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What changed in Invesco Mortgage Capital Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Invesco Mortgage Capital Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+494 added−534 removedSource: 10-K (2024-02-22) vs 10-K (2023-02-21)

Top changes in Invesco Mortgage Capital Inc.'s 2023 10-K

494 paragraphs added · 534 removed · 320 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeOur Manager invests significantly in talent development, health and welfare programs, technology and other resources that support its employees.
Biggest changeOur Manager's long-term success depends on its ability to retain, develop, engage and attract top talent. Our Manager invests significantly in talent development, health and welfare programs, technology and other resources that support its employees in developing their full potential both personally and professionally. Our Manager believes that diversity and inclusion are good for business.
We believe this strategy and our commitment to capital preservation provide us with a competitive advantage when operating in a variety of market conditions. Investment Strategy We have invested in a diversified pool of mortgage assets that generate attractive risk-adjusted returns. Our current investment portfolio includes Agency RMBS, non-Agency RMBS, non-Agency CMBS and TBAs.
We believe this strategy and our commitment to capital preservation provide us with a competitive advantage when operating in a variety of market conditions. Investment Strategy We have invested in a diversified pool of mortgage assets that generate attractive risk-adjusted returns. Our current investment portfolio includes Agency RMBS, non-Agency RMBS and non-Agency CMBS.
Under repurchase agreement financing arrangements, certain buyers require us to provide additional cash collateral in the event the market value of the asset declines to maintain the ratio of value of the collateral to the amount of borrowing. Leverage We use leverage on our assets to achieve our return objectives, which are adjusted as our investment and financing opportunities change.
Under repurchase agreement financing arrangements, certain buyers require us to provide additional cash collateral in the event the market value of the asset declines to maintain the ratio of value of the collateral to the amount of borrowing. 5 Table of Contents Leverage We use leverage on our assets to achieve our return objectives, which are adjusted as our investment and financing opportunities change.
The mortgage loan collateral for non-Agency RMBS generally consists of residential mortgage loans that do not conform to U.S. government agency or federally chartered corporation underwriting guidelines due to certain factors including mortgage balance in excess of such guidelines, borrower characteristics, loan characteristics and level of documentation.
The mortgage loan collateral for non-Agency RMBS generally consists of residential mortgage loans that do not conform to U.S. government agency or federally chartered corporation underwriting guidelines due 4 Table of Contents to certain factors including mortgage balance in excess of such guidelines, borrower characteristics, loan characteristics and level of documentation.
Agency RMBS Agency RMBS are residential mortgage-backed securities issued by a U.S. government agency such as Ginnie Mae, or a federally chartered corporation such as Fannie Mae or Freddie Mac (Government Sponsored Enterprises or “GSEs”) that are secured by a collection of mortgages.
Agency RMBS Agency RMBS are residential mortgage-backed securities issued by a U.S. government agency such as Ginnie Mae, or a federally chartered corporation such as Fannie Mae or Freddie Mac (Government Sponsored Enterprises or “GSEs”) that are 3 Table of Contents secured by a collection of mortgages.
It also reviews its compliance with our investment policies and procedures, including our investment guidelines, and our Manager provides our board of directors an investment performance report at the end of each quarter in conjunction with its review of our quarterly results. 9 Table of Conten t s Investment Process Our Manager’s investment team has a strong focus on asset selection and on the relative value of various sectors within the mortgage market.
It also reviews its compliance with our investment policies and procedures, including our investment guidelines, and our Manager provides our board of directors an investment performance report at the end of each quarter in conjunction with its review of our quarterly results. 7 Table of Contents Investment Process Our Manager’s investment team has a strong focus on asset selection and on the relative value of various sectors within the mortgage market.
In addition to direct purchases of our target assets, we also invest in ventures managed by an affiliate of our Manager, which, in turn, invest in our target assets. We accept varying levels of interest rate risk by managing our hedge portfolio and accept certain levels of credit and spread risk to earn income.
Treasury securities and, in addition to direct purchases of our target assets, invested in ventures managed by an affiliate of our Manager, which, in turn, invested in our target assets. We accept varying levels of interest rate risk by managing our hedge portfolio and accept certain levels of credit and spread risk to earn income.
The amount of financing we receive under a repurchase agreement is limited to a specified percentage of the estimated market value of the assets we sell to the buyer. The difference between the sale price and 7 Table of Conten t s repurchase price is the cost, or interest expense, of financing under a repurchase agreement.
The amount of financing we receive under a repurchase agreement is limited to a specified percentage of the estimated market value of the assets we sell to the buyer. The difference between the sale price and repurchase price is the cost, or interest expense, of financing under a repurchase agreement.
Our Corporate Information Our principal executive offices are located at 1555 Peachtree Street, N.E., Suite 1800, Atlanta, Georgia 30309. Our telephone number is (404) 892-0896. We file current and periodic reports, proxy statements and other information with the SEC. The SEC maintains a website that contains reports, proxy and other information at www.sec.gov.
Our Corporate Information Our principal executive offices are located at 1331 Spring Street, N.W., Suite 2500, Atlanta, Georgia 30309. Our telephone number is (404) 892-0896. We file current and periodic reports, proxy statements and other information with the SEC. The SEC maintains a website that contains reports, proxy and other information at www.sec.gov.
We sold our loan participation interest in April 2020. Financing Strategy 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.
Financing Strategy 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.
The information on our website is not intended to form a part of or be incorporated by reference into this Report. 10 Table of Conten t s
The information on our website is not intended to form a part of or be incorporated by reference into this Report. 8 Table of Contents
In circumstances where we have a non-controlling interest but we are deemed to be able to exert significant influence over the affairs of the enterprise, we utilize the equity method of accounting.
Unconsolidated Ventures During the periods presented in this Report, we have invested in unconsolidated ventures. In circumstances where we have a non-controlling interest but we are deemed to be able to exert significant influence over the affairs of the enterprise, we utilize the equity method of accounting.
In effect, these payments are a 4 Table of Conten t s “pass-through” of scheduled and unscheduled principal payments and the monthly interest payments made by the individual borrowers on the mortgage loans, net of any fees paid to the servicers, guarantors or other related parties of the securities.
Instead, Agency RMBS provide for monthly payments of both principal and interest. In effect, these payments are a “pass-through” of scheduled and unscheduled principal payments and the monthly interest payments made by the individual borrowers on the mortgage loans, net of any fees paid to the servicers, guarantors or other related parties of the securities.
As of December 31, 2022, we were invested in: • residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S. government agency such as the Government National Mortgage Association (“Ginnie Mae”), or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively “Agency RMBS”); • commercial mortgage-backed securities (“CMBS”) 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; and • other real estate-related financing arrangements.
As of December 31, 2023, we were invested in: • residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S. government agency such as the Government National Mortgage Association (“Ginnie Mae”), or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively “Agency RMBS”); • commercial mortgage-backed securities (“CMBS”) 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”); • U.S.
Treasury securities. 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. (the “Operating Partnership”). We are externally managed and advised by Invesco Advisers, Inc. (our “Manager”), an indirect wholly-owned subsidiary of Invesco Ltd. (“Invesco”).
We conduct our business through our wholly-owned subsidiary, IAS Operating Partnership L.P. (the “Operating Partnership”). We are externally managed and advised by Invesco Advisers, Inc. (our “Manager”), an indirect wholly-owned subsidiary of Invesco Ltd. (“Invesco”).
Our Manager is committed to improving diversity at all levels and in all functions across its global business and remains focused on increasing representation of women and other underrepresented employees. 3 Table of Conten t s Our Competitive Advantages We believe that our competitive advantages include the following: Significant Experience of Our Senior Management and Our Manager Our senior management and the structured investments team of our Manager have a long track record and broad experience in managing residential and commercial mortgage-related assets through a variety of credit and interest rate environments and have demonstrated the ability to generate attractive risk-adjusted returns under different market conditions and cycles.
Our Competitive Advantages We believe that our competitive advantages include the following: Significant Experience of Our Senior Management and Our Manager Our senior management and the structured investments team of our Manager have a long track record and broad experience in managing residential and commercial mortgage-related assets through a variety of credit and interest rate environments and have demonstrated the ability to generate attractive risk-adjusted returns under different market conditions and cycles.
Elevated inflation and the resulting acceleration of monetary policy tightening by the Federal Reserve have impacted and will continue to impact credit spreads. 8 Table of Conten t s Credit Risk We believe that our investment strategy will generally keep our credit losses and financing costs low.
Elevated inflation, monetary policy tightening by the Federal Open Market Committee (“FOMC”) and concerns around the health of the regional banking system have impacted and may continue to impact credit spreads. 6 Table of Contents Credit Risk We believe that our investment strategy will generally keep our credit losses and financing costs low.
Our assets have also historically included, and may in the future include, Agency CMBS, GSE CRT, residential mortgage loans, commercial mortgage loans and other real estate-related investments. We refer to all of these investment types collectively as our target assets.
Our investment portfolio has also historically included, and may in the future include Agency CMBS, credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (“GSE CRT”), residential mortgage loans, commercial mortgage loans, TBAs and other real estate-related investments. We refer to all of these investment types collectively as our target assets. We have also purchased U.S.
Given tightening lending conditions, loans may continue to experience increasing 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.
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.
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 Federal Home Loan Bank of Indianapolis (“FHLBI”) to finance a portion of our investment portfolio.
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 the secured overnight financing rate (“SOFR”). We have also financed investments through issuances of equity, and may utilize other forms of financing in the future.
Liquidity in the form of cash, unencumbered assets and future cash inflows is consistently monitored and evaluated versus internal targets. Foreign Exchange Rate Risk We have an investment 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.
Foreign Exchange Rate Risk We had an investment in an unconsolidated joint venture whose net assets and results of operations were exposed to foreign currency translation risk when translated in U.S. dollars upon consolidation. We historically sought to hedge our foreign currency exposures by purchasing currency forward contracts.
Human Capital As previously discussed, we do not have employees and our Manager is responsible for providing us with our management team. Our Manager's long-term success, including its success in managing our business, relies on its ability to attract, develop and retain talent.
Human Capital As previously discussed, we do not have any employees. Instead, under our management agreement, our Manager is responsible for providing us with our management team. Our executive officers may also serve as officers of our Manager. For additional information, refer to Item 13 — “Certain Relationships and Related Transactions, and Director Independence”.
Removed
During the periods presented in this Report, we also invested in: • CMBS that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively “Agency CMBS”); • credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (“GSE CRT”); • a commercial mortgage loan; and • U.S.
Added
Treasury securities; and • a real estate-related financing arrangement. During the periods presented in this Report, we also invested in: • to-be-announced securities forward contracts (“TBAs”) to purchase Agency RMBS; and • a commercial mortgage loan. We continuously evaluate new investment opportunities to complement our current investment portfolio by expanding our target assets and portfolio diversification.
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Instead, Agency RMBS provide for monthly payments of both principal and interest.
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Our Manager is committed to further strengthening diversity at all levels and in all functions across its global business. Increasing representation of women and diverse employees remains a focus for our Manager, as does building a more inclusive work environment. All employees are required to take periodic unconscious bias training.
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Our current investments in non-Agency RMBS are collateralized by prime, jumbo prime and Alt-A mortgage loans.
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Employees are also encouraged to participate in any of our Manager’s various employee resource groups where employees with diverse backgrounds, experiences and perspectives can connect. Our 2 Table of Contents Manager’s various employee resource groups are sponsored by its senior leaders and are designed by employees, for employees .
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We have also historically invested in non-Agency RMBS collateralized by subprime and reperforming mortgage loans. 5 Table of Conten t s Prime and Jumbo Prime Mortgage Loans Prime mortgage loans are mortgage loans that generally require borrower credit histories, debt-to-income ratios and loan-to-value ratios similar to those dictated by GSE underwriting guidelines, though in certain cases they may not meet the same income documentation or other requirements.
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As of December 31, 2023, our one remaining unconsolidated venture is in liquidation and plans to sell or settle its remaining investments as expeditiously as possible. TBAs TBAs are forward contracts to purchase or sell Agency RMBS.
Removed
Jumbo prime mortgage loans are mortgage loans with requirements similar to prime mortgage loans except that the mortgage balance exceeds the maximum amount permitted by GSE underwriting guidelines. Alt-A Mortgage Loans Alt-A mortgage loans are mortgage loans made to borrowers whose qualifying mortgage characteristics do not conform to GSE underwriting guidelines, but whose borrower characteristics may.
