 31, ~~2019.~~2020. Net unrealized losses in three months ended March 31, 2021 reflect wider interest rate spreads on our Agency assets as a sharp increase in mortgage rates and reduced investor demand for prepayment protection resulted in lower valuation premiums on our Agency RMBS specified pools. Net unrealized losses in the three months ended March 31, 2020 reflect lower interest rates and wider interest rate spreads on our Agency and non-Agency assets.

We ~~also~~ recorded ~~net~~ unrealized losses of $3.1 million and $1.7 million on our ~~GSE CRT portfolio accounted for under the fair value option of $152.4 million~~commercial loan in the three months ended March 31, 2021 and 2020, compared to net unrealized gains of $1.2 million in the three months ended March 31, 2019. Net unrealized losses in the three months ended March 31, 2020 reflect declines in valuations due to wider interest rate spreads.

respectively. We value our commercial loan based upon a valuation from an independent pricing service. We recorded an unrealized loss of $3.8 million on our loan participation interest ~~and an unrealized loss of $1.7 million on our commercial loan~~ in the three months ended March 31, 2020. We ~~valued~~sold our loan participation interest ~~based on the price that we sold the participation interest for~~ on April 1, 2020.

(Increase) Decrease in Provision for Credit Losses

As of March 31, 2021, $98.2 million of our MBS are classified as available-for-sale and subject to evaluation for credit losses (December 31, 2020: $116.9 million). As of December 31, 2020, we had established a $1.8 million allowance for credit losses on a single non-Agency CMBS based on a comparison of the security's amortized cost basis to discounted expected cash flows. We ~~valued~~recorded a $938,000 decrease in the provision for credit losses for this security during the three months ended March 31, 2021 because the valuation for the security improved. We did not record any provisions for credit losses the during three months ended March 31, 2020. Refer to Note 4 – "Mortgage-Backed Securities and Credit Risk Transfer Securities" of our ~~commercial loan based upon a valuation from an independent pricing service.~~condensed consolidated financial statements included in Part I. Item 1 of this Report for additional information on our allowance for credit losses.

Table of Contents

Equity in Earnings (Losses) of Unconsolidated Ventures

For the three months ended March 31, ~~2020,~~2021, we recorded equity in ~~earnings~~losses of unconsolidated ventures of ~~$170,000~~$94,000 (March 31, ~~2019:~~2020: equity in earnings of ~~$692,000)~~$170,000). We recorded equity in losses for the three months ended March 31, 2021 primarily due to realized and unrealized losses on the underlying portfolio investments. We recorded equity in earnings for the three months ended March 31, 2020 ~~and 2019~~ primarily due to realized and unrealized gains on the underlying portfolio investments.

Gain (Loss) on Derivative Instruments, net

~~Our objectives~~We record all derivatives on our condensed consolidated balance sheets at fair value. Changes in ~~using interest rate~~the fair value of our derivatives are ~~to add stability to interest expense and to manage our exposure to interest rate movements~~recorded in gain (loss) on ~~our floating rate repurchase agreements and secured loans. To accomplish these objectives, we primarily use interest rate~~ derivative instruments, ~~including~~net in our condensed consolidated statements of operations. Net interest paid or received under our interest rate swaps ~~and U.S. Treasury futures contracts as part~~is also recognized in gain (loss) on derivative instruments, net in our condensed consolidated statements of ~~our interest rate risk management strategy.~~

~~We also use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our unconsolidated joint venture investment denominated in Euros.~~operations.

The tables below summarize our realized and unrealized gain (loss) on derivative instruments, net for the following periods:


$ in thousands	$ in thousands	Three Months Ended March 31, 2020								$ in thousands	Three Months Ended March 31, 2021
Derivative not designated as hedging instrument	Derivative not designated as hedging instrument	Realized gain (loss) on derivative instruments, net	Contractual net interest income (expense)	Unrealized gain (loss), net	Gain (loss) on derivative instruments, net	Derivative not designated as hedging instrument	Realized gain (loss) on derivative instruments, net	Contractual net interest income (expense)	Unrealized gain (loss), net		Gain (loss) on derivative instruments, net
Interest Rate Swaps	Interest Rate Swaps	(904,704)	11,924	(18,532)	(911,312)	Interest Rate Swaps	327,527	(4,549)	21,081		344,059

Interest Rate Swaptions						Interest Rate Swaptions	(553)	—	—		(553)
Currency Forward Contracts	Currency Forward Contracts	484	—	49	533	Currency Forward Contracts	(539)	—	1,255		716

TBAs						TBAs	(44,185)	—	(13,076)		(57,261)
Total	Total	(904,220)	11,924	(18,483)	(910,779)	Total	282,250	(4,549)	9,260		286,961

~~Table of Contents~~


$ in thousands	$ in thousands	Three Months Ended March 31, 2019								$ in thousands	Three Months Ended March 31, 2020
Derivative not designated as hedging instrument	Derivative not designated as hedging instrument	Realized gain (loss) on derivative instruments, net	Contractual net interest income (expense)	Unrealized gain (loss), net	Gain (loss) on derivative instruments, net	Derivative not designated as hedging instrument	Realized gain (loss) on derivative instruments, net	Contractual net interest income (expense)	Unrealized gain (loss), net		Gain (loss) on derivative instruments, net
Interest Rate Swaps	Interest Rate Swaps	(165,884)	4,509	12,991	(148,384)	Interest Rate Swaps	(904,704)	11,924	(18,532)		(911,312)
Futures Contracts		(66,688)	—	12,944	(53,744)

Currency Forward Contracts	Currency Forward Contracts	185	—	483	668	Currency Forward Contracts	484	—	49		533

Total	Total	(232,387)	4,509	26,418	(201,460)	Total	(904,220)	11,924	(18,483)		(910,779)

During the three months ended March 31, ~~2020,~~2021, we terminated existing swaps with a notional amount of ~~$107.7 billion~~$500.0 million and entered into new swaps with a notional amount of ~~$93.7 billion~~$500.0 million to hedge repurchase agreement debt associated with purchases of Agency ~~RMBS and Agency CMBS securities.~~RMBS. We ~~did not have any~~realized a net gain of $327.5 million for the three months ended March 31, 2021 on interest rate ~~swap contracts as of~~swaps primarily due to rising interest rates. During the three months ended March 31, ~~2020. We~~2020, we terminated all of our ~~remaining~~outstanding interest rate swaps ~~in March 2020~~ as we ~~positioned~~repositioned our portfolio in response to unprecedented market conditions associated with the COVID-19 pandemic. Our exposure to interest rate risk decreased as we sold Agency assets and repaid borrowings. We realized a net loss of $904.7 million for the three months ended March 31, 2020 ~~respectively,~~ on interest rate swaps primarily due to falling interest rates.

We resumed entering into interest rate swaps in July 2020 as we resumed investing in Agency RMBS and financing our investments with repurchase agreements. As of March 31, 2021, we had $8.2 billion of repurchase agreement borrowings with a weighted average remaining maturity of 18 days. We typically refinance each repurchase agreement at market interest rates upon maturity. We use interest rate swaps to manage our exposure to changing interest rates and add stability to interest rate expense.

Table of Contents

As of March 31, 2021 and December 31, ~~2019,~~2020, we held the following interest rate swaps whereby we receive interest at a one-month ~~and three-month~~ LIBOR rate:


$ in thousands	$ in thousands	As of December 31, 2019												$ in thousands	As of March 31, 2021						As of December 31, 2020
Derivative instrument	Derivative instrument	Notional Amounts	Average Fixed Pay Rate		Average Receive Rate		Average Maturity (Years)	Derivative instrument	Notional Amounts	Average Fixed Pay Rate		Average Receive Rate			Average Maturity (Years)	Notional Amounts	Average Fixed Pay Rate		Average Receive Rate		Average Maturity (Years)
Interest Rate Swaps(1)	Interest Rate Swaps(1)	14,000,000	1.47	%	1.79	%	5.2	Interest Rate Swaps(1)	6,300,000	0.41	%	0.11	%		6.5	6,300,000	0.41	%	0.15	%	6.7

(1)Notional amount as of March 31, 2021 excludes $1.3 billion of interest rate swaps with forward start dates.

We ~~were~~use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates. As of March 31, 2021, we had $16.9 million (December 31, 2020: $33.1 million) of notional amount of currency forward contracts related to an investment in an unconsolidated venture denominated in euro.

We primarily use TBAs that we do not ~~a party~~intend to ~~any futures contracts~~physically settle on the contractual settlement date as an alternative means of investing in and financing Agency RMBS. As of March 31, 2021, we had $1.5 billion notional amount of TBAs (December 31, 2020: $1.7 billion). We recorded $57.3 million of realized and unrealized losses, net on TBAs during the three months ended March 31, ~~2020. During~~2021 primarily due to a sharp increase in mortgage rates. We did not invest in TBAs during the three months ended March 31, 2019, we settled futures contracts with a notional amount of $1.7 billion. We realized a net loss of $66.7 million on the settlement of futures contracts for the three months ended March 31, 2019 due to falling interest rates. Daily variation margin payment for futures is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations.2020.

Realized and Unrealized Credit Derivative Income (Loss), net

The table below summarizes the components of realized and unrealized credit derivative income (loss), net for the three months ended March 31, 2020.


