INVESCO MORTGAGE CAPITAL INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

The following discussion should be read in conjunction with our consolidated
financial statements and the accompanying notes to our consolidated financial
statements, which are included in Part IV, Item 15 of this Report.

Overview


We are a Maryland corporation primarily focused on investing in, financing and
managing mortgage-backed securities ("MBS") and other mortgage-related assets.
Our objective is to provide attractive risk-adjusted returns to our
stockholders, primarily through dividends and secondarily through capital
appreciation. To achieve this objective, we 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”);

•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 the following:


•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");

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

•Residential mortgage loans.

We continuously evaluate new investment opportunities to complement our current
investment portfolio by expanding our target assets and portfolio
diversification.

We conduct our business through our wholly-owned subsidiary, IAS Operating
Partnership L.P.
(our “Operating Partnership”). 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 an "Investment Company" under the 1940 Act.



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Factors Impacting Our Operating Results


Our operating results can be affected by a number of factors and primarily
depend on the level of our net interest income and the market value of our
assets. Our net interest income, which includes the amortization of purchase
premiums and accretion of purchase discounts, varies primarily as a result of
changes in market interest rates and prepayment speeds, as measured by the
constant prepayment rate ("CPR") on our assets. Interest rates and prepayment
speeds vary according to the type of investment, conditions in the financial
markets, competition and other factors, none of which can be predicted with any
certainty. The market value of our assets can be impacted by credit spread
premiums (yield advantage over U.S. Treasury notes) and the supply of, and
demand for, assets in which we invest.

Market Conditions

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


Financial conditions eased significantly over the first half of 2021, as markets
responded to an encouraging decrease in COVID-19 cases and deaths. However, the
easing of conditions peaked at mid-year and tightened during the second half of
the year as a resurgence of COVID-19 cases and concerns over large increases in
inflation caused investors to turn cautious. These concerns have only increased
as we enter the first weeks of 2022, as more aggressive removal of stimulus by
the Federal Reserve becomes priced into the market and is reflected in tighter
financial conditions. Despite the tighter conditions of the second half of 2021,
the equity markets were strong throughout the year, with the S&P 500 Index
increasing by 26.9% during 2021, including a gain of 10.6% during the fourth
quarter. The NASDAQ gained 21.4% for the year, including an increase of 8.3%
during the fourth quarter. Equities have dropped sharply to start 2022, however,
with the S&P down 5.3% and the NASDAQ down 9.0% through the end of January.

The employment picture improved steadily throughout the course of 2021, with
gains in nonfarm payrolls averaging 537,000 for the year and 365,000 during the
fourth quarter. The unemployment rate also improved markedly, declining from
6.7% at end of 2020 to 3.9% at the end of 2021. Consumer activity was positive
during the year, with most of the increases in consumer spending and retail
sales skewed towards the first half of the year, as the resurgence in COVID-19
cases and sharp increases in price levels took their toll during the second half
of 2021. Consumer confidence measures also reflected this dynamic, showing
confidence levels peaking around mid-year before dropping during the second half
of 2021.

Interest rates rose across the yield curve during 2021, as market expectations
of increases to the Federal Funds target rate by the Federal Open Market
Committee ("FOMC") impacted shorter maturities and increases in inflation
affected longer dated maturities. During 2021, the yield on the 2 year Treasury
note increased 61 basis points to 0.73%, the yield on the 5 year Treasury
increased 90 basis points to 1.26% and the yield on the 10 year Treasury ended
the year at 1.51%, up 60 basis points. Most of the rate increases that occurred
on the short end of the curve occurred during the fourth quarter, as the 2 year
increased 46 basis points during the quarter, reflecting a dramatic repricing of
Federal Funds futures contracts caused by an equally dramatic increase in
prices. At year-end, the pricing of these contracts reflected an expectation
that the FOMC will increase the Federal Funds target rate by approximately 125
basis points by mid-2023 as compared to an expectation of no increases at the
end of 2020. Unsurprisingly, interest rate volatility also increased drastically
throughout the year, particularly when measured against shorter term interest
rates.

One of the largest concerns for both the markets and the FOMC during 2021 has
been the severe rise in inflation. The personal consumption expenditure index
ended 2021 with an increase to 4.9% compared to 1.5% at the end of 2020.
Likewise, commodities also saw significant increases during 2021, with West
Texas Intermediate crude oil recording a 58.8% increase and the Commodity
Research Bureau commodity index gaining 38.5%. Breakeven rates on U.S Treasury
inflation-protected securities ("TIPs"), which reflect investors' expectations
of future inflation, have broken out to levels not seen in several years. The
inflation rate implied by 2 year and 5 year TIPs was 3.22% and 2.91%,
respectively, at the end of the year.

CMBS risk premiums increased in the fourth quarter of 2021 due to elevated new
issuance, renewed COVID-19 concerns resulting from the Omicron variant, higher
inflation and increased interest rate volatility. Despite these concerns, the
economy continued to show signs of improvement. This pick-up in economic
activity has translated to improving employment levels, increased commercial
real estate activity and continued property price appreciation. While commercial
mortgage loan delinquencies remain elevated across many property types, they
continue to decline from their post-pandemic peak levels. The lodging and retail
sectors have experienced the highest level of loan delinquencies due to travel
restrictions and a severe slowdown in activity. Office, multi-family and
industrial property sectors continue to post relatively lower delinquency
levels. Loans secured by office properties have benefited from long-term tenant
leases and industrial warehouse properties have benefited from growing online
shopping, as online retailers have demanded more space to support their
fulfillment process.

The housing market has staged a robust recovery since the onset of the COVID-19
pandemic, driven in part by low mortgage rates and tight supply conditions.
Demographic trends and changes in housing preferences shaped by the pandemic


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have contributed to solid demand, especially for single family homes. This
strength is reflected in rapid home price appreciation, which has only recently
begun to moderate. Meanwhile, credit spreads on residential mortgage-backed
securities have reversed the widening that occurred in March 2020, but finished
2021 well off the lows reached earlier in the year.

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 a number of fiscal stimulus measures and relief programs
for households and businesses directly or indirectly impacted by the virus.
Stimulus payments and the provision of borrower relief including forbearance and
loan modifications have substantially reduced borrower defaults and loan losses
relative to levels that would have likely occurred without these actions.

Agency RMBS significantly underperformed over the course of 2021, marking the
sector's worst total return since 2013 and the worst year of performance
relative to U.S. Treasuries since 2011. Increased interest rate volatility and
elevated market expectations for more restrictive monetary policy were
particularly harmful for low coupon 30 year Agency RMBS, which benefited the
most from the Federal Reserve's response to the COVID-19 pandemic. In addition,
net purchases of $580 billion from the Federal Reserve and nearly $400 billion
by commercial banks was mostly offset by heavy supply from mortgage originators,
which eclipsed record levels in 2021 reaching approximately $870 billion of net
issuance. During the second half of 2021, Agency RMBS performance was negatively
impacted by the market's anticipation that the Federal Reserve's MBS purchase
program would be slowed or stopped in an effort to remove accommodative policies
in its fight against inflation. While prepayment speeds remained elevated,
premiums on specified pool Agency RMBS fell in 2021 as investor demand for
prepayment protection waned given higher mortgage rates. Prepayment speeds
should moderate in the months ahead, as seasonal factors and higher mortgage
rates dampen housing and refinancing activity. The dollar roll market for low
coupon TBAs continues to be attractive, as implied financing rates remained
negative given persistent demand from the Federal Reserve and commercial banks.
Overall, we remain cautious on the Agency RMBS sector, as more restrictive
monetary policy and worsening supply and demand technicals may weigh on
valuations.

As we move into 2022, investors are focused first and foremost on the Federal
Reserve and how their removal of policy accommodation to fight persistent
inflation will impact rates and risk assets. Another concern is the impact of
the ongoing COVID-19 pandemic, and how the trajectory of new cases might impact
economic activity. These concerns leave us with a cautious outlook for the
coming year.

Proposed Changes to LIBOR


The FCA, which regulates LIBOR announced on March 5, 2021 that it will cease to
publish the overnight, one-month, three-month, six-month and 12-month USD LIBOR
settings on July 1, 2023. The ARRC, the U.S. working group tasked with assisting
in the industry wide transition away from LIBOR, has supported the FCA's
announcement of USD LIBOR cessation and has recommended the market adopt SOFR.
To accelerate the transition away from LIBOR, the Federal Reserve Board, Federal
Deposit Insurance Corporation and the Office of the Comptroller of the Currency
issued joint supervisory guidance to cease entering into new contracts
referencing USD LIBOR after December 31, 2021 (note there are limited exceptions
related to derivative product use). We, similar to the broader industry, are
transitioning away from LIBOR to alternative risk-free rates, such as SOFR. We
continue to actively monitor and adjust our LIBOR transition strategy and
timeline as necessary. Switching existing financial instruments from LIBOR to
SOFR requires calculations of a spread. There is no assurance that the
calculated spread will be fair and accurate or that all financial instruments
will use the same spread.

We have an investment in a commercial loan indexed to LIBOR that is scheduled to
mature in 2022. In addition, our 7.75% Fixed-to-Floating Series B Cumulative
Redeemable Preferred Stock and our 7.50% Fixed-to-Floating Series C Cumulative
Redeemable Preferred Stock each begin to pay a USD LIBOR-based rate at the time
the stock becomes callable. Our Series B and Series C Preferred Stock are
governed by New York state law that provides for USD LIBOR-linked contracts to
transition to an alternative reference rate for contracts. 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.

The Financial Accounting Standards Board has 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 can be applied through December 31, 2022. In the fourth quarter of
2021, we transitioned our interest rate swaps that were indexed to LIBOR to
interest rate swaps that are indexed to SOFR in a manner that allowed us to
qualify for contract modification relief and maintain the same accounting for
and presentation of interest rate swaps that was in place prior to modification.