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Given deteriorating fundamentals and tightening lending conditions, borrowers may experience difficulties meeting their obligations and refinancing loans upon scheduled maturities. Loans may experience increasing delinquency levels and eventual defaults, which could impact the performance of our mortgage-backed securities.
Removed
Generally, Alt-A mortgage loans allow homeowners to qualify for a mortgage loan with reduced or alternative forms of documentation. The credit quality of Alt-A borrowers generally exceeds the credit quality of subprime borrowers. Subprime Mortgage Loans Subprime mortgage loans are loans that do not conform to GSE underwriting guidelines.
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Liquidity in the form of cash, unencumbered assets and future cash inflows is consistently monitored and evaluated versus internal targets.
Removed
Subprime borrowers generally have imperfect or impaired credit histories and low credit scores. Reperforming Mortgage Loans Reperforming mortgage loans are residential mortgage loans that have a history of delinquency and may have been restructured since origination. Reperforming mortgage loans may or may not have originally conformed to GSE underwriting guidelines.
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One such measure that we use to monitor our liquidity is unrestricted cash and unencumbered investments, which consists of cash and cash equivalents as reported in our consolidated balances sheets and investments that have not been pledged as collateral for repurchase agreement borrowings.
Removed
Due to past delinquencies, borrowers generally have impaired credit histories and low credit scores, and may have a greater than normal risk of future delinquencies and defaults. We have also invested in non-Agency RMBS structured as re-securitizations of a real estate mortgage investment conduit (“Re-REMIC”).
Removed
A Re-REMIC is a transaction in which an existing security or securities is transferred to a special purpose entity that has formed a securitization vehicle that has issued multiple classes of securities secured by and payable from cash flows on the underlying securities. Unconsolidated Ventures We have investments in unconsolidated ventures.
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As of December 31, 2022, our unconsolidated ventures were in liquidation and plan to sell or settle their remaining investments as expeditiously as possible. Agency CMBS Agency CMBS are structured pass-through certificates representing interests in pools of commercial loans that are secured by commercial property and issued by a U.S. government agency or federally chartered corporation.
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Types of Agency CMBS include Fannie Mae DUS (Delegated Underwriting and Servicing), Freddie Mac Multifamily Mortgage Participation Certificates, Ginnie Mae project loan pools, and/or CMOs structured from such collateral. The U.S. government agency or federally chartered corporation sources these loans from a network of approved multifamily sellers/servicers and guarantees the timely payment of interest and principal on these investments.
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Unlike single family residential mortgages in which the borrower, generally, can prepay at any time, commercial mortgages frequently limit the ability of the borrower to prepay, thereby providing a certain level of prepayment protection.
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Common restrictions include yield maintenance (a prepayment premium that allows investors to attain the same yield as if the borrower made all scheduled interest payments up until the maturity date) and prepayment penalties. Additionally, Agency CMBS include Ginnie Mae Construction Loan Certificates (“CLCs”) and the resulting Project Loan Certificates (“PLCs”) when the construction project is complete.
Removed
The investor in the CLC is committed to fund the full amount of the project; however, actual funding generally occurs monthly as construction progresses on the property. Ginnie Mae guarantees the timely payment of principal and interest on each CLC and PLC. Ginnie Mae CLCs pay interest only during construction, while PLCs pay principal and interest.
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The mortgage loans underlying the PLCs generally contain a lock-out and prepayment penalty period of 10 years.
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Ginnie Mae does not guarantee the payment of prepayment penalties. 6 Table of Conten t s Government-Sponsored Enterprises Credit Risk Transfer Securities GSE CRTs are structured to provide credit protection to the issuer with respect to defaults and other credit events within pools of mortgage loans secured by single family properties that collateralize Agency RMBS issued and guaranteed by the GSEs or within pools of mortgage loans secured by multifamily properties that collateralize Agency CMBS issued and guaranteed by the GSEs.
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This credit protection is achieved by allowing the GSEs to reduce the outstanding class principal balance of the securities as designated credit events on the loans arise. The GSEs make monthly coupon payments of interest and periodic payments of principal based on prepayments to the holders of the securities.
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To date, all GSE CRTs have paid a floating interest rate benchmarked to one-month London Interbank Offered Rate (“LIBOR”) or the Secured Overnight Financing Rate (“SOFR”). TBAs TBAs are forward contracts to purchase or sell Agency RMBS.
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Loan Participation Interest In August 2018, we invested in a loan participation interest in a secured loan to a non-bank servicer that was collateralized by mortgage servicing rights associated with Fannie Mae, Freddie Mac, and Ginnie Mae loans. Mortgage servicing rights represented the right to perform and control the servicing of mortgage loans in exchange for a fee.
Removed
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. We have also financed investments through issuances of equity, and may utilize other forms of financing in the future.
Removed
The pace of commercial real estate fundamental improvement is moderating given accelerating monetary policy tightening by the Federal Reserve. Occupancy and rental rates have stabilized and valuations face downward pressure as property borrowing costs remain elevated. Meanwhile, residential real estate fundamentals have also deteriorated due to historically low affordability driven by the dramatic rise in mortgage rates throughout 2022.
Removed
CMBS loan delinquencies increased in the fourth quarter but remain materially lower than COVID-19 peak levels. Many borrowers continue to experience difficulties meeting their obligations or seek to forbear or further forbear payment on their mortgage loans.
Removed
We have historically sought to hedge our foreign currency exposures by purchasing currency forward contracts.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

132 edited+108 added−99 removed224 unchanged
Biggest changeIf we fail to qualify as a REIT in any taxable year, and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax at regular corporate income tax rates on our taxable income, which would be determined without a deduction for dividends distributed to our stockholders.
Biggest changeIf we fail to qualify as a REIT in any tax year, then: • we would be taxed as a regular domestic corporation, which under current laws would result in, among other things, means being unable to deduct dividends paid to stockholders in computing taxable income and being subject to federal and applicable state and local income tax on our taxable income at regular corporate income tax rates; • any resulting tax liability could be substantial and could have a material adverse effect on our book value; • unless we were entitled to relief under applicable statutory provisions, we would be required to pay taxes, and therefore, our cash available for distribution to stockholders would be reduced for each of the years during which we did not qualify as a REIT and for which we had taxable income; and • we generally would not be eligible to re-elect to be taxed as a REIT for the subsequent four full taxable years.
Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock.
Our charter authorizes us to issue additional authorized but unissued shares of common stock or preferred stock.
We acquire debt instruments in the secondary market for less than their face amount. The discount at which such debt instruments are acquired may reflect doubts about their ultimate collectability rather than current market interest rates. The amount of such discount will nevertheless generally be treated as “market discount” for federal income tax purposes.
We may acquire debt instruments in the secondary market for less than their face amount. The discount at which such debt instruments are acquired may reflect doubts about their ultimate collectability rather than current market interest rates. The amount of such discount will nevertheless generally be treated as “market discount” for federal income tax purposes.
In addition, market values of our investments may decline without any general increase in interest rates for a number of reasons, such as increases or expected increases in defaults, or increases or expected increases in voluntary prepayments for those investments that are subject to prepayment risk or widening of credit spreads, which may negatively affect cash available for distribution to our stockholders.
In addition, market values of our investments may decline without any general increase in interest rates for a number of reasons, such as widening of credit spreads, increases or expected increases in defaults, or changes or expected changes in voluntary prepayments for those investments that are subject to prepayment risk, which may negatively affect cash available for distribution to our stockholders.
Share repurchases also may negatively impact our ability to invest in our target assets in the future. As of December 31, 2022, 1,816,398 shares of common stock were available under our Board-authorized share repurchase program. In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock.
Share repurchases also may negatively impact our ability to invest in our target assets in the future. As of December 31, 2023, 1,816,398 shares of common stock were available under our Board-authorized share repurchase program. In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock.
While there is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test, we treat our TBAs under which we contract to purchase to-be-announced Agency MBS ("long TBAs") as qualifying assets for purposes of the REIT 75% asset test, and we treat income and gains from our long TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion of counsel substantially to the effect that (i) for purposes of the REIT asset tests, our long TBAs should be treated as “real estate assets,” and (ii) for purposes of the 75% gross income test, any gain recognized by us in connection with the disposition of our long TBAs by offset, including in dollar roll transactions, should be qualifying income.
While there is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test, we treat our TBAs under which we contract to purchase to-be-announced Agency MBS (“long TBAs”) as qualifying assets for purposes of the REIT 75% asset test, and we treat income and gains from our long TBAs as qualifying income for purposes of the 75% gross income test, based on an opinion of counsel substantially to the effect that (i) for purposes of the REIT asset tests, our long TBAs should be treated as “real estate assets,” and (ii) for purposes of the 75% gross income test, any gain recognized by us in connection with the disposition of our long TBAs by offset, including in dollar roll transactions, should be qualifying income.
If we acquire REMIC residual interests or equity interests in taxable mortgage pools (in a manner consistent with our REIT qualification) and generate “excess inclusion income,” a portion of our dividends received by a tax-exempt stockholder will be treated as unrelated business taxable income.
Similarly, if we acquire REMIC residual interests (or equity interests in taxable mortgage pools in a manner consistent with our REIT qualification) and generate “excess inclusion income,” a portion of our dividends received by a tax-exempt stockholder will be treated as unrelated business taxable income.
Although the U.S. Government has undertaken several measures to support the positive net worth of the GSEs since the financial crisis, there is no guarantee of continuing capital support, if such support were to become necessary. Despite the steps taken by the U.S.
Although the U.S. Government has undertaken several measures to support the positive net worth of the GSEs since the 2008 financial crisis, there is no guarantee of continuing capital support, if such support were to become necessary. Despite the steps taken by the U.S.
Furthermore, certain of the Operating Partnership’s current subsidiaries and subsidiaries that we may form in the future intend to rely upon an exception from the definition of investment company under 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 exception generally requires that at least 55% of a subsidiary’s portfolio must be comprised of qualifying assets and at least 80% of its portfolio must be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets).
Furthermore, certain of the Operating Partnership’s current subsidiaries and subsidiaries that we may form in the future intend to rely upon an exception from the definition of investment company under 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 19 Table of Contents exception generally requires that at least 55% of a subsidiary’s portfolio must be comprised of qualifying assets and at least 80% of its portfolio must be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets).
Our access to financing depends upon a number of factors over which we have little or no control, including: • general market conditions; • the lender’s view of the quality of our assets, valuation of our assets and our liquidity; • the lender’s perception of our growth potential; • regulatory requirements; • our current and potential future earnings and cash distributions; and • the market price of the shares of our capital stock.
Our access to financing depends upon a number of factors over which we have little or no control, including: • general market conditions; • the lender’s view of the quality of our assets, valuation of our assets and our liquidity; • regulatory requirements; • our current and potential future earnings and cash distributions; and • the market price of the shares of our capital stock.
We believe that a change in any one of the following factors and other factors described in the risk factors in this Report could adversely affect our results of operations and impair our ability to pay dividends to our stockholders: • our ability to make profitable investments; • margin calls or other expenses that reduce our cash flow; • defaults in our asset portfolio or decreases in the value of our portfolio; and • the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.
We believe that a change in any one of the following factors and 23 Table of Contents other factors described in the risk factors in this Report could adversely affect our results of operations and impair our ability to pay dividends to our stockholders: • our ability to make profitable investments; • margin calls or other expenses that reduce our cash flow; • defaults in our asset portfolio or decreases in the value of our portfolio; and • the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.
A number of factors over which we have no control may impair a borrower’s ability to repay a mortgage loan secured by a residential property, including the income and assets of the borrower. As of December 31, 2022, we do not hold any mortgage loans secured by residential property.
A number of factors over which we have no control may impair a borrower’s ability to repay a mortgage loan secured by a residential property, including the income and assets of the borrower. As of December 31, 2023, we do not hold any mortgage loans secured by residential property.
For us to qualify as a REIT, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year.
For us to qualify as a REIT, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of any calendar year.
As long as at least 20% of the total dividend is available in cash and certain other requirements are satisfied, the IRS will treat the stock distribution as a dividend (to the extent applicable rules treat such distribution as being made out of the REIT’s earnings and profits).