	Three Months Ended March 31,
$ in thousands		2020
GSE CRT embedded derivative coupon interest		4,718
Gain (loss) on settlement of GSE CRT embedded derivatives		2,283
Change in fair value of GSE CRT embedded derivatives		(40,053)
Total realized and unrealized credit derivative income (loss), net		(33,052)

Realized and ~~2019.~~

Three Months Ended March 31,
$ in thousands 2020 2019
GSE CRT embedded derivative coupon interest 4,718 5,350
Gain (loss) on settlement of GSE CRT embedded derivatives 2,283 —
Change in fair value of GSE CRT embedded derivatives (40,053) 2,534
Total realized and unrealized credit derivative income (loss), net (33,052) 7,884

Inunrealized credit derivative loss in the three months ended March 31, 2020 ~~we recorded a decrease of $40.9 million in realized and unrealized credit derivative income (loss), net compared to the same periods in 2019. The decrease~~ was ~~primarily~~ driven by a decline in the fair value of our GSE CRT embedded derivatives ~~in the three months ended March 31, 2020~~ as asset prices dropped due to spread widening.

~~Table of Contents~~

We did not hold any GSE CRTs during the three months ended March 31, 2021.

Net ~~Loss~~Gain (Loss) on Extinguishment of Debt

As discussed in Note 76 - "Borrowings" of our condensed consolidated financial statements include in Part I. Item 1. of this report on Form 10-Q, certain of our counterparties seized and sold securities that we had posted as collateral for our repurchase agreements ~~between March 23, 2020 and~~during the three months ended March 31, 2020. We recorded early termination and legal fees paid to our counterparties that were associated with the termination of these repurchase agreements as a loss on extinguishment of debt in our condensed consolidated statement of operations.

Other Investment Income (Loss), net

Our other investment income (loss), net during the three months ended March 31, 2020 ~~and 2019~~ primarily ~~consists~~consisted of quarterly dividends from FHLBI stock. We are required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured advances from the FHLBI. We earn dividend income on our investment in FHLBI stock, and theThe amount of our dividend income ~~varies~~varied based upon the number of shares that we ~~are~~were required to own and the dividend declared per share.

FHLBI redeemed our stock at cost during 2020. We terminated our FHLBI membership in the third quarter of 2020.

Expenses

We incurred management fees of ~~$11.0~~$4.9 million ~~(March 31, 2019: $9.5 million)~~ for the three months ended March 31, ~~2020.~~2021 (March 31, 2020: $11.0 million). Management fees ~~increased~~decreased for the three months ended March 31, ~~2020~~2021 compared to the same period in ~~2019~~2020 due to a ~~higher~~lower management fee base. Our management fees are calculated quarterly in arrears. Our management fee will be lower in the three months ended June 30, 2020 because the majority of realized losses on our derivative contracts and unrealized losses on our investments due to spread widening did not occur until March 2020. Realized losses on sales of investments in the three months ended June 30, 2020 will further reduce the management fee base in the three months ended September 30, 2020. Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for a discussion of our relationship with our Manager and a description of how our fees are calculated.

Our general and administrative expenses not covered under our management agreement amounted to ~~$3.1~~$2.0 million ~~(March 31, 2019: $2.3 million)~~ for the three months ended March 31, ~~2020.~~2021 (March 31, 2020: $3.1 million). General and administrative expenses primarily consist of

Table of Contents

directors and officers insurance, legal costs, accounting, auditing and tax services, filing fees, and miscellaneous general and administrative costs. General and administrative costs were ~~higher~~lower for the three months ended March 31, ~~2020~~2021 compared to the same period in ~~2019~~2020 primarily due to fees paid for third-party legal and advisory services in connection with navigating market disruption associated with the COVID-19 pandemic during the three months ended March 31, 2020 totaling $1.1 million.

Net Income (Loss) attributable to Common Stockholders

For the three months ended March 31, ~~2020,~~2021, our net loss attributable to common stockholders was $20.4 million (March 31, 2020: $1.6 billion ~~(March 31, 2019: $127.7 million~~ net ~~income~~loss attributable to common stockholders) or ~~$10.38~~$0.09 basic and diluted net loss per average share available to common stockholders (March 31, ~~2019: $1.05~~2020: $10.38 basic and diluted net ~~income~~loss per average share available to common stockholders). The change in net ~~income (loss)~~loss attributable to common stockholders was primarily due to (i) net gains on derivative instruments of $287.0 million in the 2021 period compared to net losses on derivative instruments of $910.8 million in the 2020 period; (ii) net losses on investments of $331.9 million in the 2021 period compared to ~~net losses on derivative instruments of $201.5 million in the 2019 period; (ii)~~ a net ~~loss~~losses on investments of $755.5 million in the 2020 ~~period compared to a net gains on investments of $268.4 million in the 2019~~ period; (iii) credit derivative net losses of $33.1 million in the 2020 ~~period compared to credit derivative net income of $7.9 million in the 2019~~ period; and (iv) a ~~$27.0~~$59.3 million ~~increase~~decrease in net interest income.

For further information on the changes in net gains (loss) on derivative instruments, net gain (loss) on investments, realized and unrealized credit derivative income (loss), net and net interest income, see preceding discussion under "Gain (Loss) on Derivative Instruments, net," "Gain (Loss) on Investments, net," "Realized and Unrealized Credit Derivative Income (Loss), net," and "Net Interest Income."

~~Table of Contents~~

Non-GAAP Financial Measures

We ~~have historically used~~use the following non-GAAP financial measures to analyze the Company's operating results and believe these financial measures are useful to investors in assessing our performance as further discussed below:

•core earnings (and by calculation, core earnings per common share),

•effective interest income (and by calculation, effective yield),

•effective interest expense (and by calculation, effective cost of funds),

•effective net interest income (and by calculation, effective interest rate margin), and

•~~repurchase agreement~~economic debt-to-equity ratio.

The most directly comparable U.S. GAAP measures are:

•net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share),

•total interest income (and by calculation, earning asset yields),

•total interest expense (and by calculation, cost of funds),

•net interest income (and by calculation, net interest rate margin), and

•debt-to-equity ratio.

We ~~are~~adjust our calculations of non-GAAP financial measures for changes in the composition of our investment portfolio where appropriate. We have historically adjusted core earnings to exclude the impact of realized and unrealized gains and losses on GSE CRT embedded derivatives. Beginning in 2021, realized and unrealized gains and losses on GSE CRT embedded derivatives no longer impacted the reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to core earnings because we sold all of our GSE CRTs that were accounted for as hybrid financial instruments during 2020. Additionally, we have historically calculated effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that was recorded as realized and unrealized credit derivative income (loss), net. As we no longer earn embedded derivative coupon interest due to the sale of our GSE CRTs during 2020, effective interest income will be equal to U.S. GAAP total interest income beginning in 2021.

We did not ~~presenting~~present core earnings for the ~~three months~~first half of 2020 or for the year ended ~~March~~December 31, 2020 ~~("first quarter 2020 core earnings")~~ because core earnings ~~excludes~~excluded the material adverse impact ~~that~~of the market disruption caused by the COVID-19 pandemic ~~has had~~ on our financial condition. In addition, ~~first quarter 2020~~ core earnings ~~are~~for the first half of 2020 and the year ended December 31, 2020 was not indicative of the reduced earnings potential of our current investment portfolio. ~~We intend to resume reporting core earnings when its presentation provides a useful measure~~

Table of ~~our portfolio’s earning capacity.~~Contents

We are also not presenting a repurchase agreement debt-to-equity ratio because this ratio as of March 31, 2020 is not indicative of how we have historically managed our business prior to the market disruption caused by the COVID-19 pandemic. In addition, we do not have any repurchase agreements as of the date of this release.

The non-GAAP financial measures used by management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures. In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of our peer companies.

Core Earnings

We calculate core earnings as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; TBA dollar roll income; (gain) loss on foreign currency transactions, net; amortization of net deferred (gain) loss on de-designated interest rate swaps; and net (gain) loss on extinguishment of debt. We may add and have added additional reconciling items to our core earnings calculation as appropriate.

We believe the presentation of core earnings provides a consistent measure of operating performance by excluding the impact of gains and losses described above from operating results. We exclude the impact of gains and losses because gains and losses are not accounted for consistently under U.S. GAAP. Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income. For example, a portion of our mortgage-backed securities are classified as available-for-sale securities, and we record changes in the valuation of these securities in other comprehensive income on our condensed consolidated balance sheets. We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in our condensed consolidated statements of operations. In addition, certain gains and losses represent one-time events.

We believe that providing transparency into core earnings enables our investors to consistently measure, evaluate and compare our operating performance to that of our peers over multiple reporting periods. However, we caution that core earnings should not be considered as an alternative to net income (determined in accordance with U.S. GAAP), or as an indication of our cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of our liquidity, or as an indication of amounts available to fund our cash needs, including our ability to make cash distributions.