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Investment Activities


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

$ in thousands                                         As of December 31,
                                                  2021                    2020
Agency RMBS:
30 year fixed-rate, at fair value             7,701,523               

8,050,866

Agency CMO, at fair value                        30,757                     

Non-Agency CMBS, at fair value                   62,909                 

109,583

Non-Agency RMBS, at fair value                    9,070                  

11,733

Commercial loan, at fair value                   23,515                  

23,098

Investments in unconsolidated ventures           12,476                  

16,408

Subtotal                                      7,840,250               

8,211,688

TBAs, at implied cost basis (1)               1,636,906               

1,772,211

Total investment portfolio, including TBAs    9,477,156               

9,983,899



(1)Our presentation of TBAs in the table above represents management's view of
our investment portfolio and does not reflect how we record TBAs on our
consolidated balance sheets under U.S. GAAP. Under U.S. GAAP, we record TBAs
that we do not intend to physically settle on the contractual settlement date as
derivative financial instruments. We value TBAs 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. For further details of our
U.S GAAP accounting for TBAs, refer to Note 8 "Derivatives and Hedging
Activities" in Part IV, Item 15 of this Report. Our TBA dollar roll transactions
are a form of off-balance sheet financing. For further information on how
management evaluates our at-risk leverage, see Non-GAAP Financial Measures
below.

We sold $16.3 billion and purchased $17.1 billion of Agency RMBS during the year
ended December 31, 2021. We rotated our Agency RMBS throughout the year into
securities that have higher yields, in some cases to change coupon rate or the
type of specified pool collateral. Purchases were funded with proceeds from the
sales, paydowns of securities and by leveraging proceeds from the issuance of
common stock.

As of December 31, 2021 and 2020 our holdings of 30 year fixed-rate Agency RMBS
represented 81% of our total investment portfolio, including TBAs. Our 30 year
fixed-rate Agency RMBS holdings as of December 31, 2021 and 2020 consisted of
specified pools with coupon distributions as shown in the table below.

                                                                                             As of December 31,
                                                                        2021                                                     2020
$ in thousands                                         Fair Value                  Percentage                   Fair Value                  Percentage
1.5%                                                               -                           -  %                   106,377                         1.3  %
2.0%                                                       2,408,404                        31.3  %                 3,492,399                        43.4  %
2.5%                                                       2,877,568                        37.3  %                 3,784,539                        47.0  %
3.0%                                                       2,178,476                        28.3  %                   667,551                         8.3  %
3.5%                                                         237,075                         3.1  %                         -                           -  %
Total 30 year fixed-rate Agency
RMBS                                                       7,701,523                       100.0  %                 8,050,866                       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.

We invest in TBAs as an alternative means of investing in and financing Agency
RMBS. As of December 31, 2021, the implied cost basis of TBAs represented
approximately 17% of our total investment portfolio, versus 18% as of
December 31, 2020. Our investments consist of 30-year Agency RMBS TBAs with
coupons that range from 2.5% to 3.0% in conventional collateral. We maintain a
meaningful allocation to TBAs given attractive implied financing rates in the
Agency RMBS TBA dollar roll market. Implied financing rates in the dollar roll
market were below those available in the repurchase market due to

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the magnitude and persistence of the Federal Reserve's MBS purchase program,
which began to increase holdings in March 2020. The Federal Reserve began
reducing net purchases of Agency RMBS in the fourth quarter of 2021, and net
purchases are expected to end in March 2022. It is likely the Federal Reserve
will continue to reinvest all or a portion of paydowns on their MBS portfolio in
the subsequent quarters, which would continue to support the Agency RMBS TBA
dollar roll market.

As of December 31, 2021 and 2020, our holdings of non-Agency CMBS represented
approximately 1% of our total investment portfolio, including TBAs. Our
non-Agency CMBS portfolio is comprised of fixed-rate securities that are rated
single-A (or equivalent) or higher by a nationally recognized statistical rating
organization as of December 31, 2021. Approximately 72.4% of non-Agency CMBS are
rated double-A (or equivalent) or higher by a nationally recognized statistical
rating organization as of December 31, 2021.

As of December 31, 2021 and 2020, our holdings of non-Agency RMBS represented
less than 1% of our total investment portfolio, including TBAs. We historically
held non-Agency RMBS securities collateralized by prime and Alt-A loans and
invested in re-securitizations of real estate mortgage investment conduit
("Re-REMIC") RMBS and securitizations of reperforming mortgage loans.

As of December 31, 2021, we held an investment in one commercial real estate
mezzanine loan that is due in February 2022 and has a LTV ratio of approximately
68.0%. In February 2022, we received a request from the borrower to extend the
contractual maturity of the commercial loan investment to May 29, 2022. Refer to
Note 15 - "Subsequent Events" of our consolidated financial statements in Part
IV, Item 15 of this Report for additional information.

As of December 31, 2021, we held investments in two unconsolidated ventures that
are managed by an affiliate of our Manager. Both of the unconsolidated ventures
are in liquidation and plan to sell or settle their remaining investments as
expeditiously as possible. Until the ventures complete their liquidation, we are
committed to fund $6.5 million in additional capital to cover future expenses
should they occur.

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 are expected to move in close relationship to SOFR.

We also used secured loans from the FHLBI to finance a portion of our investment
portfolio. We repaid our secured loans during 2020 with proceeds from sales of
assets that collateralized the secured loans. We terminated our membership in
FHLBI in the third quarter of 2020.

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

                                                                                           Average quarterly balance
Quarter Ended                                    Quarter-end 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
June 30, 2021                                          7,851,204                                       7,945,494                                   8,004,924
September 30, 2021                                     7,873,798                                       7,846,536                                   7,886,360
December 31, 2021                                      6,987,834                                       7,442,784                                   7,776,070

(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.





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Hedging Instruments


We generally hedge as much of our interest rate and foreign exchange risk as we
deem prudent because of market conditions. No assurance can be given that our
hedging activities will have the desired beneficial impact on our results of
operations or financial condition. Our investment policies do not contain
specific requirements as to the percentages or amount of risk that we are
required to hedge.

Hedging may fail to protect or could adversely affect us because, among other
things:

•available interest rate hedging may not correspond directly with the interest
rate risk for which protection is sought;

•the duration of the hedges may not match the duration of the related
liabilities;

•our counterparty in the hedging transaction may default on its obligation to
pay;


•the credit quality of our counterparty on the hedge may be downgraded to such
an extent that it impairs our ability to sell or assign our side of the hedging
transaction; and

•the value of derivatives used for hedging may be adjusted from time-to-time in
accordance with accounting rules to reflect changes in fair value.


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 generally pay fixed interest rates and receive
floating interest rates indexed to SOFR. To a lesser extent, we also enter into
interest rate swap agreements whereby we make floating interest rate payments
indexed to SOFR and receive fixed interest rate payments as part of our overall
risk management strategy. Prior to the transition of our swap portfolio to swaps
that are indexed to SOFR in the fourth quarter of 2021, our interest rate swaps
were generally indexed to 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 year
ended December 31, 2021, we terminated existing swaps with a notional amount of
$2.5 billion and entered into new swaps with a notional amount of $4.3 billion
as part of our overall risk management strategy. These amounts exclude $7.3
billion of terminations and additions related to the transition of our swap
portfolio from swaps that were indexed to LIBOR to swaps that are indexed to
SOFR in the fourth quarter of 2021, as well as terminations and additions of
forward starting swaps. 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 our consolidated statement of
operations. We realized a net gain of $185.2 million on interest rate swaps
during the year ended December 31, 2021 primarily due to rising interest 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 December 31, 2021, we had €11.7 million or $13.6
million (2020: €27.8 million or $33.1 million) of notional amount of forward
contracts related to our investment in an unconsolidated venture. During the
year ended December 31, 2021, we settled currency forward contracts of €70.8
million or $84.8 million (2020: €83.4 million or $93.4 million) in notional
amount and realized a net gain of $209,000 (2020: $1.3 million net loss).

Capital Activities


In February 2021, we completed a public offering of 27,600,000 shares of common
stock at the price of $3.75 per share. Total net proceeds were approximately
$103.1 million after deducting estimated offering costs.

In June 2021, we completed a public offering of 43,125,000 shares of common
stock at the price of $3.39 per share. Total net proceeds were approximately
$145.9 million after deducting offering expenses.


On June 16, 2021, we redeemed all issued and outstanding shares of our Series A
Preferred Stock for $140.0 million plus accrued and unpaid dividends. The cash
redemption price for each share of Series A Preferred Stock was 25.00. The
excess of the consideration transferred over carrying value was accounted for as
a deemed dividend and resulted in a reduction of $4.7 million in net income
(loss) attributable to common stockholders during the year ended December 31,
2021.

As of December 31, 2021, we may sell up to 56,865,980 shares of our common stock
and 5,500,000 shares of our preferred stock from time to time in at-the-market
or privately negotiated transactions under our equity distribution agreement
with placement agents. During the year ended December 31, 2021, we sold
55,744,020 shares of common stock for proceeds of $180.5 million, net of
approximately $2.6 million in commissions and fees, under our equity
distribution agreements. During the year ended December 31, 2020, we sold
21,849,740 shares of common stock for proceeds of $73.7 million, net of
approximately $1.2 million in commissions and fees, under our equity
distribution agreements.

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For information on dividends declared and paid during the year ended
December 31, 2021, see Note 12 – “Stockholders’ Equity” of our consolidated
financial statements in Part IV, Item 15 of this report on Form 10-K.

During the year ended December 31, 2021, we did not repurchase any shares of our
common stock.