As long as at least 20% of the total dividend is available in cash and certain other requirements are satisfied, the IRS will treat the stock distribution as a dividend (to the extent applicable rules treat such distribution as being made out of our earnings and profits).
The price difference between those two contracts is commonly referred to as the “drop” and is a reflection of the expected net interest income from an investment in similar Agency mortgage-backed securities, net of an implied financing cost, which would be foregone as a result of settling the contract in the later month rather than in the earlier month.
The price difference between those two contracts is commonly referred to as the “drop” and is a reflection of 18 Table of Contents the expected net interest income from an investment in similar Agency mortgage-backed securities, net of an implied financing cost, which would be foregone as a result of settling the contract in the later month rather than in the earlier month.
If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. As of December 31, 2022, we do not hold any commercial mortgage loans.
If the net operating income of the property is reduced, the borrower’s ability to repay the loan may be impaired. As of December 31, 2023, we do not hold any commercial mortgage loans.
In addition, if the market value or income potential of real estate-related investments declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and gross income therefrom and/or liquidate our non-qualifying assets to maintain our REIT qualification or exemption from the 1940 Act.
In addition, if the market value or income potential of real estate-related investments declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and gross income therefrom and/or liquidate our nonqualifying assets to maintain our REIT qualification or exemption from the 1940 Act.
In addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares.
In addition, our board of directors may, without stockholder approval, amend our charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of common stock or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares.
The amount of leverage we may deploy for particular assets will depend upon our Manager’s assessment of the credit and other risks of those assets and is limited by our debt covenants.
The amount of leverage we may deploy for particular assets will depend upon market conditions and our Manager’s assessment of the credit and other risks of those assets and is limited by our debt covenants.
Changes in the fair value of our derivatives are recorded in our consolidated statement of operations as “gain (loss) on derivative instruments, net” and may result in volatility in our U.S. GAAP earnings. The total changes in fair value may exceed our consolidated net income in any period or for a full year.
Changes in the fair value of our derivatives are recorded in our consolidated statement of operations as “gain (loss) on derivative instruments, net” and may result in volatility in our U.S. GAAP earnings. The total changes in fair value may exceed 21 Table of Contents our consolidated net income in any period or for a full year.
We compete with a variety of institutional investors, including other REITs, and many of our competitors are substantially larger and may have considerably greater financial, technical, marketing and other resources than we do. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us.
We compete with a variety of institutional investors, including other REITs, and some of our competitors are larger and may have greater financial, technical, marketing and other resources than we do. Some competitors may have a lower cost of funds and access to funding sources that may not be available to us.
Finally, if any debt instruments acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability.
Finally, if any debt instruments acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular instrument are not made when due, we may nonetheless be required to continue to 31 Table of Contents recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability.
If an adjustable-rate RMBS is prepaid before or soon after the time of adjustment to a fully indexed rate, we will have held that RMBS while it was least profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life. 14 Table of Conten t s • If we are unable to acquire new RMBS at similar yields to the prepaid RMBS, our financial condition, results of operations and cash flow would suffer.
If an adjustable-rate RMBS is prepaid before or soon after the time of adjustment to a fully indexed rate, we will have held that RMBS while it was least profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life. • If we are unable to acquire new RMBS at similar yields to the prepaid RMBS, our financial condition, results of operations and cash flow would suffer.
A projection of, or an actual, economic downturn could cause a decline in the value of lower credit quality securities because the ability of obligors of mortgages underlying MBS to make principal and interest payments may be impaired.
A projection of, or an actual, economic downturn could cause a decline in the value of lower credit quality securities because the ability of obligors of mortgages underlying MBS to make principal and 14 Table of Contents interest payments may be impaired.
As a result, our board of directors may establish a series of shares of common or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares of common stock or otherwise be in the best interest of our stockholders.
As a result, our board of directors may establish a class or series of shares of common stock or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for shares of our common stock or otherwise be in the best interests of our stockholders.
We may incur a loss on a repurchase transaction if the value of the underlying securities has declined as of the end of the transaction term, as we would have to repurchase the securities for their initial value but would receive securities worth less than that amount.
We may incur a loss on a repurchase 16 Table of Contents transaction if the value of the underlying securities has declined as of the end of the transaction term, as we would have to repurchase the securities for their initial value but would receive securities worth less than that amount.
Such economic losses would be reflected in our results of operations, and our ability to fund these obligations would depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.
Such economic losses would be reflected in our results of operations, and our ability 17 Table of Contents to fund these obligations would depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.
If a mortgage loan is secured by both real property and personal property, the value of the personal property exceeds 15% of the value of all property securing such loan, and the value of the real property at the time the REIT commits to make or acquire the loan is less 31 Table of Conten t s than the highest principal amount (i.e., the face amount) of the loan during the year, interest earned on the loan will be treated as qualifying income only in proportion to the ratio of the value of the real property at the time the REIT commits to make or acquires the loan to the highest principal amount of the loan during the year.
If a mortgage loan is secured by both real property and personal property, the value of the personal property exceeds 15% of the value of all property securing such loan, and the value of the real property at the time the REIT commits to make or acquire the loan is less than the highest principal amount (i.e., the face amount) of the loan during the year, interest earned on the loan will be treated as qualifying income only in proportion to the ratio of the value of the real property at the time the REIT commits to make or acquires the loan to the highest principal amount of the loan during the year.
Fluctuations in interest rates could adversely affect the value of our investments and cause our interest expense to increase, which could result in reduced earnings, decreased profitability and dividends, and diminished cash available for distribution to our stockholders.
Fluctuations in interest rates could adversely affect the value of our investments and derivative financial instruments and cause our interest expense to increase, which could result in reduced earnings, decreased profitability and dividends, and diminished cash available for distribution to our stockholders.
With respect to equity investments we have made in partnerships managed by an affiliate of our Manager, our Manager has agreed to waive base management fees at the equity investment level to avoid duplication of fees.
With respect to equity investments, we have made in partnerships managed by an affiliate of our Manager, our Manager has agreed to waive base 22 Table of Contents management fees at the equity investment level to avoid duplication of fees.
Under IRS Revenue Procedure 2017-45, as a publicly offered REIT, we may give stockholders a choice, subject to various limits and requirements, of receiving a dividend in cash or in common stock of the REIT.
Under IRS Revenue Procedures 2017-45, as a publicly offered REIT, we may give stockholders a choice, subject to various limits and requirements, of receiving a dividend in cash or in our common stock.
In an extreme case of market duress, a market may not even 20 Table of Conten t s be present for certain of our assets at any price. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for bankruptcy protection.
In an extreme case of market duress, a market may not even be present for certain of our assets at any price. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for bankruptcy protection.
Any insurance we maintain against the risk of this type of loss may not be sufficient to cover all actual losses or may not apply to circumstances relating to any particular breach or other cyber event.
In addition, any insurance we maintain against the risk of this type of loss may not be sufficient to cover all actual losses or may not apply to circumstances relating to any particular breach or other cyber incident.
Our qualification as a REIT could be jeopardized as a result of our interests in joint ventures or investment funds. We currently own, and may continue to acquire, interests in partnerships or limited liability companies that are joint ventures or investment funds.
Our qualification as a REIT could be jeopardized as a result of our interests in joint ventures or investment funds. We may own or acquire interests in partnerships or limited liability companies that are joint ventures or investment funds.
We are the sole general partner of our Operating Partnership and could become liable for the debts and other obligations of our Operating Partnership. We are the sole general partner of our Operating Partnership and directly or indirectly conduct all of our business activities through the Operating Partnership and its subsidiaries.
We are the sole general partner of our Operating Partnership and directly or indirectly conduct all of our business activities through the Operating Partnership and its subsidiaries. As the sole general partner, we are liable for our Operating Partnership’s debts and other obligations.
Federal Reserve’s historic participation and the current scale of its balance sheet holdings, the effects of a shift in monetary policy may be material and are difficult to predict, and we may be unable to mitigate potentially adverse effects on our portfolio and financial condition.
Given the U.S. Federal Reserve’s historic 10 Table of Contents participation and the current scale of its balance sheet holdings, the effects of a shift in monetary policy may be material and are difficult to predict, and we may be unable to mitigate potentially adverse effects on our portfolio and financial condition.
Therefore, to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans at the REIT level and may limit the structures we utilize for our securitization transactions, even though the sales or such structures might otherwise be beneficial to us. Complying with REIT requirements may limit our ability to hedge effectively.
Therefore, to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans at the REIT level and may limit the structures we utilize for our securitization transactions, even though the sales or such structures might otherwise be beneficial to us.
Federal Reserve significantly increased its acquisition of Agency RMBS. Beginning in 2022, in response to inflation running well above its long-run target, the U.S. Federal Reserve then began a passive contraction of its balance sheet by ceasing reinvestments of proceeds from maturing Agency RMBS portfolio repayments. Given the U.S.
In response to market disruptions resulting from the COVID-19 pandemic, the U.S. Federal Reserve significantly increased its acquisition of Agency RMBS. Beginning in 2022, in response to inflation running well above its long-run target, the U.S. Federal Reserve then began a passive contraction of its balance sheet by ceasing reinvestments of proceeds from maturing Agency RMBS portfolio repayments.
Our Manager and our executive officers may have conflicts between their duties to us and their duties to, and interests in, Invesco. We compete for investment opportunities directly with other client accounts and funds managed by our Manager or Invesco and its 25 Table of Conten t s subsidiaries.
Our Manager and our executive officers may have conflicts between their duties to us and their duties to, and interests in, Invesco. We compete for investment opportunities directly with other client accounts and funds managed by our Manager or Invesco and its subsidiaries.
Our business may be adversely affected by unfavorable or changing economic, market, and political conditions.
Risks Related to Our Business Our business may be adversely affected by unfavorable or changing economic, market, and political conditions.
A return to a recessionary period, elevated inflation, adverse trends in employment levels, geopolitical instability or conflicts (including the hostilities between Russia and Ukraine), trade or supply chain disruptions, economic or other sanctions, uncertainty regarding the breach of the U.S. debt ceiling or a sustained capital market correction could have an adverse effect on our business, including on the value of our investments and collateral securing our financing, which can impact our liquidity.
Elevated inflation, interest rate volatility, a recessionary period, adverse trends in employment levels, pandemics or endemics, geopolitical instability or conflicts, trade or supply chain disruptions, economic or other sanctions, uncertainty regarding the breach of the U.S. debt ceiling or a sustained capital market correction could have an adverse effect on our business, including on the value of our investments and collateral securing our financing, which can impact our liquidity.
As of December 31, 2022, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $40.2 million, or 5% of our stockholders’ equity.
As of December 31, 2023, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $39.1 million, or 5% of our stockholders’ equity.
As part of its effort to curb inflation, the Federal Reserve Open Markets Committee (FOMC) increased the target range for the federal funds rate 425 basis points in 2022, resulting in its highest level in 15 years.
As part of its effort to curb inflation, the Federal Reserve Open Markets Committee (FOMC) increased the target range for the federal funds rate 425 basis points in 2022, and a further 100 basis points in 2023, resulting in its highest level in 23 years.
If rising interest rates cause us to be unable to acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, our ability to satisfy our investment objectives and to generate income and pay dividends may be materially and adversely affected.
If rising interest rates cause us to be unable to acquire a sufficient volume of our target assets with a yield that is above our borrowing cost, our ability to satisfy our investment objectives and to generate income and pay dividends may be materially and adversely affected. Spread risk is inherent to investing in MBS and other mortgage-related assets.
To the extent that market conditions prevent us from leveraging our assets or cause the cost of our financing to increase relative to the income that can be derived from the assets acquired, the return on our assets and cash available for distribution to our stockholders may be reduced. Our financing costs will reduce cash available for distributions to stockholders.
To the extent that market conditions prevent us from leveraging our assets in line with our business strategy or cause the cost of our financing to increase relative to the income that can be derived from the assets acquired, the return on our assets and cash available for distribution to our stockholders may be reduced.
Under the statute, our board of directors has, by resolution, exempted business combinations between us and any other person, provided that such business combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person).
Thereafter, the MGCL imposes two super-majority stockholder voting requirements on these business combinations. Under the statute, our board of directors has, by resolution, exempted business combinations between us and any other person, provided that such business combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person).
We have large holdings of RMBS that are qualifying assets for purposes of the REIT asset tests and generate interest income that is qualifying income for purposes of the REIT gross income tests, but substantially decreased such holdings in 2020.