The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to core earnings for the following periods:


	Three Months Ended March 31,
$ in thousands, except per share data		2021
Net income (loss) attributable to common stockholders		(20,382)
Adjustments:
(Gain) loss on investments, net		331,857
Realized (gain) loss on derivative instruments, net (1)		(282,250)
Unrealized (gain) loss on derivative instruments, net (1)		(9,260)
TBA dollar roll income (2)		10,545

(Gain) loss on foreign currency transactions, net (3)		16
Amortization of net deferred (gain) loss on de-designated interest rate swaps(4)		(5,368)


Subtotal		45,540


Core earnings attributable to common stockholders		25,158
Basic income (loss) per common share		(0.09)
Core earnings per share attributable to common stockholders (5)		0.11

(1)U.S. GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the following components:


	Three Months Ended March 31,
$ in thousands		2021
Realized gain (loss) on derivative instruments, net		282,250
Unrealized gain (loss) on derivative instruments, net		9,260
Contractual net interest income (expense) on interest rate swaps		(4,549)
Gain (loss) on derivative instruments, net		286,961

Table of Contents

(2)A TBA dollar roll is a series of derivative transactions where TBAs with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold. The TBA settling in the later month typically prices at a discount to the TBA settling in the earlier month. TBA dollar roll income represents the price differential between the TBA price for current month settlement versus the TBA price for forward month settlement. We include TBA dollar roll income in core earnings because it is the economic equivalent of interest income on the underlying Agency securities, less an implied financing cost, over the forward settlement period. TBA dollar roll income is a component of gain (loss) on derivative instruments, net on our condensed consolidated statements of operations.

(3)Gain (loss) on foreign currency transactions, net is included in other investment income (loss) net on the condensed consolidated statements of operations.

(4)U.S. GAAP repurchase agreements interest expense on the condensed consolidated statements of operations includes the following components:


	Three Months Ended March 31,
$ in thousands		2021
Interest expense on repurchase agreement borrowings		3,708
Amortization of net deferred (gain) loss on de-designated interest rate swaps		(5,368)
Repurchase agreements interest expense		(1,660)

(5)Core earnings per share attributable to common stockholders is equal to core earnings divided by the basic weighted average number of common shares outstanding.

The components of core earnings for the three months ended March 31, 2021 are:


	Three Months Ended March 31,
$ in thousands		2021
Effective net interest income(1)		31,753
TBA dollar roll income		10,545

Equity in earnings (losses) of unconsolidated ventures		(94)
(Increase) decrease in provision for credit losses		938
Total expenses		(6,877)
Total core earnings		36,265
Dividends to preferred stockholders		(11,107)


Core earnings attributable to common stockholders		25,158

(1)See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.

Core earnings during the three months ended March 31, 2021 was driven by effective net interest income and TBA dollar roll income. As discussed above, we did not report core earnings for the three months ended March 31, 2020.

Table of Contents

Effective Interest Income / Effective Yield / Effective Interest Expense / Effective Cost of Funds / Effective Net Interest Income / Effective Interest Rate Margin

~~We calculate~~Prior to 2021, we calculated effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that iswas recorded as realized and unrealized credit derivative income (loss), net. We ~~include~~included our GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest iswas not accounted for consistently under U.S. GAAP. We ~~account~~accounted for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but ~~we have~~ elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP, coupon interest on GSE CRTs accounted for using the fair value option is recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments iswas recorded as realized and unrealized credit derivative income (loss). We ~~add~~added back GSE CRT embedded derivative coupon interest to our total interest income because we ~~consider~~considered GSE CRT embedded derivative coupon interest a current component of our total interest income irrespective of whether we elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.

We calculate effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. We view our interest rate swaps as an economic hedge against increases in future market interest rates on our floating rate borrowings. We add back the net payments we make on our interest rate swap agreements to our total U.S. GAAP interest expense because we use interest rate swaps to add stability to interest expense. We exclude the amortization of net deferred gains (losses) on de-designated interest rate swaps from our calculation of effective interest expense because we do not consider the amortization a current component of our borrowing costs.

~~Table of Contents~~

We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net; amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that iswas recorded as realized and unrealized credit derivative income (loss), net.

We believe the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, ~~provide~~provides information that is useful to investors in understanding our borrowing costs and operating performance.

The following tables reconcile total interest income to effective interest income and yield to effective yield for the following periods:


		Three Months Ended March 31,											Three Months Ended March 31,
		2020				2019						2021			2020
$ in thousands	$ in thousands	Reconciliation	Yield/Effective Yield		Reconciliation	Yield/Effective Yield		$ in thousands	Reconciliation	Yield/Effective Yield		Reconciliation	Yield/Effective Yield
Total interest income	Total interest income	186,699	4.19	%	187,074	3.91	%	Total interest income	40,010	1.72	%	186,699	4.19	%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net	Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net	4,718	0.10	%	5,350	0.11	%	Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net	—	—	%	4,718	0.10	%
Effective interest income	Effective interest income	191,417	4.29	%	192,424	4.02	%	Effective interest income	40,010	1.72	%	191,417	4.29	%

Our effective interest income decreased ~~$1.0 million~~ in the three months ended March 31, ~~2020~~2021 versus the same period in ~~2019~~2020 due to lower average earning ~~assets.~~assets and changes in portfolio composition. Our average earning assets decreased to ~~$17.8~~$9.3 billion for the three months ended March 31, ~~2020~~2021 from ~~$19.2~~$17.8 billion for the same period in 2020 primarily because we sold MBS and GSE CRTs ~~in March 2020 for cash proceeds of $16.2 billion~~ due to disruption in the financial markets caused by the COVID-19 pandemic as previously discussed. Our effective yield decreased in the three months ended March 31, 2021 versus the same period in 2020 due to changes in portfolio composition. Almost all of our investment portfolio (excluding TBAs) was invested in Agency RMBS as of March 31, 2021 compared to 18% as of March 31, 2020.

Table of Contents

The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods.


		Three Months Ended March 31,											Three Months Ended March 31,
		2020				2019						2021			2020
$ in thousands	$ in thousands	Reconciliation	Cost of Funds / Effective Cost of Funds		Reconciliation	Cost of Funds / Effective Cost of Funds		$ in thousands	Reconciliation	Cost of Funds / Effective Cost of Funds		Reconciliation	Cost of Funds / Effective Cost of Funds
Total interest expense	Total interest expense	85,688	2.07	%	113,019	2.65	%	Total interest expense	(1,660)	(0.08)	%	85,688	2.07	%
Add (Less): Amortization of net deferred gain (loss) on de-designated interest rate swaps		10,067	0.24	%	5,851	0.14	%
Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps								Add: Amortization of net deferred gain (loss) on de-designated interest rate swaps	5,368	0.26	%	10,067	0.24	%
Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net	Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net	(11,924)	(0.29)	%	(4,509)	(0.11)	%	Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net	4,549	0.22	%	(11,924)	(0.29)	%
Effective interest expense	Effective interest expense	83,831	2.02	%	114,361	2.68	%	Effective interest expense	8,257	0.40	%	83,831	2.02	%

Our effective interest expense and effective cost of funds decreased during the three months ended March 31, ~~2020~~2021 compared to the same period in ~~2019~~2020 primarily due to lower interest expense paid on our repurchase agreements ~~as well as higher~~due to lower average borrowings and a lower Federal Funds target interest rate. Lower interest expense on repurchase agreements was partially offset by contractual net interest ~~income earned~~expense on ~~our~~ interest rate ~~swaps. We paid interest expense~~swaps of ~~$85.7~~$4.5 million during the three months ended March 31, ~~2020~~2021 compared to ~~$113.0~~$11.9 million of contractual net interest income for the same period in 2019 due to lower average borrowings and a lower federal funds target interest rate. We earned contractual net interest income on interest rate swaps of $11.9 million during the three months ended March 31, 2020 compared to $4.5 million for the same period in 2019. Our higher contractual net interest income on interest rate swaps was driven by falling interest rates. For further information on interest expense and cost of funds, see the preceding discussion under "Interest Expense and Cost of Funds".

~~Table of Contents~~

2020.

The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods.


		Three Months Ended March 31,											Three Months Ended March 31,
		2020				2019						2021			2020
$ in thousands	$ in thousands	Reconciliation	Net Interest Rate Margin / Effective Interest Rate Margin		Reconciliation	Net Interest Rate Margin / Effective Interest Rate Margin		$ in thousands	Reconciliation	Net Interest Rate Margin / Effective Interest Rate Margin		Reconciliation	Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income	Net interest income	101,011	2.12	%	74,055	1.26	%	Net interest income	41,670	1.80	%	101,011	2.12	%
Add (Less): Amortization of net deferred (gain) loss on de-designated interest rate swaps		(10,067)	(0.24)	%	(5,851)	(0.14)	%
Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps								Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps	(5,368)	(0.26)	%	(10,067)	(0.24)	%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net	Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net	4,718	0.10	%	5,350	0.11	%	Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net	—	—	%	4,718	0.10	%
Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net	Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net	11,924	0.29	%	4,509	0.11	%	Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net	(4,549)	(0.22)	%	11,924	0.29	%
Effective net interest income	Effective net interest income	107,586	2.27	%	78,063	1.34	%	Effective net interest income	31,753	1.32	%	107,586	2.27	%

Effective net interest income and effective interest rate margin for the three months ended March 31, ~~2020 increased~~2021 decreased from the same period in ~~2019~~2020 primarily due to lower average ~~borrowings,~~earning assets and lower effective ~~interest expense~~yields that were partially offset by lower average borrowings and a lower effective cost of funds driven by cuts in the ~~federal funds interest rate~~Federal Funds rate.

Table of Contents

Economic Debt-to-Equity Ratio

The tables below show the allocation of our stockholders' equity to our target assets, our debt-to-equity ratio, and ~~higher contractual net interest income~~our economic debt-to-equity ratio as of March 31, 2021 and December 31, 2020. Our debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt to total stockholders' equity. As of March 31, 2021, approximately 91% of our equity is allocated to Agency RMBS.