Book Value per Common Share

We calculate book value per common share as follows:

                                                                             Years Ended December 31,
In thousands except per share amounts                         2021                       2020                     2019
Numerator (adjusted equity):
Total equity                                                1,402,135                 1,367,158                 2,931,899

Less: Liquidation preference of Series A Preferred
Stock

                                                               -                  (140,000)                 (140,000)

Less: Liquidation preference of Series B Preferred
Stock

                                                        (155,000)                 (155,000)                 (155,000)
Less: Liquidation preference of Series C Preferred
Stock                                                        (287,500)                 (287,500)                 (287,500)
Total adjusted equity                                         959,635                   784,658                 2,349,399

Denominator (number of shares):
Common stock outstanding                                      329,875                   203,222                   144,256

Book value per common share                                      2.91                      3.86                     16.29


Our book value per common share decreased 24.6% as of December 31, 2021 compared
to December 31, 2020. The increase in interest rate volatility and prepayment
speeds, combined with reduced investor demand for prepayment protection and the
potential for an earlier than expected taper of MBS purchases from the Federal
Reserve resulted in Agency RMBS sharply underperforming interest rate swap
hedges during the first half of 2021. Book value per common share further
decreased in the second half of 2021 as the Federal Reserve's announced tapering
and subsequent acceleration of the pace of tapering in December 2021 negatively
impacted Agency RMBS valuations.

Our book value per common share decreased 76.3% as of December 31, 2020 compared
to December 31, 2019 primarily due to realized and unrealized losses on
investments and derivatives during the year ended December 31, 2020 resulting
from the unprecedented market disruption caused by the COVID-19 pandemic.

Refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk”
for interest rate risk and its impact on fair value.

Critical Accounting Policies and Estimates


Our consolidated financial statements are prepared in accordance with U.S. GAAP,
which requires the use of estimates and assumptions that involve the exercise of
judgment and use of assumptions as to future uncertainties. Accounting estimates
and assumptions discussed in this section are those that we consider to be the
most critical to an understanding of our financial statements because they
involve significant judgments and uncertainties. All of these estimates reflect
our best judgment about current, and for some estimates, future economic and
market conditions and their effects based on information available as of the
date of these financial statements. If conditions change from those expected, it
is possible that the judgments and estimates described below could change, which
may result in a change in valuation of our investment portfolio, allowances for
credit losses on our available-for-sale MBS, and a change in our interest income
recognition among other effects.

Mortgage-Backed and Credit Risk Transfer Securities. We have elected the fair
value option for all of our MBS purchased on or after September 1, 2016; our GSE
CRTs purchased on or after August 24, 2015; and all of our RMBS IOs. Under the
fair value option, changes in fair value are recognized in the consolidated
statement of operations. In our view, the fair value option election more
appropriately reflects the results of our operations because MBS and GSE CRT
fair value changes are accounted for in the same manner as fair value changes in
economic hedging instruments. As of December 31, 2021, $7.7 billion
(December 31, 2020: $8.1 billion) or 99% (December 31, 2020: 99%) of our MBS are
accounted for under the fair value option.

We record our MBS purchased before September 1, 2016, as available-for-sale and
report these MBS at fair value. We recorded our GSE CRTs purchased before August
24, 2015 as hybrid financial instruments and reported these GSE CRTs at fair
value. We did not hold any GSE CRTs as of December 31, 2021 or December 31,
2020.

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We determine the fair value of our MBS by obtaining valuations from an
independent source. If the fair value of a security is not available from a
third-party pricing service, we may estimate the fair value of the security
using a variety of methods including other pricing services, discounted cash
flow analysis, matrix pricing, option adjusted spread models and other
fundamental analysis of observable market factors. It is possible that changes
in these inputs could change the valuation estimate and lead us to establish
allowances for credit losses on our available-for-sale MBS.

Further information is provided in Note 2 – “Summary of Significant Accounting
Policies” and Note 4 – “Mortgage-Backed and Credit Risk Transfer Securities.”

Interest Income Recognition. 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, unless
those changes will be reflected in an allowance for credit losses. 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 will be reflected in
an allowance for credit losses, and the security's yield is revised
prospectively.

One of the most significant factors impacting our projected cash flows is
changes in long-term interest rates. When interest rates fall, prepayments will
generally increase and when interest rates rise, prepayments will generally
decrease. However, there are a variety of factors that may impact the rate of
prepayments on our securities. Accordingly, under different conditions, we could
report materially different amounts. Refer to Item 7A. "Quantitative and
Qualitative Disclosures About Market Risk" for an estimate of the percentage
change in our net interest income, including interest paid or received under
interest rate swaps, caused by an instantaneous 50 and 100 basis points increase
or decrease in interest rates.

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.

Interest income on GSE CRTs purchased before August 24, 2015 was accrued based
on the coupon rate of the debt host contract which reflected the credit risk of
GSE unsecured senior debt with a similar maturity. Premiums or discounts
associated with the purchase of credit risk transfer securities were amortized
or accreted into interest income over the life of the debt host contract using
the effective interest method. Interest income on GSE CRTs purchased on or after
August 24, 2015 was based on estimated future cash flows.

Interest income from our commercial and other loans is recognized when earned
and deemed collectible or until a loan becomes past due based on the terms of
the loan agreement.

Accounting for Derivative Financial Instruments. We use derivatives to manage
interest rate and currency exchange risk and as an alternative means of
investing in and financing Agency RMBS. We record all derivatives on our
consolidated balance sheets at fair value. Our interest rate swaps, currency
forward contracts and TBAs are valued using a market approach through the use of
quoted prices available in an active market. All of our interest rate swaps were
centrally cleared by a registered clearing organization as of December 31, 2021.

Effective December 31, 2013, we voluntarily discontinued hedge accounting for
our interest rate swap agreements by de-designating the interest rate swaps as
cash flow hedges. As a result of discontinuing hedge accounting, changes in the
fair value of the interest rate swaps are recorded in gain (loss) on derivative
instruments, net in our consolidated statement of operations, rather than in
accumulated other comprehensive income (loss). Further information is provided
in Note 8 - "Derivatives and Hedging Activities." of our consolidated financial
statements included in Part IV, Item 15 of this Report.

Expected Impact of New Authoritative Guidance on Future Financial Information


In January 2021, the Financial Accounting Standards Board expanded existing
accounting guidance for evaluating the effects of reference rate reform on
financial reporting. The new guidance expands the temporary optional expedients
and exceptions to U.S. GAAP for contract modifications, hedge accounting and
other relationships that reference LIBOR to apply to

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all derivative instruments affected by the market-wide change in the interest
rates used for discounting, margining or contract price alignment (commonly
referred to as the discounting transition). The new guidance can be applied
through December 31, 2022.


We have an investment in a commercial loan indexed to LIBOR that is scheduled to
mature in 2022. In addition, our 7.75% Fixed-to-Floating Series B Cumulative
Redeemable Preferred Stock and our 7.50% Fixed-to-Floating Series C Cumulative
Redeemable Preferred Stock each become callable at the time the stock begins to
pay a LIBOR-based rate. Our Series B and Series C Preferred Stock are governed
by New York state law. The state of New York has approved legislative solutions
for U.S. dollar LIBOR-linked contracts to transition to an alternative rate for
contracts that are governed by New York state law. We do not currently intend to
amend our Series B or Series C Preferred Stock to change the existing LIBOR
cessation fallback language.




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Results of Operations

Our consolidated results of operations for the years ended December 31, 2021,
2020 and 2019 are summarized below:

                                                                                          Years Ended December 31,
$ in thousands except share data                                       2021                          2020                        2019
Interest income
Mortgage-backed and credit risk transfer securities                     167,056                       277,400                     772,657
Commercial and other loans                                                2,146                         2,766                       5,710
Total interest income                                                   169,202                       280,166                     778,367
Interest expense
Repurchase agreements (1)                                               (11,290)                       73,607                     430,697
Secured loans                                                                 -                         8,655                      41,623
Total interest expense                                                  (11,290)                       82,262                     472,320
Net interest income                                                     180,492                       197,904                     306,047

Other income (loss)
Gain (loss) on investments, net                                        (366,509)                     (961,938)                    624,466
(Increase) decrease in provision for credit losses                        1,768                        (1,768)                          -
Equity in earnings of unconsolidated ventures                               870                         1,163                       2,224
Gain (loss) on derivative instruments, net                              122,611                      (851,050)                   (534,755)
Realized and unrealized credit derivative income (loss), net                  -                       (35,312)                      8,343
Net gain (loss) on extinguishment of debt                                     -                        14,742                           -
Other investment income (loss), net                                           1                         2,137                       3,950
Total other income (loss)                                              (241,259)                   (1,832,026)                    104,228

Expenses

Management fee - related party                                           21,080                        29,367                      38,173
General and administrative                                                8,153                        10,863                       8,001
Total expenses                                                           29,233                        40,230                      46,174

Net income (loss) attributable to Invesco Mortgage Capital Inc. (90,000)

                   (1,674,352)                    364,101
Dividends to preferred stockholders                                      37,795                        44,426                      44,426
Issuance and redemption costs of redeemed preferred stock                 4,682                             -                           -
Net income (loss) attributable to common stockholders                  (132,477)                   (1,718,778)                    319,675

Earnings (loss) per share:
Net income (loss) attributable to common stockholders
Basic

                                                                     (0.48)                        (9.89)                       2.42
Diluted                                                                   (0.48)                        (9.89)                       2.42
Weighted average number of shares of common stock:
Basic                                                               275,132,233                   173,730,389                 132,305,568
Diluted                                                             275,132,233                   173,730,389                 132,317,853



(1)Negative interest expense on repurchase agreements in 2021 is due to
amortization of net deferred gains on de-designated interest rate swaps that
exceeds current period interest expense on repurchase agreements. 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" in
Part IV, Item 15 of this report on Form 10-K.

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Interest Income and Average Earning Asset Yields

The table below presents information related to our average earning assets and
earning asset yields for the years ended December 31, 2021, 2020 and 2019.