Changing the nature of our assets may complicate our ability to satisfy the REIT gross income and asset tests. We have large holdings of RMBS that are qualifying assets for purposes of the REIT asset tests and generate interest income that is qualifying income for purposes of the REIT gross income tests, but substantially decreased such holdings in 2020.
This change in rate may adversely affect the amount of dividends payable on our preferred stock. The Federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. Government, may adversely affect our business.
The Federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. Government, may adversely affect our business.
These requirements can and do change as statutes and regulations are enacted, promulgated, amended, and interpreted, and the recent trends among federal and state lawmakers and regulators have been toward increasing laws, regulations, and investigative proceedings concerning the mortgage industry generally.
We may incur significant ongoing costs to comply with these government regulations. These requirements can and do change as statutes and regulations are enacted, promulgated, amended, and interpreted, and the recent trends among federal and state lawmakers and regulators have been toward increasing laws, regulations, and investigative proceedings concerning the mortgage industry generally.
In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities, securities of our TRSs and qualifying real estate assets), no more than 20% of the value of our total securities can be represented by securities of one or 29 Table of Conten t s more TRSs, and no more than 25% of the value of our assets may consist of “nonqualified publicly offered REIT debt instruments.” If we fail to comply with these requirements at the end of any quarter, we must correct the failure within 30 days after the end of such calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences.
Additionally, no more than 5% of the value of our assets (other than government securities, qualified real estate assets and securities of our taxable REIT subsidiaries) can consist of the securities of any one issuer, no more than 20% of the value of our assets may be represented by securities of one or more taxable REIT subsidiaries, and no more than 25% of the value of our assets may consist of “nonqualified publicly offered REIT debt instruments.” If we fail to comply with these requirements at the end of any calendar quarter, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions in order to avoid losing our REIT qualification and suffering adverse tax consequences.
We have agreed to indemnify our Manager, its officers, stockholders, members, managers, directors and personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to the management agreement. 26 Table of Conten t s Our board of directors approved very broad investment guidelines for our Manager and does not approve each investment and financing decision made by our Manager.
We have agreed to indemnify our Manager, its officers, stockholders, members, managers, directors and personnel, any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed in good faith in accordance with and pursuant to the management agreement.
Pools of residential mortgage loans underlie the RMBS that we acquire. In the case of residential mortgage loans, there are seldom any restrictions on borrowers’ ability to prepay their loans. We generally receive prepayments of principal that are made on these underlying mortgage loans.
In the case of residential mortgage loans, there are seldom any restrictions on borrowers’ ability to prepay their loans. We generally receive prepayments of principal that are made on these underlying mortgage loans. When borrowers prepay their mortgage loans faster than expected, the prepayments on the RMBS are also faster than expected.
We may invest in synthetic securities, credit default swaps, and other credit derivatives, which expose us to additional risks. We have entered into, and may again in the future enter into, derivative contracts that could require us to make cash payments in certain circumstances. Potential payment obligations would be contingent liabilities and may not appear on our balance sheet.
We have entered into, and may again in the future enter into, derivative contracts that could require us to make cash payments in certain circumstances. Potential payment obligations would be contingent liabilities and may not appear on our balance sheet.
We may not have sufficient funds or alternative financing sources available to settle such obligations. Counterparties may also make margin calls as the value of a generic TBA-eligible security (and therefore the value of the TBA contract) declines.
We may not have sufficient funds or alternative financing sources available to settle such obligations. Counterparties may also make margin calls as the value of a generic TBA-eligible security (and therefore the value of the TBA contract) declines. Margin calls on TBA positions, or failure to roll TBA positions, could have the effects described in the liquidity risks described above.
In each case, while we would, in general, ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectible, the utility of that deduction could depend on our having taxable income in that later year or thereafter. Even if we qualify as a REIT, we may face tax liabilities that reduce our cash flow.
In each case, while we would, in general, ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectible, the utility of that deduction could depend on our having taxable income in that later year or thereafter.
It is possible, however, that the IRS could successfully assert that we did not own these assets during the term of the repurchase agreements, in which case we could fail to qualify as a REIT.
It is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and repurchase agreement, in which case we could fail to remain qualified as a REIT.
We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock.
Common stock eligible for future sale may have adverse effects on our share price. We cannot predict the effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of our common stock.
If the IRS were to successfully challenge the opinion of counsel, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs. 33 Table of Conten t s General Risk Factors Our business is subject to extensive regulation.
If the IRS were to successfully challenge the opinion 32 Table of Contents of counsel, we could be subject to a penalty tax or we could fail to remain qualified as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.
Additional risks not presently known, or that we currently deem immaterial, also may have a material adverse effect on our business, financial condition, results of operations and trading price of our securities. Risk Factor Summary Investing in our capital stock involves a high degree of risk.
Additional risks not presently known, or that we currently deem immaterial, also may have a material adverse effect on our business, financial condition, results of operations and trading price of our securities. Risk Factor Summary Risks Related to Our Investments • The U.S.
As of December 31, 2022, we had authority to purchase 1,337,634 additional shares of our Series B Preferred Stock and 1,316,470 additional shares of our Series C Preferred Stock under the current share repurchase program.
As of December 31, 2023, we had authority to purchase 1,185,997 additional shares of our Series B Preferred Stock and 1,045,439 additional shares of our Series C Preferred Stock under the current share repurchase program.
Financial statements prepared in accordance with U.S. GAAP require the use of estimates, judgments and assumptions that affect the reported amounts. Different estimates, judgments and assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future.
Different estimates, judgments and assumptions reasonably could be used that would have a material effect on the financial statements, and changes in these estimates, judgments and assumptions are likely to occur from period to period in the future.
In Revenue Procedure 2003-65, the IRS provided a safe harbor under which a mezzanine loan, if it meets each of the requirements contained in the Revenue Procedure, will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the 75% gross income test.
Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate asset for purposes of the asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the 75% gross income test.
When borrowers prepay their mortgage loans faster than expected, the prepayments on the RMBS are also faster than expected. Faster than expected prepayments could adversely affect our profitability, including in the following ways: • As described above, we may pay a premium over the par value to acquire a RMBS security. In accordance with U.S.
Faster than expected prepayments could adversely affect our profitability, including in the following ways: • As described above, we may pay a premium over the par value to acquire a RMBS security. In accordance with U.S. GAAP, we may amortize this premium over the estimated term of the RMBS.
The “unsolicited takeover” provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement takeover defenses, some of which (for example, a classified board) we do not yet have.
Additionally, Title 3, Subtitle 8 of the MGCL (“Subtitle 8”) permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain corporate governance provisions, some of which (for example, a classified board) we do not yet have.
Accordingly, if these government actions are inadequate in the future and the GSEs were to 15 Table of Conten t s suffer losses, be significantly reformed, or cease to exist, our business, operations and financial condition could be materially and adversely affected.
Government, GSEs could default on their guarantee obligations which would materially and adversely affect the value of our Agency MBS. Accordingly, if these government actions are inadequate in the future and the GSEs were to suffer losses, be significantly reformed, or cease to exist, our business, operations and financial condition could be materially and adversely affected.
A decline in the market value of our mortgage-backed securities may adversely affect our results of operations and financial condition. All of our mortgage-backed securities are reported at fair value. Changes in the market values of these assets impact our stockholders’ equity, and declines in market value adversely affect our book value per common share.
A decline in the market value of our mortgage-backed securities may adversely affect our results of operations and financial condition. All of our mortgage-backed securities are reported at fair value.
Consequently, changes in interest rates, particularly short-term 13 Table of Conten t s interest rates, may significantly influence our net income. Increases in these rates will tend to decrease our net income and the market value of our assets and may negatively affect cash available for distribution to our stockholders.
Increases in these rates will tend to decrease our net income and the market value of our assets and may negatively affect cash available for distribution to our stockholders.
Any errors in the underlying models or model assumptions could have unanticipated and adverse consequences on our business and reputation. We may repurchase shares of our common stock and preferred stock from time to time.
Any errors in the underlying models or model assumptions could have unanticipated and adverse consequences on our business and reputation. If our Manager underestimates losses relative to the price we pay for a particular investment, we may experience losses or a lower yield than expected. We may repurchase shares of our common stock and preferred stock from time to time.
We believe that, for U.S. federal income tax purposes, we will be treated as the owner of the assets that are the subject of repurchase agreements and that the repurchase agreements will be treated as secured borrowing transactions notwithstanding that such agreements may transfer record ownership of the assets to the counterparty during the term of the agreement.
We believe that we would be treated for REIT asset and income test purposes as the owner of the assets that are the subject of any such sale and repurchase agreement notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement.
The IRS could challenge treatment of such loans as real estate assets for purposes of the REIT asset and gross income tests, and if such a challenge were sustained, we could fail to qualify as a REIT.
In the event we own a mezzanine loan that does not meet the safe harbor, the IRS could challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and gross income tests and, if such a challenge were sustained, we could fail to qualify as a REIT.
In the event of such transactions, we could: • use a significant portion of our available cash; • issue equity securities, which would dilute the current percentage ownership of our stockholders; • incur substantial debt; • incur or assume contingent liabilities, known or unknown; and • incur amortization expenses related to intangibles. 34 Table of Conten t s Any such actions by us could harm our business, financial condition, results of operations, or prospects and could adversely affect the market price of our common stock.
In the event of such transactions, we could: • use a significant portion of our available cash; • issue equity securities, which would dilute the current percentage ownership of our stockholders; 33 Table of Contents • incur substantial debt; • incur or assume contingent liabilities, known or unknown; and • incur amortization expenses related to intangibles.
During the latter half of 2022, the market began to experience a yield curve inversion. There can be no guarantee that our interest rate risk management will fully mitigate the yield curve inversion risks described above.
There can be no guarantee that our interest rate risk management will fully mitigate the yield curve flattening and inversion risks described above.
Under the MGCL, certain “business combinations” between us and an “interested stockholder” (defined 27 Table of Conten t s generally as any person who beneficially owns 10% or more of our then-outstanding voting capital stock) or an affiliate thereof are prohibited for five years after the most recent date on which the stockholder becomes an interested stockholder.
Under the MGCL, certain “business combinations” between us and an “interested stockholder” (defined generally as any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the outstanding voting stock of the corporation or an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding stock of the corporation) or an affiliate thereof are prohibited for five years after the most recent date on which the stockholder becomes an interested stockholder.
Because we carry our RMBS at fair value, unrealized holding gains are reflected in total stockholders’ equity. RMBS premium is not guaranteed by the Agencies and rising interest rates tend to reduce premium values. Premium value will also erode over time as principal payments are made. Prepayment rates may adversely affect the value of our investment portfolio.
RMBS premium is not guaranteed by the Agencies and rising interest rates tend to reduce premium values. Premium value will also erode over time as principal payments are made. 12 Table of Contents Prepayment rates may adversely affect the value of our investment portfolio. Pools of residential mortgage loans underlie the RMBS that we acquire.
In addition, our decision to repurchase shares of our common stock or other securities and reduce our stockholders' equity could adversely affect our competitive position and could negatively impact our ability in the future to invest in assets that have a greater potential return than the repurchase of our common stock. 24 Table of Conten t s Risks Related to Accounting The preparation of our financial statements involves use of estimates, judgments and assumptions, and our financial statements may be materially affected if our estimates prove to be inaccurate.
In addition, our decision to repurchase shares of our common stock or other securities and reduce our stockholders' equity could adversely affect our competitive position and could negatively impact our ability in the future to invest in assets that have a greater potential return than the repurchase of our common stock.
The “control share” provisions of the MGCL provide that “control shares” of a Maryland corporation have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquiror of control shares, our officers and our employees who are also our directors.
The “control share” provisions of the MGCL provide that “control shares” of a Maryland corporation (defined as voting shares of stock that, if aggregated with all other shares of stock owned or controlled by the acquirer, would entitle the acquirer to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of issued and outstanding control shares) have no voting rights except to the extent approved by stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquiror of control shares, officers of the corporation and employees of the corporation who are also directors.
Rising interest rates, such as we have experienced in 2022, generally reduce the demand for mortgage loans due to the higher cost of borrowing. A reduction in the volume of mortgage loans originated may affect the volume of target assets available to us, which could adversely affect our ability to acquire assets that satisfy our investment objectives.