We present an economic debt-to-equity ratio, a non-GAAP financial measure of leverage that considers the impact of the off-balance sheet financing of our investments in TBAs that are accounted for as derivative instruments under U.S. GAAP. We include our TBAs at implied cost basis in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a contract for the forward sale of Agency RMBS has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. We believe that presenting our economic debt-to-equity ratio, when considered together with our U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates our at-risk leverage and gives investors a comparable statistic to those other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage.

March 31, 2021


$ in thousands	Agency RMBS	Credit Portfolio (1)	Total
Mortgage-backed securities	8,997,918	101,824	9,099,742
Cash and cash equivalents (2)	198,357	—	198,357
Restricted cash (3)	380,678	—	380,678
Derivative assets, at fair value (3)	16,634	559	17,193
Other assets	30,340	36,526	66,866
Total assets	9,623,927	138,909	9,762,836

Repurchase agreements	8,240,887	—	8,240,887



Derivative liabilities, at fair value (3)	4,273	—	4,273
Other liabilities	31,155	4,589	35,744
Total liabilities	8,276,315	4,589	8,280,904

Total stockholders' equity (allocated)	1,347,612	134,320	1,481,932
Debt-to-equity ratio (4)	6.1	—	5.6
Economic debt-to-equity ratio (5)	7.3	—	6.6

(1)Investments in non-Agency CMBS, non-Agency RMBS, a commercial loan and unconsolidated joint ventures are included in credit portfolio.

(2)Cash and cash equivalents is allocated based on ~~interest rate swaps~~our financing strategy for each asset class.

(3)Restricted cash and derivative assets and liabilities are allocated based on the hedging strategy for each asset class.

(4)Debt-to-equity ratio is calculated as ~~previously discussed.~~the ratio of total repurchase agreements to total stockholders' equity.

(5)Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.5 billion as of March 31, 2021) to total stockholders' equity.

Table of Contents

December 31, 2020


$ in thousands	Agency RMBS	Credit Portfolio (1)	Total
Mortgage-backed securities	8,050,865	121,317	8,172,182
Cash and cash equivalents (2)	148,011	—	148,011
Restricted cash	243,963	610	244,573
Derivative assets, at fair value (3)	9,893	111	10,004
Other assets	17,606	40,475	58,081
Total assets	8,470,338	162,513	8,632,851

Repurchase agreements	7,228,699	—	7,228,699


Derivative liabilities, at fair value (3)	5,537	807	6,344
Other liabilities	27,114	3,536	30,650
Total liabilities	7,261,350	4,343	7,265,693

Total stockholders' equity (allocated)	1,208,988	158,170	1,367,158
Debt-to-equity ratio (4)	6.0	—	5.3
Economic debt-to-equity ratio (5)	7.4	—	6.6

(1)Investments in non-Agency CMBS, non-Agency RMBS, a commercial loan and unconsolidated joint ventures are included in credit portfolio.

(2)Cash and cash equivalents is allocated based on our financing strategy for each asset class.

(3)Restricted cash and derivative assets and liabilities are allocated based on the hedging strategy for each asset class.

(4)Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity.

(5)Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis ($1.8 billion as of December 31, 2020) to total stockholders' equity.

Liquidity and Capital Resources

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repay borrowings and fund other general business needs. Our primary sources of funds for liquidity consist of the net proceeds from our common and preferred equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities.

We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, margin requirements and the payment of cash dividends as required for continued qualification as a REIT. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements or through the sale of liquid investments. However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls.

The COVID-19 pandemic-driven disruptions in the real estate, mortgage and financial markets ~~have~~ negatively affected ~~and are expected to continue to negatively affect~~ our ~~liquidity.~~liquidity during the year ended December 31, 2020. Under the terms of our repurchase agreements, ~~and secured loans,~~ our lenders have the contractual right to mark the underlying securities that we post as collateral to fair value as determined in their sole discretion. In addition, our lenders have the contractual right to increase the "haircut", or percentage amount by which collateral value must exceed the amount of borrowings, as market conditions become more volatile. As a result of significant spread widening in both Agency and non-Agency securities in ~~March~~the latter part of the first quarter of 2020, valuations of our portfolio assets declined sharply in a short period of time, leading to an exceptional increase in the frequency and magnitude of margin calls. We sold portfolio assets to generate liquidity, in many cases at significantly distressed market prices. Additionally, our lenders raised required haircuts on our collateral for new repurchase agreements, driving further liquidity needs. ~~We sold portfolio assets in order to generate liquidity, in many cases at significantly distressed market prices.~~ These events have ~~required~~led us to maintain higher levels of cash and unencumbered assets. See Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations and Part II. Other Information - Item 1A. Risk Factors in this Quarterly Report for more information on how the COVID-19 pandemic has impacted and may continueseek to ~~impact our liquidity and capital resources.~~avoid financing less liquid assets, such as non-Agency securities, with repurchase agreements.

We held cash, cash equivalents and restricted cash of ~~$365.0~~$579.0 million at March 31, ~~2020~~2021 (March 31, ~~2019: $83.5~~2020: $365.0 million). ~~As previously discussed, we increased our~~Our cash, cash equivalents and restricted cash increased due to normal fluctuations in cash balances ~~at March 31, 2020~~related to ~~improve our liquidity in light~~the

Table of ~~market disruption created by the COVID-19 pandemic.~~Contents

timing of principal and interest payments, repayments of debt, and asset purchases and sales. Our operating activities provided net cash of ~~$110.0~~$34.5 million for the three months ended March 31, ~~2020~~2021 (March 31, ~~2019: $68.4~~2020: $110.0 million).

Our investing activities ~~provided~~used net cash of $986.3 million in the three months ended March 31, 2021 compared to net cash provided by investing activities of $11.6 billion in the three months ended March 31, ~~2020 compared to net cash used by investing activities of $3.5 billion in the three months ended March 31, 2019.~~2020. Our primary source of cash from investing activities for the three months ended March 31, ~~2020~~2021 was proceeds from sales of MBS and GSE CRTs of ~~$16.2~~$5.5 billion (March 31, ~~2019: $734.8 million) to improve liquidity.~~2020: $16.2 billion). We also generated ~~$636.5~~$200.6 million from principal payments of MBS and GSE CRTs during the three months ended March 31, ~~2020~~2021 (March 31, ~~2019: $300.2~~2020: $636.5 million). ~~Prior to disruption in the financial markets caused by the COVID-19 pandemic, we~~We invested ~~$4.4~~$7.0 billion in MBS and GSE CRTs during the three months ended March 31, ~~2020 (2019: $4.3~~2021 (March 31, 2020: $4.4 billion). We ~~used~~received cash of ~~$904.2~~$282.3 million to ~~terminate~~settle derivative contracts in the three months ended March 31, ~~2020~~2021 (March 31, ~~2019: $232.4~~2020: net cash used of $904.2 million) ~~as we sold our Agency securities and our sensitivity to interest rates decreased.~~

~~Table of Contents~~

Our financing activities ~~used~~provided net cash of ~~$11.6~~$1.1 billion for the three months ended March 31, ~~2020 primarily because we repaid our repurchase agreement borrowings with proceeds from asset sales (2019:~~2021 (March 31, 2020: net cash ~~provided~~used by financing activities of ~~$3.4~~$11.6 billion). We ~~repaid~~received net cash from repurchase agreement borrowing of ~~$11.2~~$1.0 billion (March 31, ~~2019:~~2020: net ~~proceeds provided $3.2~~repayments of $11.2 billion). In addition, we repaid $300.0 million of secured loans from the FHLBI upon their maturity ~~on February 11,~~during the three months ended March 31, 2020. We also used cash of ~~$74.8~~$27.4 million for the three months ended March 31, ~~2020~~2021 to pay dividends (March 31, ~~2019: $58.0~~2020: $74.8 million) ~~to pay dividends.~~. Proceeds from issuance of common stock provided ~~$347.3~~$161.4 million for the three months ended March 31, ~~2020~~2021 (March 31, ~~2019: $259.0~~2020: $347.3 million).

As of March 31, ~~2020,~~2021, the average margin requirement (weighted by borrowing amount), or the ~~percentage amount by which the collateral value must exceed the loan amount (also referred to as the "haircut")~~haircut, under our repurchase agreements was ~~5.2%~~4.9% for Agency ~~RMBS, 5.4% for Agency CMBS, 17.1% for non-Agency RMBS, 20.7% for GSE CRT and 21.0% for non-Agency CMBS. Across our repurchase agreement facilities, the~~RMBS. The haircuts ranged from a low of ~~5.0%~~4% to a high of 8.0% for Agency RMBS, a low of 5.0% to a high of 10.0% for Agency CMBS, a low of 8.0% to a high of 35.0% for non-Agency RMBS, a low of 13.0% to a high of 50.0% for GSE CRT and a low of 10.0% to a high of 40.0% for non-Agency CMBS. Our repurchase agreement counterparties increased haircuts during5%. Declines in the ~~three months ended March 31, 2020 as financial conditions deteriorated and the fair~~ value of our securities ~~became more difficult~~portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event may give our counterparties the option to ~~determine.~~terminate all repurchase transactions outstanding with us and require any amount due from us to the counterparties to be payable immediately.