                                                     Years ended December 

31,

 $ in thousands                               2021                  2020    

2019

 Average earning assets (1)                     8,808,105        7,895,394  

20,566,255

 Average earning asset yields (2)                    1.92  %          3.55  %           3.78  %


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

Our primary source of income is interest earned on our investment portfolio. We
had average earning assets of approximately $8.8 billion during the year ended
December 31, 2021 (2020: $7.9 billion; 2019: $20.6 billion). Average earning
assets increased for the year ended December 31, 2021 compared to 2020 as we
resumed investing in Agency RMBS during the third quarter of 2020 after selling
a substantial portion of our MBS and GSE CRT portfolio in the first half of 2020
to generate liquidity and reduce leverage in response to the financial market
disruption caused by the COVID-19 pandemic.

Average earning assets decreased during the year ended December 31, 2020
compared to 2019. As previously discussed, we experienced unprecedented market
conditions as a result of the COVID-19 pandemic and sold a substantial portion
of our MBS and GSE CRT portfolio in the first half of 2020 to generate liquidity
and reduce leverage.

The yield on our average earning assets during the year ended December 31, 2021
was 1.92% (2020: 3.55%; 2019: 3.78%). Our average earning asset yields decreased
during the year ended December 31, 2021 compared to 2020 and during the year
ended December 31, 2020 compared to 2019 primarily due to changes in our
portfolio composition.

We earned interest income of $169.2 million (2020: $280.2 million; 2019: $778.4
million) during 2021. Our interest income consists of 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.

                                                                                   Years Ended December 31,
$ in thousands                                                     2021                       2020                      2019
Interest Income
MBS and GSE CRT - coupon interest                                  207,506                    298,613                  833,376
MBS and GSE CRT - net premium amortization                         (40,450)                   (21,213)                 (60,719)
MBS and GSE CRT - interest income                                  167,056                    277,400                  772,657
Commercial and other loans                                           2,146                      2,766                    5,710
Total interest income                                              169,202                    280,166                  778,367


MBS and GSE CRT interest income decreased $110.3 million for the year ended
December 31, 2021 compared to 2020 primarily due to a 163 basis point decrease
in average earning asset yields. Almost all of our investment portfolio
(excluding TBAs) was invested in Agency RMBS during the year ended December 31,
2021. We did not hold any GSE CRTs as of December 31, 2021 or December 31, 2020.

MBS and GSE CRT interest income decreased $495.3 million during the year ended
December 31, 2020 compared to 2019 primarily due to a $534.8 million decrease in
coupon interest reflecting lower average earning assets. Lower coupon interest
was partially offset by a $39.5 million decrease in net premium amortization
during the year ended December 31, 2020 primarily due to sales of assets
purchased at premiums. Interest income on our commercial and other loans
decreased $2.9 million during the year ended December 31, 2020, primarily due to
the sale of our loan participation interest in April 2020 and repayments on
commercial loan investments.



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Prepayment Speeds


Our RMBS portfolio (and previously our GSE CRT 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 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 following table presents net (premium amortization) discount accretion
recognized on our MBS and GSE CRT portfolio during 2021, 2020 and 2019.

                                                                              Years Ended December 31,
$ in thousands                                                 2021                      2020                     2019
Agency RMBS                                                    (41,881)                 (32,737)                 (76,676)
Agency CMBS                                                          -                   (1,744)                  (4,712)
Non-Agency CMBS                                                  2,695                   14,721                   15,347
Non-Agency RMBS                                                 (1,264)                   1,107                   13,164
GSE CRT                                                              -                   (2,560)                  (7,842)
Net (premium amortization) discount accretion                  (40,450)                 (21,213)                 (60,719)


Net premium amortization increased $19.2 million during 2021 compared to 2020
primarily due to sales of non-Agency CMBS purchased at discounts and the
purchase of Agency RMBS at premiums during the second half of 2020 and in 2021.


Net premium amortization decreased $39.5 million during 2020 compared to 2019
due to sales of assets purchased at premiums and slower prepayment speeds on
newly issued Agency RMBS purchased in the second half of 2020.

Our interest income is subject to interest rate risk. Refer to Item 7A.
“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 years ended
December 31, 2021, 2020 and 2019.


                                                                                   Years ended December 31,
$ in thousands                                                      2021                      2020                     2019
Interest Expense
Interest expense on repurchase agreement borrowings                 10,710                    97,401                  454,426

Amortization of net deferred (gain) loss on de-designated
interest rate swaps

                                                (22,000)                  (23,794)                 (23,729)
Repurchase agreements interest expense                             (11,290)                   73,607                  430,697
Secured loans                                                            -                     8,655                   41,623
Total interest expense                                             (11,290)                   82,262                  472,320


Our interest expense on repurchase agreement borrowings decreased $86.7 million
for the year ended December 31, 2021 compared to 2020 primarily due to a lower
average cost of funds reflecting decreases in the Federal Funds rate.

Our interest expense on repurchase agreement borrowings decreased $357.0 million
for the year ended December 31, 2020 compared to 2019 primarily due to lower
average borrowings and a lower average cost of funds reflecting decreases in the
Federal Funds rate. Average borrowings decreased primarily due to repayments of
repurchase agreements in the first half of 2020 with proceeds from asset sales
due to financial market disruption caused by the COVID-19 pandemic as previously
discussed. Average borrowings also decreased due to repayment of $1.65 billion
of secured loans during 2020.

Our repurchase agreements interest expense includes amortization of deferred
gains and losses on de-designated interest rate swaps as summarized in the table
above. 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
consolidated statements of operations as interest is accrued and paid on the
related repurchase agreements

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over the remaining life of the interest rate swap agreements. Amortization of
net deferred gains on de-designated interest rate swaps decreased our total
interest expense by $22.0 million, $23.8 million and $23.7 million during the
years ended December 31, 2021, December 31, 2020 and December 31, 2019,
respectively. During the next twelve months, we estimate that $19.7 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.

We repaid our secured loans during 2020 and did not incur interest expense for
secured loans during the year ended December 31, 2021.


Interest expense for our secured loans decreased for the year ended December 31,
2020 compared to 2019 primarily due to the repayment of $1.65 billion of secured
loans during 2020 and lower borrowing rates. Before modification, borrowing
rates on our secured loans were based on the three-month FHLB swap rate plus a
spread. After modification, borrowing rates on our secured loans were based on
the FHLBI's short-term cost of funds. For the year ended December 31, 2020, our
secured loans had a weighted average borrowing rate of 1.47% as compared to
2.52% for the year ended December 31, 2019.

Our total interest expense during the year ended December 31, 2021 decreased
$93.6 million compared to 2020 primarily due to a decrease of $95.3 million in
interest expense on repurchase agreement borrowings and secured loans.

Our total interest expense during the year ended December 31, 2020 decreased
$390.1 million compared to 2019 primarily due to a $390.0 million decrease in
interest expense on repurchase agreement borrowings and secured loans.

The table below presents our average borrowings and cost of funds for the years
ended December 31, 2021, 2020 and 2019.


                                                                                     Years ended December 31,
$ in thousands                                                     2021                       2020                        2019
Total average borrowings (1)                                       7,892,617                   6,926,790                  18,748,843
Maximum borrowings during the period (2)                           8,708,686                  23,132,234                  20,377,801
Cost of funds (3)                                                      (0.14) %                     1.19  %                     2.52  %


(1)Average borrowings for each period are based on weighted month-end balances.
(2)Amount represents the maximum borrowings at month-end during each of the
respective periods.
(3)Average cost of funds is calculated by dividing annualized interest expense,
including amortization of net deferred gain (loss) on de-designated interest
rate swaps, by our average borrowings.

Total average borrowings increased $965.8 million in 2021 compared to 2020
because we resumed investing in Agency RMBS in July 2020 and financing purchases
with repurchase agreements. The increase in repurchase agreement borrowings was
partially offset by the repayment of $1.65 billion of secured loans during 2020.

Total average borrowings decreased $11.8 billion in 2020 compared to 2019
because we repaid $10.3 billion of net repurchase agreements and $1.65 billion
of secured loans during 2020.

Our cost of funds decreased in 2021 compared to 2020 and in 2020 compared to
2019 primarily due to decreases in the Federal Funds rate.


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Net Interest Income

The table below presents the components of net interest income for the years
ended December 31, 2021, 2020 and 2019.


                                                                                      Years ended December 31,
$ in thousands                                                         2021                      2020                     2019
Interest Income
Mortgage-backed and credit risk transfer securities                      167,056                  277,400                  772,657
Commercial and other loans                                                 2,146                    2,766                    5,710
Total interest income                                                    169,202                  280,166                  778,367
Interest Expense
Interest expense on repurchase agreement borrowings                       10,710                   97,401                  454,426

Amortization of net deferred (gain) loss on de-designated
interest rate swaps

                                                      (22,000)                 (23,794)                 (23,729)
Repurchase agreements interest expense                                   (11,290)                  73,607                  430,697
Secured loans                                                                  -                    8,655                   41,623
Total interest expense                                                   (11,290)                  82,262                  472,320
Net interest income                                                      180,492                  197,904                  306,047
Net interest rate margin                                                    2.06  %                  2.36  %                  1.26  %


Our net interest income, which equals total interest income less total interest
expense, totaled $180.5 million for the year ended December 31, 2021 (2020:
$197.9 million; 2019: $306.0 million). The decrease in net interest income for
the year ended December 31, 2021 compared to 2020 and for the year ended
December 31, 2020 compared to 2019 was primarily due to the sale of MBS and GSE
CRTs in the first half of 2020 as 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 2.06% for the year
ended December 31, 2021 (2020: 2.36%; 2019: 1.26%). The decrease in net interest
rate margin for 2021 compared to 2020 was primarily due to the change in our
portfolio composition, including related repurchase agreements borrowings. The
increase in net interest rate margin for 2020 compared to 2019 was primarily due
to the change in our portfolio composition, including related repurchase
agreement borrowings, due to assets sales and decreases in the Federal Funds
rate that had a greater impact on our average cost of funds than on our average
earning asset yields.