A reduction in the volume of mortgage loans originated may affect the volume of target assets available to us, which could adversely affect our ability to acquire assets that satisfy our investment objectives.
Spread risk is inherent to our business as a levered investor in Agency RMBS. When the spread between the market yield on our mortgage assets and benchmark interest rates widens, our tangible net book value will typically decline. We refer to this as "spread risk".
When the spread between the market yield on our mortgage assets and benchmark interest rates widens, our tangible net book value will typically decline. We refer to this as "spread risk". Although we use hedging instruments to attempt to protect against moves in interest rates, our hedges will typically not protect us against spread risk.
Premium securities have market values that exceed their unpaid principal balance. We may purchase RMBS at a premium, which represent prices that we believe appropriately reflect the risks involved. Declining interest rates increase the premium level of our RMBS and generate unrealized holding gains.
We may purchase RMBS at a premium, which represent prices that we believe appropriately reflect the risks involved. Declining interest rates increase the premium level of our RMBS and generate unrealized holding gains. Because we carry our RMBS at fair value, unrealized holding gains are reflected in total stockholders’ equity.
During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of our Series B Preferred Stock and 3,683,530 shares of our Series C Preferred Stock.
During the year ended December 31, 2023, we repurchased and retired 151,637 shares of our Series B Preferred Stock and 271,031 shares of our Series C Preferred Stock.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties. Our principal executive office is located at 1555 Peachtree Street, NE, Suite 1800, Atlanta, Georgia 30309. As part of our management agreement, our Manager is responsible for providing office space and office services required in rendering services to us.
Biggest changeItem 2. Properties. Our principal executive office is located at 1331 Spring Street, N.W., Suite 2500, Atlanta, Georgia 30309. As part of our management agreement, our Manager is responsible for providing office space and office services required in rendering services to us.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeDuring the quarter ended December 31, 2022, we did not repurchase any shares of our common stock. 37 Table of Conten t s Repurchases of Preferred Equity Securities In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock with no stated expiration date.
Biggest changeDuring the quarter ended December 31, 2023, we did not repurchase any shares of our common stock. 37 Table of Contents Repurchases of Preferred Equity Securities The following tables sets forth information with respect to our repurchases of Series B Preferred Stock during the three months ended December 31, 2023.
Repurchases of Common Equity Securities In December 2011, our board of directors approved a share repurchase program with no stated expiration date. As of December 31, 2022, there were 1,816,398 common shares available for repurchase under the program.
Repurchases of Common Equity Securities In December 2011, our board of directors approved a share repurchase program with no stated expiration date. As of December 31, 2023, there were 1,816,398 common shares available for repurchase under the program.
No cash dividends can be paid on our common stock unless we have paid full cumulative dividends on our preferred stock. From the date of issuance of our preferred stock through December 31, 2022, we have paid full cumulative dividends on our preferred stock.
No cash dividends can be paid on our common stock unless we have paid full cumulative dividends on our preferred stock. From the date of issuance of our preferred stock through December 31, 2023, we have paid full cumulative dividends on our preferred stock.
For information about our recent dividend payments, please see Note 12 - “Stockholders' Equity” of our consolidated financial statements in Part IV of this Report. Holders As of February 17, 2023, there were 134 common stockholders of record.
For information about our recent dividend payments, please see Note 12 - “Stockholders' Equity” of our consolidated financial statements in Part IV of this Report. Holders As of February 20, 2024, there were 131 common stockholders of record.
The manner, price, number and timing of share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. During the quarter ended December 31, 2022, we did not repurchase any shares of our preferred stock.
The manner, price, number and timing of share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules.
The graph assumes that the value of the investment in our common stock and in each of the indices (including reinvestment of dividends) was $100 on December 31, 2017 and tracks it through December 31, 2022. 36 Table of Conten t s Index 12/31/2017 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 Invesco Mortgage Capital Inc. 100.00 90.40 116.59 28.77 26.08 14.46 S&P 500 100.00 95.62 125.72 148.85 191.58 156.88 FTSE NAREIT Mortgage REITs 100.00 97.48 118.27 96.07 111.09 81.53 The stock price performance included in this graph is not necessarily indicative of future stock price performance.
The graph assumes that the value of the investment in our common stock and in each of the indices (including reinvestment of dividends) was $100 on December 31, 2018 and tracks it through December 31, 2023. 36 Table of Contents Index 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Invesco Mortgage Capital Inc. 100.00 128.97 31.82 28.85 15.99 13.71 S&P 500 100.00 131.49 155.68 200.37 164.08 207.21 FTSE NAREIT Mortgage REITs 100.00 121.33 98.56 113.97 83.64 96.48 The stock price performance included in this graph is not necessarily indicative of future stock price performance.
Removed
As of December 31, 2022, we had authority to purchase 1,337,634l shares of our Series B Preferred Stock and 1,316,470 shares of our Series C Preferred Stock under the current share repurchase program.
Added
Month Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Maximum Number at end of period of Shares that May Yet Be Purchased Under the Plans or Programs (1) October 1, 2023 to October 31, 2023 27,434 20.67 27,434 1,237,980 November 1, 2023 to November 30, 2023 31,554 22.20 31,554 1,206,426 December 1, 2023 to December 31, 2023 20,429 22.66 20,429 1,185,997 79,417 21.79 79,417 The following tables sets forth information with respect to our repurchases of Series C Preferred Stock during the three months ended December 31, 2023.
Added
Month Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Maximum Number at end of period of Shares that May Yet Be Purchased Under the Plans or Programs (1) October 1, 2023 to October 31, 2023 49,603 19.12 49,603 1,131,608 November 1, 2023 to November 30, 2023 53,767 20.04 53,767 1,077,841 December 1, 2023 to December 31, 2023 32,402 21.18 32,402 1,045,439 135,772 19.98 135,772 (1) In May 2022, our board of directors approved a share repurchase program under which we may purchase up to 3,000,000 shares of our Series B Preferred Stock and 5,000,000 shares of our Series C Preferred Stock with no stated expiration date.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeLower total interest expense was partially offset by contractual net interest expense on interest rate swaps of $15.8 million for the year ended December 31, 2021 compared to $8.0 million of contractual net interest income for the same period in 2020. 58 Table of Conten t s 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, 2022 2021 2020 $ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Net interest income 142,953 2.64 % 180,492 2.06 % 197,904 2.36 % Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps (19,708) (0.44) % (22,000) (0.28) % (23,794) (0.34) % Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net — — % — — % 6,323 0.08 % Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 86,872 1.93 % (15,803) (0.20) % 8,047 0.12 % Effective net interest income 210,117 4.13 % 142,689 1.58 % 188,480 2.22 % Effective net interest income and effective interest rate margin increased for the year ended December 31, 2022 versus 2021 due to changes in contractual net interest income (expense) on interest rate swaps and an increase in total interest income resulting from our rotation into higher yielding Agency RMBS, which were partially offset by higher total interest expense and a higher average cost of funds resulting from increases in the Federal Funds target rate.
Biggest changeThe 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, 2023 2022 2021 $ in thousands Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Reconciliation Net Interest Rate Margin / Effective Interest Rate Margin Net interest income 49,700 0.41 % 142,953 2.64 % 180,492 2.06 % Less: Amortization of net deferred (gain) loss on de-designated interest rate swaps (10,405) (0.23) % (19,708) (0.44) % (22,000) (0.28) % Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net 239,008 5.26 % 86,872 1.93 % (15,803) (0.20) % Effective net interest income 278,303 5.44 % 210,117 4.13 % 142,689 1.58 % Our effective net interest income and effective interest rate margin increased for the year ended December 31, 2023 compared to 2022 due to higher interest income resulting from our rotation into higher yielding Agency RMBS.
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 or receipts 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 view our interest rate swaps as an economic hedge against increases in future market interest rates on our borrowings. We add back the net payments or receipts 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.
(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.
(2) Cash and cash equivalents is allocated based on our financing strategy for each asset class. (3) Restricted cash and derivative assets 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.
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.
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; 42 Table of Contents • 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.
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.
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 Securities.
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.
We believe the presentation of effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S.
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.
We include TBA dollar roll income in earnings available for distribution because it is the economic equivalent of interest income on the underlying Agency RMBS, 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.
“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 our average borrowings and cost of funds for the years ended December 31, 2022, 2021 and 2020.
“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 our average borrowings and cost of funds for the years ended December 31, 2023, 2022 and 2021.
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.
We enter into interest rate swap agreements that are designed to mitigate the effects of changes 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.
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.
Because we view earnings available for distribution as a consistent measure of our investment portfolio's ability to generate income for distribution to common 53 Table of Contents 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.
We also met all REIT requirements regarding the stock ownership and distribution of dividends of our taxable income as of December 31, 2022. Therefore, as of December 31, 2022, we believe that we qualified as a REIT under the Code.
We also met all REIT requirements regarding the stock ownership and distribution of dividends of our taxable income as of December 31, 2023. Therefore, as of December 31, 2023, we believe that we qualified as a REIT under the Code.
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, 2022. Consequently, we believe we met the REIT income and asset test as of December 31, 2022.
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, 2023. Consequently, we believe we met the REIT income and asset test as of December 31, 2023.
We also generated $403.3 million from principal payments of MBS and received cash of $459.5 million to settle derivative contracts during the year ended December 31, 2022. We used cash of $25.7 billion to purchase MBS and $502.3 million to purchase U.S. Treasury securities during the year ended December 31, 2022.
We also generated $403.3 million from principal payments of MBS and received cash of $459.5 million to settle derivative contracts during the 58 Table of Contents year ended December 31, 2022. We used cash of $25.7 billion to purchase MBS and $502.3 million to purchase U.S. Treasury securities during the year ended December 31, 2022.
Our interest income consists of coupon interest and net (premium amortization) discount accretion on MBS and other securities as well as interest income on commercial and other loans as shown in the table below.
Our interest income consists of coupon interest and net (premium amortization) discount accretion on MBS and other securities as well as interest income on our commercial loan as shown in the table below.
The reverse stock split was effected following the close of business on June 3, 2022. For all periods presented, all per common shares and per common share amounts have been adjusted on a retroactive basis to reflect our one-for-ten reverse stock split, unless otherwise noted.
The reverse stock split was effected following the close of business on June 3, 2022. For all periods presented, all per common shares and per common share amounts have been adjusted on a retroactive basis to reflect our one-for-ten reverse stock split.
GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; TBA dollar roll income; gain on repurchase and retirement of preferred stock; (gain) loss on foreign currency transactions, net and amortization of net deferred (gain) loss on de-designated interest rate swaps.
GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; TBA dollar roll income; gain on repurchase and retirement of preferred stock; foreign currency (gains) losses, net and amortization of net deferred (gain) loss on de-designated interest rate swaps.
GAAP Measure Earnings available for distribution (and by calculation, earnings available for distribution per common share) Net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share) Effective interest income (and by calculation, effective yield) Total interest income (and by calculation, earning asset yields) Effective interest expense (and by calculation, effective cost of funds) Total interest expense (and by calculation, cost of funds) Effective net interest income (and by calculation, effective interest rate margin) Net interest income (and by calculation, net interest rate margin) Economic debt-to-equity ratio Debt-to-equity ratio The non-GAAP financial measures used by management should be analyzed in conjunction with U.S.
GAAP Measure Earnings available for distribution (and by calculation, earnings available for distribution per common share) Net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share) Effective interest expense (and by calculation, effective cost of funds) Total interest expense (and by calculation, cost of funds) Effective net interest income (and by calculation, effective interest rate margin) Net interest income (and by calculation, net interest rate margin) Economic debt-to-equity ratio Debt-to-equity ratio The non-GAAP financial measures used by management should be analyzed in conjunction with U.S.
For information on dividends declared and paid during the year ended December 31, 2022, see Note 12 - “Stockholders' Equity” of our consolidated financial statements in Part IV, Item 15 of this report on Form 10-K.
For information on dividends declared and paid during the years ended December 31, 2023 and 2022, see Note 12 - “Stockholders' Equity” of our consolidated financial statements in Part IV, Item 15 of this report on Form 10-K.
We calculate that as of December 31, 2022, we conducted our business so as not to be regulated as an investment company under the 1940 Act.
We calculate that as of December 31, 2023, we conducted our business so as not to be regulated as an investment company under the 1940 Act.