Effects of Margin Requirements, Leverage and Credit Spreads

Our securities have values that fluctuate according to market conditions and the market value of our securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a "margin call," which means that the lender will require us to pay cash or pledge additional collateral. Under our repurchase facilities, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities based on recent trades 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 and increased collateral requirements 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 unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will seek 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 or increased collateral requirements. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness.

We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls and increased collateral requirements but that also allows us to be substantially invested in securities. 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 would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.

We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to operate in a manner which complies with all of our financial covenants. Our lending and derivative agreements provide that we may be declared in default of our obligations if our leverage ratio exceeds certain thresholds and we fail to maintain stockholders’ equity or market value above certain thresholds over specified time periods.

Table of Contents

Forward-Looking Statements Regarding Liquidity

As ~~previously discussed, we repaid all~~ of ~~our repurchase agreement borrowings on May 7, 2020 and reduced the balance of our secured loans from $1.35 billion at~~ March 31, ~~2020 to $837.5 million as~~2021, we held $8.6 billion of ~~May 31, 2020.~~

~~As of May 31, 2020, our investment portfolio is primarily composed of credit assets~~Agency securities that are financed by ~~FHLBI. Our secured loans are due by December 2020, and we intend to repay FHLBI with proceeds from sales of assets that are currently collateralizing our secured loans.~~

repurchase agreements. We ~~have~~also had approximately ~~$540~~$494.5 million of unencumbered ~~securities as of May 31, 2020~~investments and unrestricted cash of ~~$272.5 million. We intend to finance the purchase~~$198.4 million as of new Agency investments with a moderate amount of repurchase agreement borrowings or other financing arrangements. We will determine the amount of leverage on new investments based upon the type of investment and market conditions at the time of investment.March 31, 2021.

Based upon our current portfolio and existing borrowing arrangements, ~~and anticipated proceeds from sales of assets that are currently collateralizing our secured loans,~~ we believe that cash flow from operations, and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our required distributions to stockholders and fund other general corporate expenses.

Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing. We may increase our capital resources by obtaining long-term credit facilities or through public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, senior or subordinated notes and convertible notes. Such financing will depend on market conditions for capital raises and our ability to invest such offering proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.

Contractual Obligations

We have entered into an agreement with our Manager under which our Manager is entitled to receive a management fee and the reimbursement of certain operating expenses incurred on our behalf. The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our stockholders’ equity, per annum. Refer to Note 11 - "Related Party Transactions" of our condensed consolidated financial statements for additional information on how our management fee is calculated. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel who, notwithstanding that certain of those individuals are also our officers, receive no cash compensation directly from us. We are required to reimburse our Manager for operating expenses related to us incurred by our Manager, 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. Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for details of our reimbursements to our Manager.

~~Table of Contents~~

As of March 31, ~~2020,~~2021, we had the following contractual obligations:

Payments Due by Period
$ in thousands Total Less than 1
year 1-3 years 3-5 years After 5
years
Repurchase agreements ⁽¹⁾
6,287,746 6,287,746 — — —
Secured loans ⁽²⁾
1,350,000 100,000 — — 1,250,000
Interest expense on repurchase agreements ⁽³⁾
11,596 11,596 — — —
Interest expense on secured loans ^{(2) (3)}
84,800 33,343 30,936 19,594 927
Total ⁽⁴⁾
7,734,142 6,432,685 30,936 19,594 1,250,927


	Payments Due by Period
$ in thousands	Total	Less than 1 year	1-3 years	3-5 years	After 5 years

Repurchase agreements	8,240,887	8,240,887	—	—	—
Interest expense on repurchase agreements	1,153	1,153	—	—	—
Total (1)	8,242,040	8,242,040	—	—	—

(1)~~We repaid all of our repurchase agreements as of May 7, 2020.~~

~~(2)The FHLBI modified~~ ~~the terms of our secured loans in the second quarter of 2020 as discussed in Note 15 - "Subsequent Events". The balance of our secured loans is due by December 2020.~~

~~(3)Interest expense is calculated based on variable rates in effect at March 31, 2020~~.

~~(4)~~Excluded from total contractual obligations are the amounts due to our Manager under the management agreement, as those obligations do not have fixed and determinable payments.

The above table does not include total commitments of approximately $510.2 million to fund the purchase of Agency CMBS securities because those securities are reported as an investment related payable in our condensed consolidated balance sheet as of March 31, 2020. We have sold our Agency CMBS holdings as of the filing date of this Quarterly Report.

Off-Balance Sheet Arrangements

We have committed to invest up to ~~$125.1~~$125.4 million in unconsolidated ventures that are sponsored by an affiliate of our Manager. As of March 31, ~~2020,~~2021, $118.7 million of our commitment to these unconsolidated ventures had been called. We are committed to fund ~~$6.4~~$6.7 million in additional capital to fund future investments and cover future expenses should they occur.

Table of March 31, 2020, we had an unfunded commitment on a loan participation interest in a secured loan of $49.6 million. We sold our loan participation interest on April 1, 2020 and no longer have any future financing commitments related to this loan participation interest.Contents

Dividends

To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our 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 repurchase agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make 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 discussed above, our distribution requirements are based on REIT taxable income rather than U.S. GAAP net income. The primary differences between our REIT taxable income and U.S. GAAP net income are: (i) unrealized gains and losses on investments that we have elected the fair value option for that are included in current U.S. GAAP income but are excluded from REIT taxable income until realized or settled; (ii) gains and losses on derivative instruments that are included in current U.S. GAAP net income but are excluded from REIT taxable income until realized; and (iii) temporary differences related to amortization of premiums and discounts on investments. For additional information regarding the characteristics of our dividends, refer to Note 12 – ~~“Stockholders' Equity”~~"Stockholders' Equity" of our annual report on Form 10-K for the year ended December 31, ~~2019.~~

~~Inflation~~

Virtually all of our assets and liabilities are sensitive to interest rates. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.2020.

Unrelated Business Taxable Income

We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income.

~~Table of Contents~~

Exposure to Financial Counterparties

We ~~historically~~ finance a substantial portion of our investment portfolio through repurchase agreements. Under these agreements, we pledge assets from our investment portfolio as collateral. Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty.

As of March 31, ~~2020, two~~2021, no counterparties held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than ~~$70.5~~$74.1 million, or 5% of our stockholders' equity. ~~We repaid all of our repurchase agreement borrowings in May 2020 and do not have any repurchase agreement borrowings as of the filing date of this Quarterly Report.~~

The following table summarizes our exposure to counterparties by geographic concentration as of March 31, ~~2020.~~2021. The information is based on the geographic headquarters of the counterparty or counterparty's parent company. However, our repurchase agreements are generally denominated in U.S. dollars.


$ in thousands	$ in thousands	Number of Counterparties	Repurchase Agreement Financing	Exposure	$ in thousands	Number of Counterparties	Repurchase Agreement Financing	Exposure
North America	North America	10	3,763,424	440,519	North America	11	5,182,059	270,933
Europe (excluding United Kingdom)	Europe (excluding United Kingdom)	5	1,140,260	137,350	Europe (excluding United Kingdom)	2	884,295	42,148
Asia	Asia	3	447,803	43,529	Asia	4	2,174,533	109,449
United Kingdom		4	936,259	115,482

Total	Total	22	6,287,746	736,880	Total	17	8,240,887	422,530

Other Matters

We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended March 31, ~~2020,~~2021, and that our proposed method of operation will permit us to satisfy the asset tests, gross income tests, and distribution and stock ownership requirements for our taxable year that will end on December 31, ~~2020.~~2021.

At all times, we intend to conduct our business so that neither we nor our Operating Partnership nor the subsidiaries of our Operating Partnership are required to register as an investment company under the 1940 Act. If we were required to register as an investment company, then our use of leverage would be substantially reduced. Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of

Table of Contents

U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries. In addition, we believe neither we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the Operating Partnership’s wholly-owned or majority-owned subsidiaries, we and the Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries. IAS Asset I LLC and certain of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of "investment company" under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). (“percentage tests”). The SEC staff has issued a “no-action” letter in which it confirmed that it would not recommend enforcement action if an issuer continues to rely on the exclusion provided by Section 3(c)(5)(C) of the 1940 Act if the issuer does not meet the percentage tests if: (1) the inability to meet those tests is the result of the sale of an underlying asset; (2) proceeds from the sale are invested in government securities, certificates of deposit, or other securities appropriate for the purpose of preserving value pending the investment of the proceeds in assets that meet the percentage tests; and (3) the issuer intends to purchase assets that meet the percentage tests as soon as possible but generally within one year. (Medidentic Mortgage Investors, SEC No-Action Letter (May 23, 1984)). In light of this analysis, we believeWe calculate that as of March 31, ~~2020,~~2021, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

~~Table of Contents~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The primary components of our market risk are related to interest rate, principal prepayment and market value. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and we seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

For additional discussion of market risk associated with the COVID-19 pandemic, see Part I. Item ~~Part II. Item 1A~~1 - Risk Factors of ~~this Quarterly Report.~~our annual report on Form 10-K for the year ended December 31, 2020.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We are subject to interest rate risk in connection with our investments and our repurchase agreements. Our repurchase agreements are typically short-term in nature and are periodically refinanced at current market rates. We typically mitigate this interest rate risk by utilizing derivative contracts, primarily interest rate swap agreements, futures contracts and TBAs.