Gain (Loss) on Investments, net

The table below summarizes the components of gain (loss) on investments, net for
the years ended December 31, 2021, 2020 and 2019.


                                                                                           Years Ended December 31,
$ in thousands                                                             2021                       2020                      2019
Net realized gains (losses) on sale of investments                        (281,224)                  (363,781)                    8,039

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

                                                      -                   (101,138)                        -
Other-than-temporary impairment losses                                           -                          -                    (7,731)

Net unrealized gains (losses) on MBS and GSE CRT accounted for under
the fair value option

                                                      (85,702)                  (492,047)                  624,158
Net unrealized gains (losses) on commercial loan                               417                     (1,164)                        -
Realized loss on loan participation interest                                     -                     (3,808)                        -

Total gain (loss) on investments, net                                     (366,509)                  (961,938)                  624,466



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During the year ended December 31, 2021, we sold MBS for cash proceeds of $16.3
billion (2020: MBS and GSE CRTs of $25.0 billion; 2019: MBS and GSE CRTs of $3.3
billion) and realized net losses of $281.2 million (2020: net losses of $363.8
million; 2019: net gains of $8.0 million). Realized net losses during the year
ended December 31, 2021 primarily reflect sales of lower yielding Agency RMBS to
purchase higher yielding Agency RMBS. We sold securities during the year ended
December 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 in March 2020.

We did not record any impairment during the years ended December 31, 2021 or
2019 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 $94.1
million of impairment on non-Agency RMBS and CMBS securities during the year
ended December 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. For additional information regarding our accounting policy for
impairment, refer to Note 2 - "Summary of Significant Accounting Policies" of
our consolidated financial statements included in Part IV, Item 15 of this
Report.

We have elected the fair value option for all of our MBS purchased on or after
September 1, 2016 and all of our GSE CRTs purchased on or after August 24, 2015.
Before September 1, 2016, we had also elected the fair value option for our RMBS
IOs. Under the fair value option, changes in fair value are recognized in income
in the consolidated statements of operations. As of December 31, 2021, $7.7
billion or 99% (December 31, 2020: $8.1 billion or 99%) of our MBS are accounted
for under the fair value option.

We recorded net unrealized losses on our MBS and GSE CRT portfolio accounted for
under the fair value option of $85.7 million in 2021 compared to net unrealized
losses of $492.0 million in 2020 and unrealized gains of $624.2 million in 2019.
Net unrealized losses in 2021 primarily reflect wider interest rate spreads on
our Agency RMBS. Net unrealized losses in the year ended December 31, 2020
reflect declines in valuations due to wider interest rate spreads. Net
unrealized gains in 2019 reflect lower interest rates, tighter interest rate
spreads on credit assets and Agency CMBS and valuation gains in specified pool
Agency RMBS.

We recorded unrealized gains of $417,000 and unrealized losses of $1.2 million
on our commercial loan investment during the years ended December 31, 2021 and
2020, respectively. We value our commercial loan investment based upon a
valuation from an independent pricing service.

We recorded a realized loss of $3.8 million on our loan participation interest
during year ended December 31, 2020. We sold the loan participation interest on
April 1, 2020.

(Increase) Decrease in Provision for Credit Losses


As of December 31, 2021, approximately $70.2 million of our $7.8 billion of MBS
are classified as available-for-sale and subject to evaluation for credit
losses. We recorded a provision for credit losses of $1.8 million on single
non-Agency CMBS for the year ended December 31, 2020 based on a comparison of
the security's amortized cost basis to discounted expected cash flows. We
recorded a $1.8 million decrease in the provision for credit losses during the
year ended December 31, 2021 because the security fully repaid in June 2021.
Refer to Note 2 - "Summary of Significant Accounting Policies" of our
consolidated financial statements included in Part IV, Item 15 of this Report
for additional information on how we calculate our provision for credit losses.

Equity in Earnings (Losses) of Unconsolidated Ventures


For the year ended December 31, 2021, we recorded equity in earnings of
unconsolidated ventures of $870,000 (2020: $1.2 million; 2019: $2.2 million). We
recorded equity in earnings for the years ended December 31, 2021, 2020 and 2019
primarily due to earnings on the underlying portfolio investments.

Gain (Loss) on Derivative Instruments, net


We record all derivatives on our consolidated balance sheets at fair value.
Changes in the fair value of our derivatives are recorded in gain (loss) on
derivative instruments, net in our consolidated statements of operations. Net
interest paid or received under our interest rate swaps is also recognized in
gain (loss) on derivative instruments, net in our consolidated statements of
operations.

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The tables below summarize the components of our gain (loss) on derivative
instruments, net for the years ended December 31, 2021, 2020 and 2019:


$ in thousands                                                              

Year ended December 31, 2021

            Derivative             Realized gain (loss)              Contractual net                                                  Gain (loss) on
        not designated as             on derivative                  interest income                     Unrealized              derivative instruments,
        hedging instrument           instruments, net                   (expense)                     gain (loss), net                     net
Interest Rate Swaps                       185,232                             (15,803)                        (5,869)                       163,560
Interest Rate Swaptions                      (553)                                  -                              -                           (553)
Currency Forward Contracts                    209                                   -                            970                          1,179
TBAs                                      (28,731)                                  -                        (12,844)                       (41,575)
Total                                     156,157                             (15,803)                       (17,743)                       122,611



$ in thousands                                                             

Year ended December 31, 2020

          Derivative            Realized gain (loss)               

Contractual net

       not designated as            on derivative                  interest income                     Unrealized              Gain (loss) on derivative
      hedging instrument          instruments, net                    (expense)                     gain (loss), net               instruments, net
Interest Rate Swaps                    (857,753)                              8,047                        (24,068)                       (873,774)

Currency Forward Contracts               (1,301)                                  -                           (345)                         (1,646)
TBAs                                     14,477                                   -                          9,893                          24,370
Total                                  (844,577)                              8,047                        (14,520)                       (851,050)



$ in thousands                                                             

Year ended December 31, 2019

          Derivative            Realized gain (loss)               

Contractual net

       not designated as            on derivative                  interest income                     Unrealized              Gain (loss) on derivative
      hedging instrument          instruments, net                    (expense)                     gain (loss), net               instruments, net
Interest Rate Swaps                    (440,626)                             35,840                         18,826                        (385,960)
Futures Contracts                      (157,929)                                  -                          7,836                        (150,093)
Currency Forward Contracts                1,478                                   -                           (180)                          1,298

Total                                  (597,077)                             35,840                         26,482                        (534,755)


During the year ended December 31, 2021, we terminated existing interest rate
swaps with a notional amount of $2.5 billion and entered into new swaps with a
notional amount of $4.3 billion, excluding terminations and additions related to
the transition of our interest rate swaps to swap that are indexed to SOFR in
the fourth quarter of 2021 and terminations and additions of forward starting
swaps. We realized a net gain of $185.2 million on interest rate swaps during
the year ended December 31, 2021 due to rising interest rates. As of
December 31, 2021, we had $7.0 billion of repurchase agreement borrowings with a
weighted average remaining maturity of 29 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.

In March 2020, we terminated all of our outstanding interest rate swaps as we
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 on these interest rate swaps during the first half of 2020
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.

During the year ended December 31, 2019, we terminated existing swaps with a
notional amount of $25.3 billion and entered into new swaps with a notional
amount of $27.0 billion to hedge repurchase agreement debt associated with
purchases of Agency RMBS and Agency CMBS securities. We realized a net loss of
$440.6 million on interest rate swaps in 2019 primarily due to falling interest
rates.



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As of December 31, 2021 and 2020, we held interest rate swaps whereby we receive
interest at a variable rate as shown in the table below. As of December 31,
2021, our interest rate swaps received variable interest based upon SOFR. As of
December 31, 2020, our interest rate swaps received variable interest based upon
one-month LIBOR.

$ in thousands                                                December 31, 2021                                                                      December 31, 2020
                                                                                 Weighted            Weighted                                                           Weighted            Weighted
                                                            Weighted             Average             Average                                       Weighted             Average             Average
                                                         Average Fixed           Floating            Years to                                   Average Fixed           Floating            Years to
    Derivative instrument       Notional Amounts            Pay Rate           Receive Rate          Maturity          Notional Amounts            Pay Rate           Receive Rate          Maturity
Interest Rate Swaps (1)               6,300,000                 0.30  %              0.05  %                5.7              6,300,000                 0.41  %              0.15  %                6.7

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

As of December 31, 2021, we held interest rate swaps whereby we pay variable
interest based upon SOFR as shown in the table below. We did not hold any
interest rate swaps that paid floating interest as of December 31, 2020.


$ in thousands                                                                           December 31, 2021
                                                                              Weighted Average          Weighted Average           Weighted Average
         Derivative instrument                    Notional Amounts            Floating Pay Rate        Fixed Receive Rate         Years to Maturity
Interest Rate Swaps                                       1,750,000                      0.05  %                   0.98  %                        4.9


We have also used futures contracts to manage our exposure to interest rate
risk. We were not party to any futures contracts as of December 31, 2021, 2020
or 2019. During the year ended December 31, 2019, we realized net losses of
$157.9 million on the settlement of futures contracts 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 consolidated statement of operations.

We use currency forward contracts to help mitigate the potential impact of
changes in foreign currency exchange rates. As of December 31, 2021, we had
$13.6 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 intend to physically settle on the
contractual settlement date as an alternative means of investing in and
financing Agency RMBS. As of December 31, 2021, we had $1.6 billion notional
amount of TBAs and recorded $41.6 million of realized and unrealized losses
during the year ended December 31, 2021 primarily due to the sharp increase in
mortgage rates during the first quarter of 2021. As of December 31, 2020, we had
$1.7 billion notional amount of TBAs and recorded $24.4 million of realized and
unrealized gains during the year ended December 31, 2020. We were not party to
any TBAs accounted for as derivatives during 2019.