We have entered into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on investments denominated in foreign currencies. We did not have any currency forward contracts outstanding as of December 31, 2022.
We have historically entered into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on investments denominated in foreign currencies. We did not have any currency forward contracts outstanding as of December 31, 2023 or December 31, 2022.
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. 55 Table of Conten t s The table below provides a reconciliation of 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. The table below provides a reconciliation of U.S.
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.
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.
GAAP gain (loss) on derivative instruments, net on the consolidated statements of operations includes the following components: Years Ended December 31, $ in thousands 2022 2021 Realized gain (loss) on derivative instruments, net 459,466 156,157 Unrealized gain (loss) on derivative instruments, net 12,669 (17,743) Contractual net interest income (expense) on interest rate swaps 86,872 (15,803) Gain (loss) on derivative instruments, net 559,007 122,611 (2) A TBA dollar roll is a series of derivative transactions where TBAs with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold.
GAAP gain (loss) on derivative instruments, net on the consolidated statements of operations includes the following components: Years Ended December 31, $ in thousands 2023 2022 2021 Realized gain (loss) on derivative instruments, net (179,526) 459,466 156,157 Unrealized gain (loss) on derivative instruments, net 2,356 12,669 (17,743) Contractual net interest income (expense) on interest rate swaps 239,008 86,872 (15,803) Gain (loss) on derivative instruments, net 61,838 559,007 122,611 (2) A TBA dollar roll is a series of derivative transactions where TBAs with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold.
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.
In our view, the fair value option election more appropriately reflects the results of our operations because MBS fair value changes are accounted for in the same manner as fair value changes in economic hedging instruments.
As of December 31, 2022, $4.7 billion (December 31, 2021: $7.7 billion) or 99% (December 31, 2021: 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.
As of December 31, 2023, $5.0 billion (December 31, 2022: $4.7 billion) or 99.7% (December 31, 2022: 99.1%) 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.
The table below presents the components of interest expense for the years ended December 31, 2022, 2021 and 2020.
The table below presents the components of interest expense for the years ended December 31, 2023, 2022 and 2021.
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 over the remaining life of the interest rate swap agreements.
Amounts recorded in accumulated other comprehensive income before we discontinued cash flow hedge accounting for our interest rate swaps were reclassified to interest expense on repurchase agreements on the consolidated statements of operations as interest was accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements.
Such financing will depend on market conditions for capital raises and our ability to 62 Table of Conten t s 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.
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.
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. 45 Table of Conten t s 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, 2022, 2021 and 2020.
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. 46 Table of Contents Interest Income and Average Earning Asset Yields The table below presents information related to our average earning assets and earning asset yields for the years ended December 31, 2023, 2022 and 2021.
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, 2022.
Our interest rate swaps 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, 2023.
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.
We have elected the fair value option for all of our MBS purchased on or after September 1, 2016 and all of our RMBS IOs. Under the fair value option, changes in fair value are recognized in the consolidated statement of operations.
As of December 31, 2022, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $40.2 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, 2022.
As of December 31, 2023, no counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than $39.1 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, 2023.
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. In an environment of rising interest rates, prepayment speeds will generally decrease as homeowners are not as incentivized to refinance.
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. In an environment of rising interest rates, prepayment speeds will generally decrease as homeowners are not as incentivized to refinance.
For the year ended December 31, 2022, our general and administrative expenses not covered under our management agreement amounted to $8.4 million (2021: $8.2 million; 2020: $10.9 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.
For the year ended December 31, 2023, our general and administrative expenses not covered under our management agreement amounted to $7.4 million (2022: $8.4 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.
The components of earnings available for distribution for the years ended December 31, 2022 and 2021 are: Years Ended December 31, $ in thousands 2022 2021 Effective net interest income (1) 210,117 142,689 TBA dollar roll income 28,843 40,058 Equity in earnings (losses) of unconsolidated ventures (407) 870 (Increase) decrease in provision for credit losses — 1,768 Total expenses (25,324) (29,233) Subtotal 213,229 156,152 Dividends to preferred stockholders (28,218) (37,795) Issuance and redemption costs of redeemed preferred stock — (4,682) Earnings available for distribution 185,011 113,675 (1) See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.
The components of earnings available for distribution for the years ended December 31, 2023, 2022 and 2021 were: Years Ended December 31, $ in thousands 2023 2022 2021 Effective net interest income (1) 278,303 210,117 142,689 TBA dollar roll income 697 28,843 40,058 Equity in earnings (losses) of unconsolidated ventures (1) (407) 870 (Increase) decrease in provision for credit losses (320) — 1,768 Total expenses (19,730) (25,324) (29,233) Subtotal 258,949 213,229 156,152 Dividends to preferred stockholders (23,153) (28,218) (37,795) Issuance and redemption costs of redeemed preferred stock — — (4,682) Earnings available for distribution 235,796 185,011 113,675 (1) See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.
GAAP repurchase agreements interest expense on the consolidated statements of operations includes the following components: Years Ended December 31, $ in thousands 2022 2021 Interest expense on repurchase agreements outstanding 71,268 10,710 Amortization of net deferred (gain) loss on de-designated interest rate swaps (19,708) (22,000) Repurchase agreements interest expense 51,560 (11,290) 56 Table of Conten t s (5) 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.
GAAP repurchase agreements interest expense on the consolidated statements of operations includes the following components: Years Ended December 31, $ in thousands 2023 2022 2021 Interest expense on repurchase agreements borrowings 238,634 71,268 10,710 Amortization of net deferred (gain) loss on de-designated interest rate swaps (10,405) (19,708) (22,000) Repurchase agreements interest expense 228,229 51,560 (11,290) (5) 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.
During the year ended December 31, 2022, we settled currency forward contracts of €33.0 million or $37.1 million (2021: €70.8 million or $84.8 million) in notional amount related to our investment in an unconsolidated venture and realized a net gain of $919,000 (2021: $209,000 net gain).
During the year ended December 31, 2022, we settled currency forward contracts of €33.0 million or $37.1 million in notional amount related to our investment in an unconsolidated venture denominated in euro and realized a net gain of $919,000.
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 2022 2021 Net income (loss) attributable to common stockholders (416,963) (132,477) Adjustments: (Gain) loss on investments, net 1,079,339 366,509 Realized (gain) loss on derivative instruments, net (1) (459,466) (156,157) Unrealized (gain) loss on derivative instruments, net (1) (12,669) 17,743 TBA dollar roll income (2) 28,843 40,058 Gain on repurchase and retirement of preferred stock (14,179) — (Gain) loss on foreign currency transactions, net (3) (186) (1) Amortization of net deferred (gain) loss on de-designated interest rate swaps (4) (19,708) (22,000) Subtotal 601,974 246,152 Earnings available for distribution 185,011 113,675 Basic earnings (loss) per common share (12.21) (4.82) Earnings available for distribution per common share (5) 5.42 4.13 (1) 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 2023 2022 2021 Net income (loss) attributable to common stockholders (37,541) (416,963) (132,477) Adjustments: (Gain) loss on investments, net 107,280 1,079,339 366,509 Realized (gain) loss on derivative instruments, net (1) 179,526 (459,466) (156,157) Unrealized (gain) loss on derivative instruments, net (1) (2,356) (12,669) 17,743 TBA dollar roll income (2) 697 28,843 40,058 (Gain) on repurchase and retirement of preferred stock (1,471) (14,179) — Foreign currency (gains) losses, net (3) 66 (186) (1) Amortization of net deferred (gain) loss on de-designated interest rate swaps (4) (10,405) (19,708) (22,000) Subtotal 273,337 601,974 246,152 Earnings available for distribution 235,796 185,011 113,675 Basic earnings (loss) per common share (0.85) (12.21) (4.82) Earnings available for distribution per common share (5) 5.35 5.42 4.13 (1) U.S.
Equity in Earnings (Losses) of Unconsolidated Ventures For the year ended December 31, 2022, we recorded equity in losses of unconsolidated ventures of $407,000 (2021: equity in earnings of $870,000; 2020: equity in earnings of $1.2 million). Earnings and losses of unconsolidated ventures are driven primarily by the underlying portfolio investments.
Equity in Earnings (Losses) of Unconsolidated Ventures For the year ended December 31, 2023, we recorded equity in losses of unconsolidated ventures of $1,000 (2022: equity in losses of $407,000). Earnings and losses of unconsolidated ventures are driven primarily by the underlying portfolio investments.
Our cash, cash equivalents and restricted cash change due to normal fluctuations in cash balances related to the timing of principal and interest payments, repayments of debt, and asset purchases and sales. Our operating activities provided net cash of approximately $196.1 million for the year ended December 31, 2022 (2021: $152.3 million; 2020: $170.5 million).
Our cash, cash equivalents and restricted cash change due to normal fluctuations in cash balances related to the timing of principal and interest payments, repayments of debt, and asset purchases and sales. Our operating activities provided net cash of approximately $237.8 million for the year ended December 31, 2023 (2022: $196.1 million).
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.
As of December 31, 2023, approximately 98% 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.
During the year ended December 31, 2022, we recorded $133.0 million of realized and unrealized losses on TBAs primarily due to rising interest rates, in addition to wider interest rate spreads on Agency RMBS.
We recorded $442,000 and $133.0 million of net realized and unrealized losses on TBAs during the year ended December 31, 2023 and December 31, 2022, respectively. Net realized and unrealized losses on TBAs for the year ended December 31, 2022 primarily reflect rising interest rates, in addition to wider interest rate spreads on Agency RMBS.
As of December 31, 2022, we had authority to purchase 1,337,634 additional shares of our Series B Preferred Stock and 1,316,470 additional shares of our Series C Preferred Stock under the current share repurchase program. In May 2022, our board of directors approved a one-for-ten reverse split of outstanding shares of our common stock.
As of December 31, 2023, we had authority to repurchase 1,185,997 additional shares of our Series B Preferred Stock and 1,045,439 additional shares of our Series C Preferred Stock under the current share repurchase program. In May 2022, our board of directors approved a one-for-ten reverse split of outstanding shares of our common stock.
Years ended December 31, $ in thousands 2022 2021 2020 Average earning assets (1) 5,137,339 8,808,105 7,895,394 Average earning asset yields (2) 3.79 % 1.92 % 3.55 % (1) Average balances for each period are based on weighted month-end balances.
Years ended December 31, $ in thousands 2023 2022 2021 Average earning assets (1) 5,106,473 5,137,339 8,808,105 Average earning asset yields (2) 5.44 % 3.79 % 1.92 % (1) Average balances for each period are based on weighted month-end balances.
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.
Accordingly, under different conditions, we could report materially different amounts. For Agency RMBS 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.
We calculate effective interest expense (and by calculation, effective cost of funds) as U.S.
Effective Interest Expense / Effective Cost of Funds / Effective Net Interest Income / Effective Interest Rate Margin We calculate effective interest expense (and by calculation, effective cost of funds) as U.S.
Years ended December 31, $ in thousands 2022 2021 2020 Total average borrowings (1) 4,495,581 7,892,617 6,926,790 Maximum borrowings during the period (2) 6,636,913 8,708,686 23,132,234 Cost of funds (3) 1.15 % (0.14) % 1.19 % (1) Average borrowings for each period are based on weighted month-end balances.
Years ended December 31, $ in thousands 2023 2022 2021 Total average borrowings (1) 4,540,252 4,495,581 7,892,617 Maximum borrowings during the period (2) 4,987,006 6,636,913 8,708,686 Cost of funds (3) 5.03 % 1.15 % (0.14) % (1) Average borrowings for each period are based on weighted month-end balances.
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.
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.
Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $19.7 million, $22.0 million and $23.8 million during the years ended December 31, 2022, December 31, 2021 and December 31, 2020, respectively.
Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $10.4 million and $19.7 million during the years ended December 31, 2023 and December 31, 2022, respectively.
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.
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 and amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense.
The following table presents net (premium amortization) discount accretion recognized on our mortgage-backed and other securities portfolio during 2022, 2021 and 2020. Years Ended December 31, $ in thousands 2022 2021 2020 Agency RMBS (6,755) (41,881) (32,737) Agency CMBS — — (1,744) Non-Agency CMBS 1,624 2,695 14,721 Non-Agency RMBS (552) (1,264) 1,107 GSE CRT — — (2,560) U.S.