The COVID-19 pandemic caused significant dislocations in financial markets, including the interest rates market. In March 2020, the Federal Open Market Committee lowered the Federal Funds target range to 0 to 0.25%. We currently do not have any interest rate hedges in place given our expectation that normal correlations between hedging instruments and portfolio assets would not follow historical patterns. We intend to resume interest rate hedging activity when normal market correlations resume in the fixed income markets.

Interest Rate Effect on Net Interest Income

Our operating results depend in large part upon differences between the yields earned on our investments and our cost of borrowing and interest rate hedging activities. Most of our repurchase agreements provide financing based on a floating rate of interest calculated on a fixed spread over LIBOR. The fixed spread will vary depending on the type of underlying asset which collateralizes the financing. Accordingly, the portion of our portfolio which consists of floating interest rate assets are match-funded utilizing our expected sources of short-term financing, while our fixed interest rate assets are not match-funded. During periods of rising interest rates, the borrowing costs associated with our investments tend to increase while the income earned on our fixed interest rate investments may remain substantially unchanged. This increase in borrowing costs results in the narrowing of the net interest spread between the related assets and borrowings and may even result in losses. Further, ~~during this portion of the interest rate and credit cycles,~~ defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Such delinquencies or defaults could also have an adverse effect on the spread between interest-earning assets and interest-bearing liabilities.

Hedging techniques are partly based on assumed levels of prepayments of our RMBS. If prepayments are slower or faster than assumed, the life of the RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.

Interest Rate Effects on Fair Value

Another component of interest rate risk is the effect that changes in interest rates will have on the market value of the assets that we acquire. We face the risk that the market value of our assets will increase or decrease at different rates than those of our liabilities, including our hedging instruments.

We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration ~~numbers~~values for the same securities.

The impact of changing interest rates on fair value can change significantly when interest rates change materially. Therefore, the volatility in the fair value of our assets could increase significantly in the event interest rates change materially. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, changes in actual interest rates may have a material adverse effect on us.

6153

Table of Contents

Spread Risk

We employ a variety of spread risk management techniques that seek to mitigate the influences of spread changes on our book value and our liquidity to help us achieve our investment objectives. We refer to the difference between interest rates on our investments and interest rates on risk free instruments as spreads. The yield on our investments changes over time due to the level of risk free interest rates, the creditworthiness of the security, and the price of the perceived risk. The change in the market yield of our interest rate hedges also changes primarily with the level of risk free interest rates. We manage spread risk through careful asset selection, sector allocation, regulating our portfolio value-at-risk, and maintaining adequate liquidity. Changes in spreads impact our book value and our liquidity and could cause us to sell assets and to change our investment strategy ~~in order~~ to maintain liquidity and preserve book value.

~~Uncertainties related~~Unprecedented government responses to the COVID-19 pandemic, ~~caused credit spreads to widen significantly in the second half of March 2020. Unprecedented government responses,~~ including fiscal stimulus, monetary policy actions, and various purchase and financing programs have ~~had~~impacted and will continue to impact credit spreads.

Prepayment Risk

As we receive prepayments of principal on our investments, premiums paid on these investments are amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments.

Historically low interest rates, high interest rate volatility, uncertainties related to government ~~polices~~policies on mortgage finance in response to the COVID-19 pandemic, social distancing, and other factors have made it more difficult to predict prepayment levels for the securities in our portfolio. As a result, it is possible that realized prepayment behavior will be materially different from our expectations.

Extension Risk

We compute the projected weighted average life of our investments based upon assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when a fixed-rate or hybrid adjustable-rate security is acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect us from rising interest rates, because the borrowing costs are fixed for the duration of the fixed-rate portion of the related target asset.

However, if prepayment rates decrease in a rising interest rate environment, then the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the hybrid adjustable-rate assets would remain fixed. This situation may also cause the market value of our hybrid adjustable-rate assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

Market Risk

Market Value Risk

Our available-for-sale securities are reflected at their estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income ~~pursuant to~~under ASC Topic 320. The estimated fair value of these securities fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of these securities would be expected to decrease; conversely, in a ~~decreasing~~falling interest rate environment, the estimated fair value of these securities would be expected to increase.

The COVID-19 pandemic and related preventative measures have caused unprecedented volatility and illiquidity in fixed income markets. The amount of financing we receive under our repurchase agreements is directly related to our counterparties’ valuation of our assets that collateralize the outstanding repurchase agreement financing. As a result, if these market conditions persist, margin call risk remains elevated and our operating results and financial condition may be materially impacted.

The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments and net interest income, including net interest paid or received under interest rate swaps, at March 31, ~~2020,~~2021, assuming a static portfolio and constant financing and credit spreads. When evaluating the impact of changes in interest rates, prepayment assumptions and

~~Table of Contents~~

principal reinvestment rates are adjusted based on our Manager’s expectations. The analysis presented utilized assumptions, models and estimates of our Manager based on our Manager’s judgment and experience.

Change in Interest Rates Percentage Change in Projected
Net Interest Income Percentage Change in Projected
Portfolio Value
+1.00% (22.47) % (3.62) %
+0.50% (10.87) % (1.80) %
-0.50% 11.17 % 1.66 %
-1.00% 23.16 % 2.72 %

Table of Contents


Change in Interest Rates	Percentage Change in Projected Net Interest Income		Percentage Change in Projected Portfolio Value
+1.00%	(2.31)	%	(3.00)	%
+0.50%	0.21	%	(1.35)	%
-0.50%	(8.72)	%	0.44	%
-1.00%	(23.89)	%	(0.36)	%

Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at March 31, ~~2020.~~2021. Furthermore, while we generally expect to retain such assets and the associated interest rate risk to maturity, future purchases and sales of assets could materially change our interest rate risk profile.

Our scenario analysis assumes a floor of 0% for U.S. Treasury yields. Given the relatively low interest rates at March 31, ~~2020,~~2021, to be consistent, we also applied a floor of 0% for all related funding costs. Due to this floor, we anticipate that declines in funding costs resulting from a significant interest rate decrease would be limited. At the same time, increases in prepayment speed forecasts resulting from lower rates are also limited by this assumption. For purposes of our calculations, the net interest income projections are determined for each specific security. In contrast, for the market value analysis, this floor may limit the gains in market values in scenarios where the interest rate drops significantly.

The information set forth in the interest rate sensitivity table above and all related disclosures constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table.

Real Estate Risk

Residential and commercial property values are subject to volatility and may be adversely affected by a number of factors, including, but not limited to: national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as the supply of housing ~~stock)~~stock or other property sectors); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.

Credit Risk

We retain the risk of potential credit losses on all of our residential and commercial mortgage investments. We seek to manage this risk through our pre-acquisition due diligence process. In addition, we re-evaluate the credit risk inherent in our investments on a regular basis pursuant to fundamental considerations such as GDP, unemployment, interest rates, retail sales, store closings/openings, corporate earnings, housing inventory, affordability and regional home price trends. We also review key loan credit metrics including, but not limited to, payment status, current loan-to-value ratios, current borrower credit scores and debt yields. These characteristics assist in determining the likelihood and severity of loan loss as well as prepayment and extension expectations. We then perform structural analysis under multiple scenarios to establish likely cash flow profiles and credit enhancement levels relative to collateral performance projections. This analysis allows us to quantify our opinions of credit quality and fundamental value, which are key drivers of portfolio management decisions.

The conditions related to the COVID-19 pandemic have adversely affected the fundamentals of many of our portfolio investments. The significant decrease in economic activity and/or resulting decline in the housing market could have an adverse effect on the value of our investments in mortgage real estate-related assets. Further, ~~in light~~because of the COVID-19 pandemic’s impact on the overall economy, such as rising unemployment levels or changes in consumer behavior related to loans as well as government policies and pronouncements, borrowers may experience difficulties meeting their obligations or seek to forbear or further forbear payment on or refinance their mortgage loans to avail themselves of lower rates. In addition to residential mortgage-related assets, the adverse economic conditions could negatively impact tenants onunderlying our commercial property assets resulting in potential delinquencies, defaults or declines in asset values. In many instances, tenants are foregoing rent payments or seeking forbearance. As a result, loans may experience increased delinquencies and defaults, which could impact the fundamental performance of our mortgage-backed securities. Further, we expect credit rating agencies to reassess transactions that are negatively impacted by these adverse changes. This may result in our investments being downgraded by credit rating agencies.

6355

Table of Contents

Foreign Exchange Rate Risk

We have an investment of ~~€14.1~~€11.4 million in an unconsolidated joint venture whose net assets and results of operations are exposed to foreign currency translation risk when translated in U.S. dollars upon consolidation. We seek to hedge our foreign currency exposures by purchasing currency forward contracts.

Risk Management

To the extent consistent with maintaining our REIT qualification, we seek to manage risk exposure to protect our investment portfolio against the effects of major interest rate changes. We generally seek to manage this risk by:

•monitoring and adjusting, if necessary, the reset index and interest rate related to our target assets and our financings;

•attempting to structure our financing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;

•exploring options to obtain financing arrangements that are not marked to ~~market~~market;

•using hedging instruments, primarily interest rate swap agreements but also financial futures, options, interest rate cap agreements, floors and forward sales to adjust the interest rate sensitivity of our target assets and our borrowings; and

•actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset margins of our target assets and the interest rate indices and adjustment periods of our financings.