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 years ended December 31, 2020 and 2019.


                                                                                        Years Ended December 31,
$ in thousands                                                                     2020                          2019
GSE CRT embedded derivative coupon interest                                         6,323                         20,833
Gain (loss) on settlement of GSE CRT embedded derivatives                         (31,354)                             -
Change in fair value of GSE CRT embedded derivatives                              (10,281)                       (12,490)

Total realized and unrealized credit derivative income (loss), net

       (35,312)                         8,343


During the year ended December 31, 2020, we recorded realized and unrealized
credit derivative losses of $41.6 million, excluding embedded derivative coupon
interest. The decrease from 2019 was primarily driven by a decline in the fair
value of our GSE CRT embedded derivatives as asset prices declined due to spread
widening. We sold all of our GSE CRTs that were accounted for as hybrid
financial instruments with embedded derivatives during the year ended
December 31, 2020.





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Net Gain (Loss) on Extinguishment of Debt


As discussed in Note 6 - "Borrowings" of our consolidated financial statements
in Part IV, Item 15 of this Report, during 2020, certain of our counterparties
seized and sold securities that we had posted as collateral for our repurchase
agreements. 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 and settlements of counterparty
claims for less than the principal balance of our repurchase agreements as a
gain on extinguishment of debt in our consolidated statement of operations.

Other Investment Income (Loss), net


Other investment income (loss), net in 2020 and 2019 primarily consists of
quarterly dividends from FHLBI stock. The amount of our dividend income varied
based upon the number of shares that we 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. The table below summarizes
the components of other investment income (loss), net for the years ended
December 31, 2021, 2020 and 2019.

                                                                                Years Ended December 31,
$ in thousands                                                    2021                    2020                    2019
Dividend income                                                       -                    2,072                   3,944
Gain (loss) on foreign currency transactions, net                     1                       65                       6
Total                                                                 1                    2,137                   3,950


Other investment income (loss), net decreased during the year ended December 31,
2021 compared to 2020 and during the year ended December 31, 2020 compared to
2019 due to the redemption of our FHLBI stock.

Expenses


For the year ended December 31, 2021, we incurred management fees of $21.1
million (2020: $29.4 million) that are payable to our Manager under our
management agreement. Management fees decreased for the year ended December 31,
2021 compared to 2020 due to a lower stockholders' equity management fee base in
2021. Our management fees are calculated quarterly in arrears. Refer to Note 11
- "Related Party Transactions" of our consolidated financial statements in Part
IV, Item 15 of this Report for a discussion of our relationship with our Manager
and a description of how our fees are calculated.

For the year ended December 31, 2020 we incurred management fees of $29.4
million (2019: $38.2 million) that are payable to our Manager under our
management agreement. Management fees decreased for the year ended December 31,
2020 compared to 2019 due to a lower stockholders' equity management fee base in
2020.

For the year ended December 31, 2021, our general and administrative expenses
not covered under our management agreement amounted to $8.2 million (2020: $10.9
million; 2019: $8.0 million). General and administrative expenses not covered
under our management agreement primarily consist of directors and officers
insurance, legal costs, accounting, auditing and tax services, filing fees and
miscellaneous general and administrative costs. General and administrative costs
were lower for the year ended December 31, 2021 compared to 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 totaling $2.6
million in 2020. General and administrative costs were higher for the year ended
December 31, 2020 compared to 2019 primarily due to these fees.

Issuance and Redemption Costs of Redeemed Preferred Stock


On June 16, 2021, we redeemed all issued and outstanding shares of our Series A
Preferred Stock. The excess of the consideration transferred over carrying value
was accounted for as a deemed dividend and resulted in a reduction of
$4.7 million in net income (loss) attributable to common stockholders during the
year ended December 31, 2021.

Net Income (Loss) attributable to Common Stockholders


For the year ended December 31, 2021, our net loss attributable to common
stockholders was $132.5 million (2020: $1.7 billion net loss attributable to
common stockholders; 2019: $319.7 million net income attributable to common
stockholders) or $0.48 basic and diluted net loss per average share available to
common stockholders (2020: $9.89 basic and diluted net loss per average share
available to common stockholders; 2019: $2.42 basic and diluted net income per
average share available to common stockholders).

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For the year ended December 31, 2021, the change in net loss attributable to
common stockholders compared to 2020 was primarily due to: (i) net losses on
investments of $366.5 million versus $961.9 million in the 2020 period; (ii) net
gains on derivative instruments of $122.6 million versus net losses on
derivatives of $851.1 million in the 2020 period; (iii) net losses on credit
derivatives of $35.3 million in the 2020 period; (iv) lower net interest income
of $180.5 million versus $197.9 million in the 2020 period and (v) net gains on
debt extinguishment of $14.7 million in the 2020 period.

For the year ended December 31, 2020, we reported a net loss attributable to
common stockholders compared to net income attributable to common stockholders
in 2019 primarily due to: (i) net losses on investments of $961.9 million versus
net gains on investments of $624.5 million in the 2019 period; (ii) net losses
on derivative instruments of $851.1 million versus $534.8 million in the 2019
period; (iii) net losses on credit derivatives of $35.3 million versus net gains
on credit derivatives of $8.3 million in the 2019 period; (iv) lower net
interest income of $197.9 million versus $306.0 million in the 2019 period and
(v) net gains on debt extinguishment of $14.7 million in the 2020 period.

For further information on the changes in net gain (loss) on investments, net
gain (loss) on derivative instruments, realized and unrealized credit derivative
income (loss), net changes in net interest income and net gain (loss) on
extinguishment of debt in the 2021, 2020 and 2019 periods, see preceding
discussion under "Gain (loss) on Investments, net", "Gain (Loss) on Derivative
Instruments, net", "Realized and Unrealized Credit Derivative Income (Loss),
net", "Net Interest Income" and "Net Gain (Loss) on Extinguishment of Debt".

Non-GAAP Financial Measures

The table below shows the non-GAAP financial measures we use to analyze our
operating results and the most directly comparable U.S. GAAP measures. We
believe these non-GAAP measures are useful to investors in assessing our
performance as discussed further below.


           Non-GAAP Financial Measure                     Most Directly Comparable U.S. GAAP Measure
Earnings available for distribution (and by            Net income (loss) attributable to common
calculation, earnings available for distribution       stockholders (and by calculation, basic earnings
per common share)                                      (loss) per common 

share)

Effective interest income (and by calculation, Total interest income (and by calculation,
effective yield)

                                       earning asset 

yields)

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

                               of funds)
Effective net interest income (and by                  Net interest income (and by calculation, net
calculation, effective interest rate margin)           interest rate 

margin)

Economic debt-to-equity ratio                          Debt-to-equity ratio


Commencing with the quarter ended June 30, 2021, we changed the title of our
non-GAAP measure of core earnings (and by calculation, core earnings per common
share) to earnings available for distribution (and by calculation, earnings
available for distribution per common share) to clarify what the measure
presents. The adjustments made to reconcile net income (loss) attributable to
common stockholders to earnings available for distribution are identical to
those adjustments that we previously made to determine core earnings.

We adjust our calculations of non-GAAP financial measures for changes in the
composition of our investment portfolio where appropriate. We have historically
excluded the impact of realized and unrealized gains and losses on GSE CRT
embedded derivatives from the calculation of earnings available for
distribution. 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 earnings available for
distribution 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 is equal to U.S.
GAAP total interest income beginning in 2021.

We did not present earnings available for distribution for the year ended
December 31, 2020 because earnings available for distribution excluded the
material adverse impact of the market disruption caused by the COVID-19 pandemic
on our financial condition. In addition, earnings available for the year ended
December 31, 2020 was not indicative of the reduced earnings potential of our
current investment portfolio.

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.


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Earnings Available for Distribution (formerly Core Earnings)


Our business objective is to provide attractive risk-adjusted returns to our
stockholders, primarily through dividends and secondarily through capital
appreciation. We use earnings available for distribution as a measure of our
investment portfolio's ability to generate income for distribution to common
stockholders and to evaluate our progress toward meeting this objective. We
calculate earnings available for distribution 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; realized and unrealized (gain) loss on GSE CRT
embedded derivatives, 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.

By excluding the gains and losses discussed above, we believe the presentation
of earnings available for distribution provides a consistent measure of
operating performance that investors can use to evaluate our results over
multiple reporting periods and, to a certain extent, compare to our peer
companies. However, because not all of our peer companies use identical
operating performance measures, our presentation of earnings available for
distribution may not be comparable to other similarly titled measures used by
our peer companies. We exclude the impact of gains and losses when calculating
earnings available for distribution because (i) when analyzed in conjunction
with our U.S. GAAP results, earnings available for distribution provides
additional detail of our investment portfolio's earnings capacity and (ii) 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 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 consolidated statements of operations. In addition, certain
gains and losses represent one-time events. We may add and have added additional
reconciling items to our earnings available for distribution calculation as
appropriate.

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 have historically distributed at least 100% of our REIT
taxable income. Because we view earnings available for distribution as a
consistent measure of our investment portfolio's ability to generate income for
distribution to common stockholders, earnings available for distribution is one
metric, but not the exclusive metric, that our board of directors uses to
determine the amount, if any, and the payment date of dividends on our common
stock. However, earnings available for distribution should not be considered as
an indication of our taxable income, a guaranty of our ability to pay dividends
or as a proxy for the amount of dividends we may pay, as earnings available for
distribution excludes certain items that impact our cash needs.

Earnings available for distribution is an incomplete measure of our financial
performance and there are other factors that impact the achievement of our
business objective. We caution that earnings available for distribution 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.