The following table presents net (premium amortization) discount accretion recognized on our mortgage-backed and other securities portfolio during 2023, 2022 and 2021. Years Ended December 31, $ in thousands 2023 2022 2021 Agency RMBS 5,160 (6,755) (41,881) Non-Agency CMBS 1,101 1,624 2,695 Non-Agency RMBS (479) (552) (1,264) U.S.
The lodging and retail sector reported the highest level of CMBS loan delinquencies while multi-family and industrial property sectors continued to post relatively lower delinquency levels.
Retail and office property sectors reported the highest level of CMBS loan delinquencies while industrial and multi-family posted relatively lower delinquency levels.
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.
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 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, 2022, we did not have a net notional amount of TBAs.
We primarily use TBAs that we do not intend to physically settle on the contractual settlement date as an alternative means of investing in and financing Agency RMBS. As of December 31, 2023 and December 31, 2022, we had no investments or immaterial investments in TBAs.
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. 50 Table of Conten t s The tables below summarize the components of our gain (loss) on derivative instruments, net for the years ended December 31, 2022, 2021 and 2020: $ in thousands Year ended December 31, 2022 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps 593,035 86,872 11,426 691,333 Currency Forward Contracts 919 — (271) 648 TBAs (134,488) — 1,514 (132,974) Total 459,466 86,872 12,669 559,007 $ in thousands Year ended December 31, 2021 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps 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 not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps (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) During the year ended December 31, 2022, we terminated existing interest rate swaps with a notional amount of $10.0 billion and entered into new swaps with a notional amount of $10.1 billion, excluding terminations and additions of forward starting swaps.
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. 50 Table of Contents The tables below summarize the components of our gain (loss) on derivative instruments, net for the years ended December 31, 2023, 2022 and 2021: $ in thousands Year ended December 31, 2023 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps (177,628) 239,008 918 62,298 Currency Forward Contracts (18) — — (18) TBAs (1,880) — 1,438 (442) Total (179,526) 239,008 2,356 61,838 $ in thousands Year ended December 31, 2022 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps 593,035 86,872 11,426 691,333 Currency Forward Contracts 919 — (271) 648 TBAs (134,488) — 1,514 (132,974) Total 459,466 86,872 12,669 559,007 $ in thousands Year ended December 31, 2021 Derivative not designated as hedging instrument Realized gain (loss) on derivative instruments, net Contractual net interest income (expense) Unrealized gain (loss), net Gain (loss) on derivative instruments, net Interest Rate Swaps 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 During the year ended December 31, 2023, we entered into interest rate swaps with a notional amount of $3.5 billion and terminated existing interest rate swaps with a notional amount of $7.6 billion (December 31, 2022: $10.0 billion of additions and $10.1 billion of terminations).
Years Ended December 31, $ in thousands 2022 2021 2020 Interest Income Mortgage-backed and other securities - coupon interest 198,290 207,506 298,613 Mortgage-backed and other securities - net (premium amortization) discount accretion (5,724) (40,450) (21,213) Mortgage-backed and other securities - interest income 192,566 167,056 277,400 Commercial and other loans 1,947 2,146 2,766 Total interest income 194,513 169,202 280,166 Mortgage-backed and other securities interest income increased $25.5 million for the year ended December 31, 2022 compared to 2021 despite lower average earning assets due to a 187 basis point increase in average earning asset yields.
Years Ended December 31, $ in thousands 2023 2022 2021 Interest Income Mortgage-backed and other securities - coupon interest 271,856 198,290 207,506 Mortgage-backed and other securities - net (premium amortization) discount accretion 6,073 (5,724) (40,450) Mortgage-backed and other securities - interest income 277,929 192,566 167,056 Commercial loan — 1,947 2,146 Total interest income 277,929 194,513 169,202 Mortgage-backed and other securities interest income increased $85.4 million for the year ended December 31, 2023 compared to 2022 due to a 165 basis point increase in average earning asset yields.
Capital Activities During the year ended December 31, 2022, we sold 5,686,598 shares of common stock under our equity distribution agreement with placement agents for proceeds of $81.6 million, net of approximately $1.3 million in commissions and fees.
During the year ended December 31, 2023, we sold 9,699,471 shares of common stock under our equity distribution agreement with placement agents for proceeds of $109.1 million, net of approximately $1.5 million in commissions and fees.
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.
To a lesser extent, we have also used 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. We actively manage our interest rate swap portfolio as the size and composition of our investment portfolio changes.
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.
“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. Accounting for Derivative Financial Instruments.
Years ended December 31, $ in thousands 2022 2021 2020 Interest Income Mortgage-backed and other securities 192,566 167,056 277,400 Commercial and other loans 1,947 2,146 2,766 Total interest income 194,513 169,202 280,166 Interest Expense Interest expense on repurchase agreement borrowings 71,268 10,710 97,401 Amortization of net deferred (gain) loss on de-designated interest rate swaps (19,708) (22,000) (23,794) Repurchase agreements interest expense 51,560 (11,290) 73,607 Secured loans — — 8,655 Total interest expense 51,560 (11,290) 82,262 Net interest income 142,953 180,492 197,904 Net interest rate margin 2.64 % 2.06 % 2.36 % Our net interest income, which equals total interest income less total interest expense, totaled $143.0 million for the year ended December 31, 2022 (2021: $180.5 million; 2020: $197.9 million).
Years ended December 31, $ in thousands 2023 2022 2021 Interest Income Mortgage-backed and other securities 277,929 192,566 167,056 Commercial loan — 1,947 2,146 Total interest income 277,929 194,513 169,202 Interest Expense Interest expense on repurchase agreement borrowings 238,634 71,268 10,710 Amortization of net deferred (gain) loss on de-designated interest rate swaps (10,405) (19,708) (22,000) Repurchase agreements interest expense 228,229 51,560 (11,290) Total interest expense 228,229 51,560 (11,290) Net interest income 49,700 142,953 180,492 Net interest rate margin 0.41 % 2.64 % 2.06 % Our net interest income, which equals total interest income less total interest expense, totaled $49.7 million for the year ended December 31, 2023 (2022: $143.0 million).
Gain on Repurchase and Retirement of Preferred Stock In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock.
During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock and recorded a gain on repurchase and retirement of preferred stock of $14.2 million.
Years ended December 31, $ in thousands 2022 2021 2020 Interest Expense Interest expense on repurchase agreement borrowings 71,268 10,710 97,401 Amortization of net deferred (gain) loss on de-designated interest rate swaps (19,708) (22,000) (23,794) Repurchase agreements interest expense 51,560 (11,290) 73,607 Secured loans — — 8,655 Total interest expense 51,560 (11,290) 82,262 Our interest expense on repurchase agreement borrowings increased $60.6 million for the year ended December 31, 2022 compared to 2021 due to a higher cost of funds.
Years ended December 31, $ in thousands 2023 2022 2021 Interest Expense Interest expense on repurchase agreement borrowings 238,634 71,268 10,710 Amortization of net deferred (gain) loss on de-designated interest rate swaps (10,405) (19,708) (22,000) Repurchase agreements interest expense 228,229 51,560 (11,290) Total interest expense 228,229 51,560 (11,290) Our interest expense on repurchase agreement borrowings increased $167.4 million for the year ended December 31, 2023 compared to 2022 due to a higher cost of funds.
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. 59 Table of Conten t s December 31, 2022 $ in thousands Agency RMBS Credit Portfolio (1) Total Mortgage-backed securities 4,746,693 45,200 4,791,893 Cash and cash equivalents (2) 175,535 — 175,535 Restricted cash (3) 103,246 — 103,246 Derivative assets, at fair value (3) 662 — 662 Other assets 25,252 807 26,059 Total assets 5,051,388 46,007 5,097,395 Repurchase agreements 4,234,823 — 4,234,823 Derivative liabilities, at fair value (3) 2,079 — 2,079 Other liabilities 53,980 2,438 56,418 Total liabilities 4,290,882 2,438 4,293,320 Total stockholders' equity (allocated) 760,506 43,569 804,075 Debt-to-equity ratio (4) 5.6 — 5.3 Economic debt-to-equity ratio (5) 5.6 — 5.3 (1) Investments in non-Agency CMBS, non-Agency RMBS and unconsolidated joint ventures are included in credit portfolio.
We did not have any TBAs outstanding as of December 31, 2023. 57 Table of Contents As of December 31, 2022 $ in thousands Agency RMBS Credit Portfolio (1) Total Mortgage-backed securities 4,746,693 45,200 4,791,893 Cash and cash equivalents (2) 175,535 — 175,535 Restricted cash (3) 103,246 — 103,246 Derivative assets, at fair value (3) 662 — 662 Other assets 25,252 807 26,059 Total assets 5,051,388 46,007 5,097,395 Repurchase agreements 4,234,823 — 4,234,823 Derivative liabilities, at fair value (3) 2,079 — 2,079 Other liabilities 53,980 2,438 56,418 Total liabilities 4,290,882 2,438 4,293,320 Total stockholders' equity (allocated) 760,506 43,569 804,075 Debt-to-equity ratio (4) 5.6 — 5.3 Economic debt-to-equity ratio (5) 5.6 — 5.3 (1) Investments in non-Agency CMBS, non-Agency RMBS and unconsolidated joint ventures are included in credit portfolio.
Our financing activities for the year ended December 31, 2022 primarily consisted of net principal repayments on our repurchase agreements of $2.8 billion. We paid dividends of $140.3 million and used $115.1 million to repurchase Series B and Series C Preferred Stock. Proceeds from the issuance of common stock provided $81.9 million during the year ended December 31, 2022.
We paid dividends of $140.3 million and used cash of $115.1 million to repurchase Series B and Series C Preferred Stock during the year ended December 31, 2022. Proceeds from the issuance of common stock provided $81.9 million during the year ended December 31, 2022.
Other Investment Income (Loss), net Our other investment income, net for the years ended December 31, 2022 and 2021 consisted of foreign currency transaction gains and losses. Other investment income, net for the year ended December 31, 2020 primarily consisted of quarterly dividends on FHLBI stock.
Other Investment Income (Loss), net Our other investment income, net for the years ended December 31, 2023 and 2022 consisted of foreign currency transaction gains and losses.
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.
Expenses For the year ended December 31, 2023, we incurred management fees of $12.3 million (2022: $16.9 million) that are payable to our Manager under our management agreement. Management fees decreased for the year ended December 31, 2023 compared to 2022 due to a lower stockholders' equity management fee base in 2023. Our management fees are calculated quarterly in arrears.
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.
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.
In October 2022, our commercial loan with a principal balance of $23.9 million was repaid in full. We recorded unrealized gains of $404,000 and $417,000 on our commercial loan investment during the years ended December 31, 2022 and 2021, respectively, and unrealized losses of $1.2 million during the year ended December 31, 2020.
In October 2022, our commercial loan with a principal balance of $23.9 million was repaid in full. We recorded unrealized gains of $404,000 on our commercial loan investment during the years ended December 31, 2022. We valued our commercial loan investment based upon a valuation from an independent pricing service.
The following table presents the amount of collateralized borrowings outstanding under repurchase agreements 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 Quarter Ended Quarter-end balance Average quarterly balance (1) Maximum balance (2) 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 March 31, 2022 5,837,420 6,218,445 6,636,913 June 30, 2022 3,262,530 4,059,917 4,902,191 September 30, 2022 3,887,291 3,907,505 4,165,996 December 31, 2022 4,234,823 3,825,218 4,234,823 (1) Average quarterly balance for each period is based on month-end balances.
The following table presents the amount of collateralized borrowings outstanding under repurchase agreements 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 Quarter Ended Quarter-end balance Average quarterly balance (1) Maximum balance (2) March 31, 2022 5,837,420 6,218,445 6,636,913 June 30, 2022 3,262,530 4,059,917 4,902,191 September 30, 2022 3,887,291 3,907,505 4,165,996 December 31, 2022 4,234,823 3,825,218 4,234,823 March 31, 2023 4,814,700 4,734,819 4,814,700 June 30, 2023 4,959,388 4,791,720 4,959,388 September 30, 2023 4,987,006 4,902,400 4,987,006 December 31, 2023 4,458,695 3,736,432 4,458,695 (1) Average quarterly balance for each period is based on month-end balances.