6456

Table of Contents

ITEM 4. CONTROLS AND PROCEDURES.

Our management is responsible for establishing and maintaining disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.

We have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of March 31, ~~2020.~~2021. Based upon our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31, ~~2020~~2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

6557

Table of Contents

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of March 31, ~~2020,~~2021, we were not involved in any such legal proceedings.

ITEM 1A. RISK FACTORS.

There were no material changes during the period covered by this Report to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2019, other than those risks related to~~2020, as filed with the ~~COVID-19 pandemic as described below.~~SEC on February 22, 2021. Additional risks not presently known, or that we currently deem immaterial, also may have a material adverse effect on our business, financial condition and results of operations.

~~The global COVID-19 pandemic has adversely affected, and will likely continue to adversely affect, the U.S. economy, the mortgage REIT industry and our business.~~

The COVID-19 pandemic and the related preventative measures are causing significant disruptions to the U.S. and global economies and has contributed to volatility and negative pressure in financial markets. Many businesses, particularly smaller ones within the service-sector, have been forced to close, furlough and/or lay off employees. As a result, U.S. unemployment claims have dramatically risen at unprecedented rates. Other economic activity, including retail sales and industrial production, have slowed as well. Current forecasts of economic activity suggest a meaningful economic contraction in the first half of 2020, with the potential for some economic recovery later in the year. However, the pace, timing and strength of any recovery are still unknown and difficult to predict.

Beginning in the first quarter of 2020, particularly in March, the COVID-19 pandemic began to adversely affect the mortgage REIT industry generally. In addition to negative general economic conditions, the impact of COVID-19 caused severe volatility across asset classes, including mortgage-related assets. Forced sales of the securities and other assets that secure repurchase and other financing arrangements due to drops in fair market value of such collateral have been, and may continue to be, on terms less favorable than might otherwise be available in a regularly functioning market and have, and may continue to generate ~~higher than historical levels of margin calls.~~

The conditions related to the COVID-19 pandemic discussed above have also adversely affected our business and we expect these conditions to continue during 2020. The significant decrease in economic activity and/or resulting decline in the real estate market could have an adverse effect on the value of our investments in mortgage real estate-related assets. Further, in light of the COVID-19 pandemic’s impact on the overall economy, such as rising unemployment levels or changes in consumer behavior related to loans as well as government policies and pronouncements, borrowers may experience difficulties meeting their obligations or seek to forbear or further forbear payment on or refinance their mortgage loans to avail themselves of lower rates. Elevated levels of delinquency or default would have an adverse impact on the value of our mortgage related assets. In addition to residential mortgage-related assets, the adverse economic conditions could negatively impact tenants on our commercial property assets resulting in potential delinquencies, defaults or declines in asset values. To the extent current conditions persist or worsen, we expect there to be a negative effect on our results of operations, which may reduce earnings and, in turn, cash available for distribution to our stockholders. The continued spread of COVID-19 could also negatively impact the availability of our Manager’s key personnel necessary to conduct our business.

In response to the COVID-19 pandemic, the U.S. government has taken various actions to support the economy and the continued functioning of the financial markets. The Federal Reserve has announced its commitment to purchase unlimited amounts of U.S. Treasuries, mortgage-backed securities, municipal bonds and other assets. In addition, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which will provide billions of dollars of relief to individuals, businesses, state and local governments, and the health care system suffering the impact of the pandemic, including mortgage loan forbearance and modification programs to qualifying borrowers who have difficulty making their loan payments. There can be no assurance as to how, in the long term, these and other actions by the U.S. government will affect the efficiency, liquidity and stability of the financial and mortgage markets. To the extent the financial or mortgage markets do not respond favorably to any of these actions, or such actions do not function as intended, our business, results of operations and financial condition may continue to be materially adversely affected.

~~Table of Contents~~

Our inability to access funding or the terms on which funding is available could have a material adverse effect on our results of operations and financial condition, particularly in light of ongoing market dislocations resulting from the COVID-19 pandemic.

~~Our~~ ability to fund our operations, meet financial obligations and finance asset acquisitions may be impacted by an inability to secure and maintain our repurchase agreements with counterparties. Because repurchase agreements are short-term commitments of capital, repurchase agreement counterparties may respond to market conditions in a manner that makes it more difficult for us to renew or replace on a continuous basis maturing short-term financings and have and may continue to impose less favorable conditions when rolling such financings. If we are not able to renew or roll our repurchase agreements or arrange for new financing on terms acceptable to us, or if we default on our financial covenants, are otherwise unable to access funds under our financing arrangements, or if we are required to post more collateral or face larger haircuts on our financings, we may have to dispose of assets at significantly lower prices and at inopportune times, which could cause significant losses, and may also force us to limit our asset acquisition activities.

~~Issues~~ related to financing are heightened in times of significant volatility in the financial markets, such as those being experienced now in connection with the COVID-19 pandemic. It is possible that our financing counterparties will become unwilling or unable to provide us with financing, and we could be forced to sell our assets at an inopportune time when prices are depressed or markets are illiquid, which could cause significant losses. In addition, if the regulatory capital requirements imposed on our financing counterparties change, they may be required to significantly increase the cost of the financing that they provide to us, or to increase the amounts of collateral they require as a condition to providing us with financing. Our financing counterparties also have revised, and may continue to revise, their eligibility requirements for the types of assets that they are willing to finance or the terms of such financings, including increased haircuts and requiring additional cash collateral, based on, among other factors, the regulatory environment and their management of actual and perceived risk. Moreover, the amount of financing that we receive under our repurchase agreements will be directly related to our counterparties’ valuation of our assets that collateralize the outstanding repurchase agreement financing. Typically, repurchase agreements grant the repurchase agreement counterparty the absolute right to reevaluate the fair market value of the assets that cover the amount financed under the repurchase agreement at any time. If a repurchase agreement counterparty determines in its sole discretion that the value of the assets subject to the repurchase agreement financing has decreased, it has the right to initiate a margin call. These valuations may be different than the values that we ascribe to these assets and may be influenced by recent asset sales at distressed levels by forced sellers. A margin call requires us to transfer additional assets to a repurchase agreement counterparty without any advance of funds from the counterparty for such transfer or to repay a portion of the outstanding repurchase agreement financing. We would also be required to post additional collateral if haircuts increase under a repurchase agreement. In these situations, we could be forced to sell assets at significantly depressed prices to meet such margin calls or increased haircuts and to maintain adequate liquidity, which could cause significant losses.

As a result of the ongoing COVID-19 pandemic, during the first quarter of 2020, we observed a mark-down of a portion of our mortgage assets by the counterparties to our financing arrangements, resulting in us having to post cash or securities to satisfy higher than historical levels of margin calls. Significant margin calls had and could have in the future a material adverse effect on our results of operations, financial condition, business, liquidity and ability to make distributions to our stockholders, and caused and could cause in the future the value of our common stock to decline. We may be forced to sell assets at significantly depressed prices to meet such margin calls and to maintain adequate liquidity. If these trends continue, it will continue to have a negative adverse impact on our liquidity.

~~Our ability to make distributions to our stockholders has been and may continue to be adversely affected by the COVID-19 pandemic.~~

~~The~~ declaration, amount and payment of any future dividends on shares of common stock will be at the sole discretion of our board of directors. Consistent with our intention to enhance our liquidity and strengthen our cash position to take advantage of future opportunities, in the second quarter of 2020, our board of directors reduced our quarterly cash dividend on our shares of common stock from prior quarters. The payment of dividends may be more uncertain during severe market disruption in the mortgage, real estate or related sectors, such as those being experienced now as a result of the COVID-19 pandemic.

~~Additionally~~, the Internal Revenue Service issued a revenue procedure permitting “publicly offered” REITs, such as us to pay dividends in a mixture of stock and cash, with at least 10% of the total distribution being paid in cash, to satisfy their REIT distribution requirements. Pursuant to this revenue procedure, we have elected and may elect again in the future to make distributions of our taxable income to common stockholders in a mixture of our common stock and cash. As a result, common stockholders may be required to pay income taxes with respect to such dividends in excess of cash received. If a U.S.

~~Table of Contents~~

stockholder sells the common stock that it receives as a dividend in order to pay this tax, the sale proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we or the applicable withholding agent may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

We have experienced, and may continue to, experience significant changes in our portfolio during times of severe market disruption in the mortgage, real estate or related sectors, such as those being experienced now as a result of the COVID-19 pandemic.

Consistent with current market conditions related to the COVID-19 pandemic and our intention to enhance our liquidity and strengthen our cash position, during the first quarter of 2020 we have reduced leverage and taken other steps to manage our portfolio through unprecedented market volatility and preserve long-term stockholder value, including completing various transactions to reposition our portfolio. Stockholders may not agree with, nor are required to consent to, significant changes to our portfolio.