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


                                                                               Years Ended December 31,
$ in thousands, except per share data                                          2021                                     2019
Net income (loss) attributable to common stockholders                        (132,477)                                  319,675

Adjustments:

(Gain) loss on investments, net                                               366,509                                  (624,466)
Realized (gain) loss on derivative instruments, net (1)                      (156,157)                                  597,077
Unrealized (gain) loss on derivative instruments, net (1)                      17,743                                   (26,482)

Realized and unrealized (gain) loss on GSE CRT embedded derivatives,
net (2)

                                                                             -                                    12,490
TBA dollar roll income (3)                                                     40,058                                         -
(Gain) loss on foreign currency transactions, net (4)                              (1)                                       (6)
Amortization of net deferred (gain) loss on de-designated interest rate
swaps (5)                                                                     (22,000)                                  (23,729)

Subtotal                                                                      246,152                                   (65,116)
Earnings available for distribution                                           113,675                                   254,559
Basic earnings (loss) per common share                                          (0.48)                                     2.42
Earnings available for distribution per common share (6)                         0.41                                      1.92



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


                                                                              Years Ended December 31,
$ in thousands                                                                2021                                     2019
Realized gain (loss) on derivative instruments, net                          156,157                                  (597,077)
Unrealized gain (loss) on derivative instruments, net                        (17,743)                                   26,482
Contractual net interest income (expense) on interest rate swaps             (15,803)                                   35,840
Gain (loss) on derivative instruments, net                                   122,611                                  (534,755)



(2)U.S. GAAP realized and unrealized credit derivative income (loss), net on the
consolidated statements of operations includes the following components:


                                                                             Years Ended December 31,
$ in thousands                                                              2021                                    2019

Realized and unrealized gain (loss) on GSE CRT embedded derivatives,
net

                                                                             -                                  (12,490)
GSE CRT embedded derivative coupon interest                                     -                                   20,833

Realized and unrealized credit derivative income (loss), net                    -                                    8,343



(3)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 earnings available for distribution 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
consolidated statements of operations.

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(4)U.S. GAAP other investment income (loss), net on the consolidated statements
of operations includes the following components:

                                                        Years Ended December 31,
$ in thousands                                         2021                               2019
Dividend income                                          -                               3,944
Gain (loss) on foreign currency transactions, net        1                                   6
Other investment income (loss), net                      1                               3,950



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


                                                                               Years Ended December 31,
$ in thousands                                                                2021                                     2019
Interest expense on repurchase agreements outstanding                         10,710                                  454,426

Amortization of net deferred (gain) loss on de-designated interest rate
swaps

                                                                        (22,000)                                 (23,729)
Repurchase agreements interest expense                                       (11,290)                                 430,697



(6) Earnings available for distribution per common share is equal to earnings
available for distribution divided by the basic weighted average number of
common shares outstanding.

The components of earnings available for distribution for the years ended
December 31, 2021 and 2019 are:


                                                                                Years Ended December 31,
$ in thousands                                                                  2021                                     2019
Effective net interest income(1)                                               142,689                                  338,991
TBA dollar roll income                                                          40,058                                        -
Dividend income                                                                      -                                    3,944
Equity in earnings (losses) of unconsolidated ventures                             870                                    2,224
(Increase) decrease in provision for credit losses                               1,768                                        -
Total expenses                                                                 (29,233)                                 (46,174)
Subtotal                                                                       156,152                                  298,985
Dividends to preferred stockholders                                            (37,795)                                 (44,426)
Issuance and redemption costs of redeemed preferred stock                       (4,682)                                       -
Earnings available for distribution                                            113,675                                  254,559


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


Earnings available for distribution for the year ended December 31, 2021 was
driven by effective net interest income and TBA dollar roll income. Earnings
available for distribution for the year ended December 31, 2019 was driven by
effective net interest income. As discussed above, we did not report earnings
available for distribution for the year ended December 31, 2020.


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

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 was recorded as realized and unrealized
credit derivative income (loss), net. We included our GSE CRT embedded
derivative coupon interest in effective interest income because GSE CRT coupon
interest was not accounted for consistently under U.S. GAAP. We accounted for
GSE CRTs purchased before August 24, 2015 as hybrid financial instruments, but
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 was recorded as interest income, whereas coupon interest on GSE
CRTs accounted for as hybrid financial instruments was recorded as realized and
unrealized credit derivative income (loss). We added back GSE CRT embedded
derivative coupon interest to our total interest income because we 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 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.

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; the amortization of net deferred
gains (losses) on de-designated interest rate swaps that is recorded as
repurchase agreement interest expense and GSE CRT embedded derivative coupon
interest that is 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 information that is useful to
investors in understanding our borrowing costs and operating performance.

The following table reconciles total interest income to effective interest
income and yield to effective yield for the following periods:

                                                                                                                     Years Ended December 31,
                                                                2021                                                           2020                                                           2019
$ in thousands                              Reconciliation              Yield/Effective Yield              Reconciliation              Yield/Effective Yield              Reconciliation              Yield/Effective Yield
Total interest income                                 169,202                          1.92  %                       280,166                          3.55  %                       778,367                          3.78  %
Add: GSE CRT embedded derivative
coupon interest recorded as realized
and unrealized credit derivative
income (loss), net                                          -                             -  %                         6,323                          0.08  %                        20,833                          0.11  %
Effective interest income                             169,202                          1.92  %                       286,489                          3.63  %                       799,200                          3.89  %


Our effective interest income decreased for the year ended December 31, 2021
versus 2020 due to lower asset yields primarily as a result of our asset sales
in the first half of 2020. Changes in effective yield for the year ended
December 31, 2021 versus 2020 are primarily due to changes in portfolio
composition. Almost all of our investment portfolio (excluding TBAs) was
invested in Agency RMBS during the year ended December 31, 2021.

Our effective interest income decreased for the year ended December 31, 2020
versus 2019 primarily due to lower average earning assets. Our average earning
assets decreased to $7.9 billion for the year ended December 31, 2020 from $20.6
billion for the year ended December 31, 2019 primarily because we sold a
substantial portion of our MBS and GSE CRT portfolio during the first half of
2020 due to disruption in the financial markets caused by the COVID-19 pandemic
as previously discussed. Changes in effective yield for the year ended
December 31, 2020 versus 2019 are primarily due to changes in our portfolio
composition.

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The following table reconciles total interest expense to effective interest
expense and cost of funds to effective cost of funds for the following periods:

                                                                                                         Years Ended December 31,
                                                             2021                                                  2020                                                  2019
                                                                       Cost of Funds /                                       Cost of Funds /                                       Cost of Funds /
                                                                        Effective Cost                                        Effective Cost                                        Effective Cost
$ in thousands                               Reconciliation                of Funds                Reconciliation                of Funds                Reconciliation                of Funds
Total interest expense                                (11,290)                 (0.14) %                      82,262                   1.19  %                     472,320                   2.52  %
Add: Amortization of net deferred gain
(loss) on de-designated interest rate
swaps                                                  22,000                   0.28  %                      23,794                   0.34  %                      23,729                   0.13  %
Add (Less): Contractual net interest
expense (income) on interest rate swaps
recorded as gain (loss) on derivative
instruments, net                                       15,803                   0.20  %                      (8,047)                 (0.12) %                     (35,840)                 (0.19) %
Effective interest expense                             26,513                   0.34  %                      98,009                   1.41  %                     460,209                   2.46  %


Our effective interest expense and effective cost of funds decreased for the
year ended December 31, 2021 versus 2020 primarily due to a lower average cost
of funds reflecting decreases in the Federal Funds rate. Lower total interest
expense was partially offset by contractual net interest expense on interest
rate swaps of $15.8 million during the year ended December 31, 2021 compared to
$8.0 million of contractual net interest income for the same period in 2020.

Our effective interest expense and effective cost of funds decreased for the
year ended December 31, 2020 versus 2019 primarily due to lower interest expense
paid on repurchase agreements. We recorded total interest expense of $82.3
million for the year ended December 31, 2020 compared to $472.3 million for the
same period in 2019 due to lower average borrowings and a lower Federal Funds
rate.

The following table reconciles net interest income to effective net interest
income and net interest rate margin to effective interest rate margin for the
following periods:
                                                                                                         Years Ended December 31,
                                                             2021                                                  2020                                                  2019
                                                                         Net Interest                                          Net Interest                                          Net Interest
                                                                        Rate Margin /                                         Rate Margin /                                         Rate Margin /
                                                                          Effective                                             Effective                                             Effective
                                                                        Interest Rate                                         Interest Rate                                         Interest Rate
$ in thousands                               Reconciliation                 Margin                 Reconciliation                 Margin                 Reconciliation                 Margin
Net interest income                                   180,492                   2.06  %                     197,904                   2.36  %                     306,047                   1.26  %
Less: Amortization of net deferred
(gain) loss on de-designated interest
rate swaps                                            (22,000)                 (0.28) %                     (23,794)                 (0.34) %                     (23,729)                 (0.13) %
Add: GSE CRT embedded derivative coupon
interest recorded as realized and
unrealized credit derivative income
(loss), net                                                 -                      -  %                       6,323                   0.08  %                      20,833                   0.11  %
Add (Less): Contractual net interest
income (expense) on interest rate swaps
recorded as gain (loss) on derivative
instruments, net                                      (15,803)                 (0.20) %                       8,047                   0.12  %                      35,840                   0.19  %
Effective net interest income                         142,689                   1.58  %                     188,480                   2.22  %                     338,991                   1.43  %


Effective net interest income for the year ended December 31, 2021 decreased
versus 2020 primarily due to lower asset yields as a result of our asset sales
in the first half of 2020 that were partially offset by a lower average cost of
funds reflecting decreases in the Federal Funds rate. Effective interest rate
margin for the year ended December 31, 2021 decreased versus 2020 due to changes
in portfolio composition.

Effective net interest income for the year ended December 31, 2020 decreased
versus 2019 primarily due to lower average earning asset balances that were
partially offset by lower average borrowings and a lower effective cost of funds
driven

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by cuts in the Federal Funds rate. Effective interest rate margin for the year
ended December 31, 2020 increased versus 2019 due to changes in portfolio
composition, including related repurchase agreement borrowings, and a lower
Federal Funds rate.