As of December 31, 2022 and 2021, we held the following interest rate swaps whereby we pay floating rate interest based upon SOFR and receive fixed rate interest. $ in thousands December 31, 2022 December 31, 2021 Derivative instrument Notional Amounts Weighted Average Floating Pay Rate Weighted Average Fixed Receive Rate Weighted Average Years to Maturity Notional Amounts Weighted Average Floating Pay Rate Weighted Average Fixed Receive Rate Weighted Average Years to Maturity Interest Rate Swaps (1) 2,350,000 4.30 % 2.78 % 9.3 1,750,000 0.05 % 0.98 % 4.9 (1) Excludes $275.0 million notional amount of interest rate swaps with forward start dates as of December 31, 2022 that will pay floating interest based upon SOFR (December 31, 2021: none).
We did not have any such interest rate swaps as of December 31, 2023. $ in thousands As of December 31, 2022 Derivative instrument Notional Amount Weighted Average Floating Pay Rate Weighted Average Fixed Receive Rate Weighted Average Years to Maturity Interest Rate Swaps (1) 2,350,000 4.30 % 2.78 % 9.3 (1) As of December 31, 2022, we held $275.0 million notional amount of SOFR-based pay floating and receive fixed interest rate swaps with forward start dates that had a weighted average maturity of 16.0 years and a weighted average fixed receive rate of 2.63% that are excluded from that table above.
For the year ended December 31, 2022, the change in net loss attributable to common stockholders compared to 2021 was primarily due to: (i) net losses on investments of $1.1 billion versus $366.5 million in the 2021 period; (ii) net gains on derivative instruments of $559.0 million versus net gains on derivatives of $122.6 million in the 2021 period; (iii) lower net interest income of $143.0 million versus $180.5 million in the 2021 period; and (iv) a gain on repurchase and retirement of preferred stock of $14.2 million in 2022.
For the year ended December 31, 2023, the change in net loss attributable to common stockholders compared to 2022 was primarily due to: (i) net losses on investments of $107.3 million versus $1.1 billion in the 2022 period; (ii) net gains on derivative instruments of $61.8 million versus $559.0 million in the 2022 period and (iii) a $93.3 million decrease in net interest income.
Treasury notes) and the supply of, and demand for, assets in which we invest. Market Conditions Macroeconomic factors that affect our business include interest rates, 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.
Market Conditions and Impacts Macroeconomic factors that affect our business include interest rates, interest rate volatility, spread premiums, fiscal and monetary policy, residential and commercial real estate prices, credit availability, the health of the banking system, consumer personal income and spending, corporate earnings, employment conditions, financial conditions and inflation.
Interest income from our commercial and other loans was recognized when earned and deemed collectible. 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.
We use or have used 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.
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. 44 Table of Conten t s Results of Operations Our consolidated results of operations for the years ended December 31, 2022, 2021 and 2020 are summarized below: Years Ended December 31, $ in thousands except share data 2022 2021 2020 Interest income Mortgage-backed and other securities 192,566 167,056 277,400 Commercial and other loans 1,947 2,146 2,766 Total interest income 194,513 169,202 280,166 Interest expense Repurchase agreements (1) 51,560 (11,290) 73,607 Secured loans — — 8,655 Total interest expense 51,560 (11,290) 82,262 Net interest income 142,953 180,492 197,904 Other income (loss) Gain (loss) on investments, net (1,079,339) (366,509) (961,938) (Increase) decrease in provision for credit losses — 1,768 (1,768) Equity in earnings (losses) of unconsolidated ventures (407) 870 1,163 Gain (loss) on derivative instruments, net 559,007 122,611 (851,050) Realized and unrealized credit derivative income (loss), net — — (35,312) Net gain (loss) on extinguishment of debt — — 14,742 Other investment income (loss), net 186 1 2,137 Total other income (loss) (520,553) (241,259) (1,832,026) Expenses Management fee — related party 16,906 21,080 29,367 General and administrative 8,418 8,153 10,863 Total expenses 25,324 29,233 40,230 Net income (loss) (402,924) (90,000) (1,674,352) Dividends to preferred stockholders (28,218) (37,795) (44,426) Gain on repurchase and retirement of preferred stock 14,179 — — Issuance and redemption costs of redeemed preferred stock — (4,682) — Net income (loss) attributable to common stockholders (416,963) (132,477) (1,718,778) Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic (12.21) (4.82) (98.93) Diluted (12.21) (4.82) (98.93) Weighted average number of shares of common stock: Basic 34,160,080 27,513,223 17,373,039 Diluted 34,160,080 27,513,223 17,373,039 (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.
Years Ended December 31, $ in thousands except share data 2023 2022 2021 Interest income Mortgage-backed and other securities 277,929 192,566 167,056 Commercial loan — 1,947 2,146 Total interest income 277,929 194,513 169,202 Interest expense Repurchase agreements (1) 228,229 51,560 (11,290) Total interest expense 228,229 51,560 (11,290) Net interest income 49,700 142,953 180,492 Other income (loss) Gain (loss) on investments, net (107,280) (1,079,339) (366,509) (Increase) decrease in provision for credit losses (320) — 1,768 Equity in earnings (losses) of unconsolidated ventures (1) (407) 870 Gain (loss) on derivative instruments, net 61,838 559,007 122,611 Other investment income (loss), net (66) 186 1 Total other income (loss) (45,829) (520,553) (241,259) Expenses Management fee — related party 12,290 16,906 21,080 General and administrative 7,440 8,418 8,153 Total expenses 19,730 25,324 29,233 Net income (loss) (15,859) (402,924) (90,000) Dividends to preferred stockholders (23,153) (28,218) (37,795) Gain on repurchase and retirement of preferred stock 1,471 14,179 — Issuance and redemption costs of redeemed preferred stock — — (4,682) Net income (loss) attributable to common stockholders (37,541) (416,963) (132,477) Earnings (loss) per share: Net income (loss) attributable to common stockholders Basic (0.85) (12.21) (4.82) Diluted (0.85) (12.21) (4.82) Weighted average number of shares of common stock: Basic 44,073,815 34,160,080 27,513,223 Diluted 44,073,815 34,160,080 27,513,223 (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.
In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock.
During the year ended December 31, 2022, we repurchased and retired 1,662,366 shares of Series B Preferred Stock and 3,683,530 shares of Series C Preferred Stock and recorded a gain on repurchase and retirement of preferred stock of $14.2 million.
Net unrealized gains in the year ended December 31, 2022 reflect reclassifications on securities that were sold as well as tighter spreads and favorable rates on assets held at year end. Net unrealized losses in the years ended December 31, 2021 and 2020 primarily reflect wider interest rate spreads.
Net unrealized gains in the year ended December 31, 2023 primarily reflect favorable valuations on our assets held at year end. Net unrealized gains in the year ended December 31, 2022 reflect reclassifications of unrealized losses upon sale as well as tighter spreads and favorable rates on assets held at year end.
Our investing activities provided net cash of $2.4 billion for the year ended December 31, 2022 (2021: $120.7 million; 2020: $11.6 billion). Our primary source of cash from investing activities during the year ended December 31, 2022 was proceeds from the sale of MBS of $27.3 billion and proceeds from the sale of U.S. Treasury securities of $468.1 million.
We also generated $348.5 million from principal payments of MBS during the year ended December 31, 2023. Our primary source of cash from investing activities during the year ended December 31, 2022 was proceeds from the sale of MBS of $27.3 billion and proceeds from the sale of U.S. Treasury securities of $468.1 million.
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.
We estimate future expected cash flows at the time of purchase and determine the effective interest rate based 44 Table of Contents on these estimated cash flows and our purchase price.
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.
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. 59 Table of Contents Forward-Looking Statements Regarding Liquidity As of December 31, 2023, we held $4.7 billion of Agency securities that are financed by repurchase agreements.
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.
As of December 31, 2023, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.6% for Agency RMBS. The haircuts ranged from a low of 3% to a high of 5% for Agency RMBS. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeWe 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.
Biggest changeInterest 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.
While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and we seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake. For additional discussion of market risk, see Item Part I.
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. 61 Table of Contents For additional discussion of market risk, see Item Part I.
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.
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.
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, 2022 and 2021, assuming a static portfolio and constant financing and credit spreads.
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, as of December 31, 2023 and 2022, assuming a static portfolio and constant financing and credit spreads.
The interest rate scenarios assume interest rates at December 31, 2022 and 2021. 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.
The interest rate scenarios assume interest rates as of December 31, 2023 and 2022. 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.
Generally, in a rising interest rate environment, the 65 Table of Conten t s 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.
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.
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.
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.
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.
Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table. 63 Table of Contents 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.
At December 31, 2022 At December 31, 2021 Change in Interest Rates Percentage Change in Projected Net Interest Income Percentage Change in Projected Portfolio Value Percentage Change in Projected Net Interest Income Percentage Change in Projected Portfolio Value +1.00% (2.97) % (1.15) % (3.27) % (1.61) % +0.50% (1.54) % (0.48) % (0.19) % (0.52) % -0.50% 1.56 % 0.22 % (1.96) % (0.38) % -1.00% 2.90 % 0.13 % (16.33) % (2.11) % 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.
As of December 31, 2023 As of December 31, 2022 Change in Interest Rates Percentage Change in Projected Net Interest Income Percentage Change in Projected Portfolio Value Percentage Change in Projected Net Interest Income Percentage Change in Projected Portfolio Value +1.00% (1.04) % (0.76) % (2.97) % (1.15) % +0.50% (0.41) % (0.23) % (1.54) % (0.48) % -0.50% 0.27 % (0.13) % 1.56 % 0.22 % -1.00% 0.93 % (0.68) % 2.90 % 0.13 % 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 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.
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.
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.
Spread Risk We refer to the difference between interest rates on our investments and interest rates on risk free instruments as spreads. 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.
Elevated inflation and the resulting acceleration of monetary policy tightening by the Federal Reserve have impacted and will continue to impact credit spreads. Prepayment Risk As we receive prepayments of principal on our investments, premiums or discounts on these investments are amortized against interest income.
Inflation, financial conditions, monetary policy initiatives, interest rates and interest rate volatility have impacted and may continue to impact credit spreads. Prepayment Risk As we receive prepayments of principal on our investments, premiums or discounts on these investments are amortized against interest income.
Many borrowers continue to experience difficulties meeting their obligations or seek to forbear or further forbear payment on their mortgage loans. Given tightening lending conditions, loans may continue to experience increasing delinquency levels and eventual defaults, which could impact the performance of our mortgage-backed securities.
Given deteriorating fundamentals and tightening lending conditions, borrowers may experience difficulties meeting their obligations and refinancing loans upon scheduled maturities. Loans may experience increasing delinquency levels and eventual defaults, which could impact the performance of our mortgage-backed securities.
The COVID-19 pandemic, unprecedented fiscal and monetary policy responses to the COVID-19 pandemic, and the ongoing normalization of such policy responses 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.
Pandemics and other widespread crises, including any related fiscal or monetary policy responses, may cause extreme 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.
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.
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.
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.
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.
As a result, if these market conditions persist, margin call risk remains elevated and our operating results and financial condition may be materially impacted.
When these or similar market conditions are present, margin call risk is elevated and our operating results and financial condition may be materially impacted.
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.
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. 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 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.
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.
Increased inflation, elevated interest rate volatility 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.
In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments. 62 Table of Contents Uncertainty regarding the rate of inflation, fiscal and monetary policy initiatives, elevated interest rate volatility and other factors have made it more difficult to predict prepayment levels for the securities in our portfolio.
Removed
Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns. 64 Table of Conten t s 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.
Added
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.
Removed
Accordingly, changes in actual interest rates may have a material adverse effect on us. Spread Risk We refer to the difference between interest rates on our investments and interest rates on risk free instruments as spreads.
Removed
The pace of commercial real estate fundamental improvement is moderating given accelerating monetary policy tightening by the Federal Reserve. Occupancy and rental rates have stabilized and valuations face downward pressure as property borrowing costs remain elevated.
Removed
Meanwhile, residential real estate fundamentals have also deteriorated due to historically low affordability driven by the dramatic rise in mortgage rates throughout 2022. 66 Table of Conten t s CMBS loan delinquencies increased in the fourth quarter but remain materially lower than COVID-19 peak levels.
Removed
Foreign Exchange Rate Risk As of December 31, 2022, we have an investment of €43,000 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.
Removed
The unconsolidated joint 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.

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