~~The COVID-19 pandemic has created an uncertain and volatile interest rate environment, which could adversely affect our business.~~

The COVID-19 pandemic has created an uncertain and volatile interest rate environment and general fixed income patterns have deviated widely from historical trends, which have and may continue to adversely affect our business. We have experienced historically larger spreads to benchmark rates in the repurchase markets and, in some cases, availability of repurchase financing has been limited or not available. Further, in response to the COVID-19 pandemic, significant government programs, stimulus plans as well as government purchase and finance programs have had and will continue to have an impact on interest rates and fair values of fixed income assets. It is unclear what the impact of these actions will be and how long they will continue to drive the interest rate environment. With respect to prepayments, given the combination of low interest rates, government stimulus and high unemployment, and other disruptions related to the COVID-19 pandemic, it has become more difficult to predict prepayment levels for the securities in our portfolio. Actual prepayment results may be materially different than the assumptions we use. With respect to our hedging activities, we terminated all of our remaining interest rate swaps in March 2020 as we repositioned our portfolio in response to unprecedented market conditions associated with the COVID-19 pandemic and reduced our exposure to interest rate risk. However, we anticipate utilizing hedges in future quarters.

~~Market disruptions caused by the COVID-19 pandemic have made it more difficult for us to determine the fair value of our investments.~~

As discussed in Note 10 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, market-based inputs are generally the preferred source of values for purposes of measuring the fair value of many of our assets under U.S. GAAP. The markets for our investments have experienced, and continue to experience, extreme volatility, reduced transaction volume and liquidity, and disruption as a result of the ongoing COVID-19 pandemic, which has made it more difficult for us, and for the providers of third-party valuations that we use, to rely on market-based inputs in connection with the valuation of many of our assets under U.S. GAAP. In the absence of market inputs, U.S. GAAP permits the use of management assumptions to measure fair value. However, the considerable market volatility and disruption caused by the COVID-19 pandemic and the considerable uncertainty regarding the ultimate impact and duration of the pandemic have made it more difficult for our management to formulate assumptions to measure the fair value of certain of our assets.

The fair value of certain of our investments may fluctuate over short periods of time, and our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. The value of our common stock and preferred stock could be adversely affected if our determinations regarding the fair value of these investments were materially higher than the values that we ultimately realize upon their disposal.

~~We have experienced, and may experience in the future, a decline in the fair value of our investments as a result of the COVID-19 pandemic, which could materially and adversely affect us.~~

~~During~~ ~~the quarter ended March 31, 2020, we experienced a significant amount of realized and unrealized losses on our assets. A future decline in the fair value of our investments as a result of the COVID-19~~ ~~pandemic~~ ~~may require us to recognize~~

~~Table of Contents~~

an impairment under U.S. GAAP if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the original acquisition cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be impaired. Such impairment charges reflect non-cash losses at the time of recognition. The subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale. If we experience a decline in the fair value of our investments, it could materially and adversely affect our business, results of operations, financial condition and ability to make distributions to our stockholders.

~~Measures intended to prevent the spread of COVID-19 could disrupt our operations.~~

In response to the outbreak of COVID-19 and the federal and state mandates implemented to control its spread, a significant portion of our Manager’s employees are working remotely. If our Manager’s employees are unable to work effectively as a result of the COVID-19 ~~pandemic~~, including because of illness, quarantines, office closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted. Further, remote work arrangements may increase the risk of cyber-security incidents and cyber-attacks, which could have a material adverse effect on our business and results of operations, due to, among other things, the loss of investor or proprietary data, interruptions or delays in the operation of our business and damage to our reputation.

~~We may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks, extreme weather events or other natural disasters.~~

~~The~~ occurrence of unforeseen or catastrophic events, including the emergence of a pandemic, such as COVID-19, or other widespread health emergency (or concerns over the possibility of such an emergency), terrorist attacks or natural disasters, could create economic and financial disruptions, and could lead to material adverse declines in the market values of our assets, illiquidity in our investment and financing markets and negatively impact our ability to effectively conduct our business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the three months ended March 31, ~~2020,~~2021, we did not repurchase any shares of our common stock.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

~~No disclosure required. Please see the Company’s Form 8-Ks filed with the Securities and Exchange Commission on March 24, 2020, March 26, 2020, April 7, 2020, April 17, 2020 and May 11, 2020.~~None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.

6958

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	INVESCO MORTGAGE CAPITAL INC.

~~June 22, 2020~~May 5, 2021	By:	/s/ John M. Anzalone
		John M. Anzalone
		Chief Executive Officer

~~June 22, 2020~~May 5, 2021	By:	/s/ R. Lee Phegley, Jr.
		R. Lee Phegley, Jr.
		Chief Financial Officer

7059

Table of Contents

EXHIBIT INDEX

Item 6. Exhibits


Exhibit No.	Description

3.1		Articles of Amendment and Restatement of Invesco Mortgage Capital Inc. (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed with the Securities and Exchange Commission ("SEC") on August 12, 2009).

3.2		Articles Supplementary of 7.75% Series A Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form 8-A, filed with the SEC on July 23, 2012).

3.3		Articles Supplementary classifying 1,500,000 shares of the Company’s preferred stock as additional Series A Shares (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed with the SEC on March 19, 2019).

3.4		Articles Supplementary of 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.3 to the Registrant’s Registration Statement on Form 8-A, filed with the SEC on September 8, 2014).

3.5		Articles Supplementary classifying 1,500,000 shares of the Company’s preferred stock as additional Series B Shares (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K, filed with the SEC on March 19, 2019).

3.6		Articles Supplementary of 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock (incorporated by reference to Exhibit 3.4 to the Registrant’s Registration Statement on Form 8-A, filed with the SEC on August 11, 2017).

3.7		Articles Supplementary classifying 4,000,000 shares of the Company’s preferred stock as additional Series C Shares (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K, filed with the SEC on March 19, 2019).

3.8		Amended and Restated Bylaws of Invesco Mortgage Capital Inc., incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed with the SEC on February 17, 2017.



31.1	Certification of John M. Anzalone pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of R. Lee Phegley, Jr. pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of John M. Anzalone pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of R. Lee Phegley, Jr. pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101	101.INS XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH XBRL Taxonomy Extension Schema Document 101.CAL XBRL Taxonomy Calculation Linkbase Document 101.LAB XBRL Taxonomy Label Linkbase Document 101.PRE XBRL Taxonomy Presentation Linkbase Document 101.DEF XBRL Taxonomy Definition Linkbase Document

104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

7160


	Less than 12 Months					12 Months or More				Total ⁽¹⁾
$ in thousands	Fair Value	Unrealized Losses	Number of Securities	Fair Value	Unrealized Losses	Number of Securities	Fair Value	Unrealized Losses	Number of Securities





Agency-CMO	3,278	(668)	11	2,201	(442)	7	5,479	(1,110)	18
Agency CMBS	194,960	(3,054)	7	—	—	—	194,960	(3,054)	7
Non-Agency CMBS	1,107,247	(234,156)	115	—	—	—	1,107,247	(234,156)	115
GSE CRT	534,114	(161,429)	44	—	—	—	534,114	(161,429)	44
Non-Agency RMBS	77,300	(11,590)	27	297	(17)	3	77,597	(11,607)	30
Total	1,916,899	(410,897)	204	2,498	(459)	10	1,919,397	(411,356)	214


	Three Months Ended March 31,
	2020
	Restricted Stock Units	Weighted Average Grant Date Fair Value ⁽¹⁾
Unvested at the beginning of the period	12,520	$	12.84
Shares granted during the period	2,996	16.08


Shares vested during the period	(4,844)	14.82
Unvested at the end of the period	10,672	$	12.85


	2003-2007		2008-2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		2020		Total
Prime	13.3	%	0.1	%	—	%	—	%	17.6	%	6.8	%	—	%	0.5	%	—	%	23.3	%	11.0	%	—	%	72.6	%
Alt-A	15.4	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	15.4	%
Re-REMIC ⁽¹⁾	0.9	%	5.9	%	2.5	%	1.8	%	0.8	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	11.9	%
Subprime/RPL	0.1	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	—	%	0.1	%
Total Non-Agency RMBS	29.7	%	6.0	%	2.5	%	1.8	%	18.4	%	6.8	%	—	%	0.5	%	—	%	23.3	%	11.0	%	—	%	100.0	%
GSE CRT	—	%	—	%	—	%	—	%	15.2	%	24.7	%	4.8	%	21.9	%	3.1	%	4.5	%	14.9	%	10.9	%	100.0	%
Non-Agency CMBS	—	%	2.0	%	14.1	%	11.9	%	10.7	%	32.0	%	7.1	%	5.3	%	7.5	%	5.1	%	3.6	%	0.7	%	100.0	%


Non-Agency RMBS State	Percentage		GSE CRT State	Percentage		Non-Agency CMBS State	Percentage
California	44.2	%	California	16.5	%	New York	15.3	%
New York	8.7	%	Texas	7.0	%	California	14.5	%
Florida	6.5	%	Florida	5.5	%	Texas	8.7	%
New Jersey	3.3	%	New York	4.5	%	Florida	6.1	%
Colorado	3.1	%	Illinois	3.8	%	Illinois	4.8	%
Washington	3.1	%	Virginia	3.7	%	New Jersey	3.9	%
Virgina	3.0	%	Washington	3.5	%	Pennsylvania	3.4	%
Massachusetts	2.7	%	New Jersey	3.2	%	Virginia	3.2	%
Texas	2.7	%	Colorado	3.2	%	Michigan	3.1	%
Maryland	2.5	%	Pennsylvania	3.1	%	Ohio	3.1	%
Other	20.2	%	Other	46.0	%	Other	33.9	%
Total	100.0	%	Total	100.0	%	Total	100.0	%