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 our economic debt-to-equity ratio as of
December 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 December 31, 2021, approximately 93% 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.

December 31, 2021

$ in thousands                                                    Agency RMBS       Credit Portfolio (1)         Total
Mortgage-backed securities                                        7,732,281                71,978              7,804,259
Cash and cash equivalents (2)                                       357,134                     -                357,134
Restricted cash(3)                                                  219,918                     -                219,918
Derivative assets, at fair value (3)                                      -                   270                    270
Other assets                                                         25,728                36,532                 62,260
Total assets                                                      8,335,061               108,780              8,443,841

Repurchase agreements                                             6,987,834                     -              6,987,834
Derivative liabilities, at fair value (3)                            14,356                     -                 14,356
Other liabilities                                                    35,596                 3,920                 39,516
Total liabilities                                                 7,037,786                 3,920              7,041,706

Total stockholders' equity (allocated)                            1,297,275               104,860              1,402,135
Debt-to-equity ratio (4)                                                5.4                     -                    5.0
Economic debt-to-equity ratio (5)                                       6.6                     -                    6.2


(1)Investments in non-Agency CMBS, non-Agency RMBS, commercial loans 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
our 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 ($1.6 billion as of December 31, 2021)
to total stockholders' equity.



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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 (3)                                                 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
our 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 negatively affected our liquidity during the year ended
December 31, 2020. Under the terms of our repurchase agreements, 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 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. These events have led us to seek to avoid financing
less liquid assets, such as non-Agency securities, with repurchase agreements.
See Part II. Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations and Part I. Item 1A. Risk Factors in this Report for
more information on how the COVID-19 pandemic has impacted and may continue to
impact our liquidity and capital resources.

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We held cash, cash equivalents and restricted cash of $577.1 million at
December 31, 2021 (2020: $392.6 million). Our cash, cash equivalents and
restricted cash increased due to normal fluctuations in cash timing of principal
and interest payments, repayments of debt, and asset purchases and sales. Our
operating activities provided net cash of approximately $152.3 million for the
year ended December 31, 2021 (2020: $170.5 million; 2019: $343.4 million).

Our investing activities provided net cash of $120.7 million for the year ended
December 31, 2021 (2020: provided net cash of $11.6 billion; 2019: used net cash
of $4.3 billion). Our primary source of cash from investing activities during
the year ended December 31, 2021 was $16.3 billion from the sale of MBS. We also
generated $825.2 million from principal payments of MBS and received cash of
$156.2 million to settle derivative contracts during the year ended December 31,
2021. We used cash of $17.1 billion to purchase MBS during the year ended
December 31, 2021.

During the year ended December 31, 2020, we sold MBS and GSE CRT for proceeds of
$25.0 billion. We also generated $892.6 million from principal payments of MBS
and GSE CRT during the year ended December 31, 2020. We used cash to purchase
$13.6 billion of MBS and GSE CRT securities during the year ended December 31,
2020. We also used cash of $844.6 million on derivative contracts during the
year ended December 31, 2020 primarily as we sold Agency securities and our
sensitivity to interest rates decreased.

During the year ended December 31, 2019, we used cash to purchase $9.2 billion
of MBS and GSE CRT securities. Purchases were partially funded by principal
payments from MBS and GSE CRT securities of $2.2 billion, proceeds from MBS and
GSE CRT sales of $3.3 billion, and through investing and leveraging proceeds of
common stock offerings.

Our financing activities used net cash of $88.6 million for the year ended
December 31, 2021 (2020: used net cash of $11.6 billion; 2019: provided net cash
of $4.1 billion).


Our financing activities for the year ended December 31, 2021 primarily
consisted of net principal repayments on our repurchase agreements of $240.9
million. We paid dividends of $133.1 million and used cash of $140.0 million to
redeem our Series A Preferred Stock during the year ended December 31, 2021.
Proceeds from the issuance of common stock provided $430.5 million during the
year ended December 31, 2021.

Our financing activities for the year ended December 31, 2020 primarily
consisted of net principal repayments on our repurchase agreements of $10.3
billion
. In addition, we repaid secured loans of $1.65 billion and paid
dividends of $137.5 million. Proceeds from the issuance of common stock provided
$420.7 million during the year ended December 31, 2020.


Our financing activities for the year ended December 31, 2019 primarily
consisted of net proceeds from repurchase agreements of $3.9 billion. We also
raised proceeds of $509.1 million from the issuance of common stock and paid
dividends of $271.2 million.

As of December 31, 2021, the average margin requirement (weighted by borrowing
amount), or the haircut, under our repurchase agreements was 4.8% for Agency
RMBS. The haircuts ranged from a low of 3% to a high of 5%. Declines in the
value of our securities 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 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.

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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.

Forward-Looking Statements Regarding Liquidity


As of December 31, 2021, we held $7.3 billion of Agency securities that are
financed by repurchase agreements. We also had approximately $514.1 million of
unencumbered investments and unrestricted cash of $357.1 million as of
December 31, 2021. As of December 31, 2021, our known contractual obligations
primarily consist of $7.0 billion of repurchase agreement borrowings with a
weighted average remaining maturity of 29 days. We generally intend to refinance
the majority of our repurchase agreement borrowings at market rates upon
maturity. Repurchase agreement borrowings that are not refinanced upon maturity
are typically repaid through the use of cash on hand or proceeds from sales of
securities. We are also committed to fund $6.5 million in additional capital to
our unconsolidated joint ventures to cover future expenses should they occur.

Based upon our current portfolio and existing borrowing arrangements, 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.

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 REIT 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"
of our consolidated financial statements in Part IV, Item 15 of this Report.

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.


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Exposure to Financial Counterparties


We 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 December 31, 2021, no counterparty held collateral that exceeded the
amounts borrowed under the related repurchase agreements by more than $70.1
million, or 5% of our stockholders' equity. The following table summarizes our
exposure under repurchase agreements to counterparties by geographic
concentration as of December 31, 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.

                                                                                                   Repurchase Agreement
$ in thousands                                     Number of Counterparties                             Financing                                 Exposure
North America                                                    11                                        4,265,161                               219,940
Europe (excluding United Kingdom)                                 2                                          614,623                                28,202
Asia                                                              4                                        1,917,804                                99,182
United Kingdom                                                    1                                          190,246                                 8,018
Total                                                            18                                        6,987,834                               355,342


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") at the end of each
calendar quarter in 2021. We also believe that our revenue qualifies for the 75%
source of income test and for the 95% source of income test rules for the year
ended December 31, 2021. Consequently, we believe we met the REIT income and
asset test as of December 31, 2021. We also met all REIT requirements regarding
the stock ownership and distribution of dividends of our taxable income as of
December 31, 2021. Therefore, as of December 31, 2021, we believe that we
qualified as a REIT under the Code.

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 U.S. government securities and cash items) on an unconsolidated
basis. 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). We calculate
that as of December 31, 2021, we conducted our business so as not to be
regulated as an investment company under the 1940 Act.

Item 7A. 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.

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For additional discussion of market risk associated with the COVID-19 pandemic,
see Item Part I. Item 1A – Risk Factors of this Report.

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..

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. 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, 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 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.

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 to maintain liquidity and preserve book value.

Unprecedented government responses to the COVID-19 pandemic, including fiscal
stimulus, monetary policy actions, and various purchase and financing programs
have impacted and will continue to impact credit spreads.

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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 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 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
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 December 31, 2021 and 2020, assuming a static portfolio and constant
financing and credit spreads. When evaluating the impact of changes in interest
rates, prepayment assumptions and 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.

                                                                               At December 31, 2021                                                                                At December 31, 2020
                                                     Percentage Change in                              Percentage Change in                              Percentage Change in                              Percentage Change in
Change in Interest Rates                         Projected Net Interest Income                       Projected Portfolio Value                       Projected Net Interest Income                       Projected Portfolio Value
+1.00%                                                                      (3.27) %                                            (1.61) %                                        29.73  %                                            (1.91) %
+0.50%                                                                      (0.19) %                                            (0.52) %                                        20.76  %                                            (0.61) %
-0.50%                                                                      (1.96) %                                            (0.38) %                                       (23.01) %                                            (0.73) %
-1.00%                                                                     (16.33) %                                            (2.11) %                                       (46.95) %                                            (1.59) %


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
scenarios assume interest rates at December 31, 2021 and 2020.

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Furthermore, while the analysis reflects the estimated impact of interest rate
increases and decreases on a static portfolio, we actively manage the size and
composition of our investment and swap portfolios, which can result in material
changes to 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 December 31, 2021 and 2020, 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 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.

Amid the COVID-19 vaccine program and progress toward controlling the pandemic,
the U.S. economy has strengthened despite elevated case counts largely fueled by
the Omicron variant. This pick-up in economic activity has translated to
improving employment levels and increased activity in residential and commercial
real estate. While loan delinquencies remain elevated, they continue to decline
from their post-pandemic peak levels. In particular, multi-family and
single-family housing have been aided by government support and generous
forbearance practices. Further, stimulative monetary policies have helped
support real estate activity and property valuations. Despite these positives,
many borrowers continue to experience difficulties meeting their obligations or
seek to forbear or further forbear payment on their mortgage loans. As a result,
loans may continue to experience elevated delinquency levels and eventual
defaults, which could impact the performance of our mortgage-backed securities.
We also expect credit rating agencies to continue to reassess transactions
negatively impacted by these adverse changes, which may result in our
investments being downgraded.

Foreign Exchange Rate Risk


As of December 31, 2021, we have an investment of €9.2 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 have historically sought to hedge our foreign currency
exposures by purchasing currency forward contracts.

The unconsolidated venture is in liquidation and plans to sell or settle its
remaining investments as expeditiously as possible.

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;



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•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;


•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.

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