In this quarterly report on Form 10-Q, or this "Quarterly Report," we refer to
Invesco Mortgage Capital Inc. and its consolidated subsidiaries as "we," "us,"
"our Company," or "our," unless we specifically state otherwise or the context
indicates otherwise. We refer to our external manager, Invesco Advisers, Inc.,
as our "Manager," and we refer to the indirect parent company of our Manager,
Invesco Ltd. together with its consolidated subsidiaries (which does not include
us), as "Invesco."
The following discussion should be read in conjunction with our condensed
consolidated financial statements and the accompanying notes to our condensed
consolidated financial statements, which are included in Item 1 of this Report,
as well as the information contained in our most recent Form 10-K filed with the
Securities and Exchange Commission (the "SEC").

Forward-Looking Statements
We make forward-looking statements in this Report and other filings we make with
the SEC within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and such statements are intended to be covered by the safe
harbor provided by the same. Forward-looking statements are subject to
substantial risks and uncertainties, many of which are difficult to predict and
are generally beyond our control. These forward-looking statements include
information about possible or assumed future results of our business, investment
strategies, financial condition, liquidity, results of operations, plans and
objectives. When we use the words "believe," "expect," "anticipate," "estimate,"
"plan," "intend," "project," "forecast" or similar expressions and future or
conditional verbs such as "will," "may," "could," "should," and "would," and any
other statement that necessarily depends on future events, we intend to identify
forward-looking statements. Factors that could cause actual results to differ
from those expressed in our forward-looking statements include, but are not
limited to:
•Ongoing spread and economic and operational impact of the COVID-19 pandemic;

•our business and investment strategy;



•our investment portfolio and expected investments;
•our projected operating results;
•general volatility of financial markets and effects of governmental responses,
including actions and initiatives of the U.S. governmental agencies and changes
to U.S. government policies in response to the COVID-19 pandemic, mortgage loan
modification programs, actions and initiatives of foreign governmental agencies
and central banks, monetary policy actions of the Federal Reserve, including
actions relating to its agency mortgage-backed securities portfolio and the
continuation of re-investment of principal payments, and our ability to respond
to and comply with such actions, initiatives and changes;
•the availability of financing sources, including our ability to obtain
additional financing arrangements and the terms of such arrangements;
•financing and advance rates for our target assets;
•changes to our expected leverage;
•our expected book value per common share;
•interest rate mismatches between our target assets and our borrowings used to
fund such investments;
•the adequacy of our cash flow from operations and borrowings to meet our
short-term liquidity needs;
•our ability to maintain sufficient liquidity to meet our short-term liquidity
needs;
•changes in the credit rating of the U.S. government;
•changes in interest rates and interest rate spreads and the market value of our
target assets;
•changes in prepayment rates on our target assets;
•the impact of any deficiencies in foreclosure practices of third parties and
related uncertainty in the timing of collateral disposition;
•our reliance on third parties in connection with services related to our target
assets;
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•disruption of our information technology system;
•effects of hedging instruments on our target assets;
•rates of default or decreased recovery rates on our target assets;
•modifications to whole loans or loans underlying securities;
•the degree to which our hedging strategies may or may not protect us from
interest rate volatility and foreign currency exchange rate;
•the degree to which derivative contracts expose us to contingent liabilities;
•counterparty defaults;
•compliance with financial covenants in our financing arrangements;
•changes in governmental regulations, zoning, insurance, eminent domain and tax
law and rates, and similar matters and our ability to respond to such changes;
•our ability to maintain our qualification as a real estate investment trust for
U.S. federal income tax purposes;
•our ability to maintain our exception from the definition of "investment
company" under the Investment Company Act of 1940, as amended (the "1940 Act");
•availability of investment opportunities in mortgage-related, real
estate-related and other securities;
•availability of U.S. Government Agency guarantees with regard to payments of
principal and interest on securities;
•the market price and trading volume of our capital stock;
•availability of qualified personnel of our Manager;
•the relationship with our Manager;
•estimates relating to taxable income and our ability to continue to make
distributions to our stockholders in the future;
•estimates relating to fair value of our target assets and loan loss reserves;
•our understanding of our competition;
•changes to generally accepted accounting principles in the United States of
America ("U.S. GAAP");
•the adequacy of our disclosure controls and procedures and internal controls
over financial reporting; and
•market trends in our industry, interest rates, real estate values, the debt
securities markets or the general economy.
The forward-looking statements are based on our beliefs, assumptions and
expectations of our future performance, taking into account all information
currently available to us. You should not place undue reliance on these
forward-looking statements. These beliefs, assumptions and expectations can
change as a result of many possible events or factors, not all of which are
known to us. Some of these factors are described under the headings "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." If a change occurs, our business,
financial condition, liquidity and results of operations may vary materially
from those expressed in our forward-looking statements. Any forward-looking
statement speaks only as of the date on which it is made. New risks and
uncertainties arise over time, and it is not possible for us to predict those
events or how they may affect us. Except as required by law, we are not
obligated to, and do not intend to, update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The following discussion should be read in conjunction with our condensed
consolidated financial statements and the accompanying notes to our condensed
consolidated financial statements, which are included in this Report.
Executive Summary
We are a Maryland corporation primarily focused on investing in, financing and
managing residential and commercial mortgage-backed securities ("MBS") and
mortgage loans. Our objective is to provide attractive risk-adjusted returns to
our investors, primarily through dividends and secondarily through capital
appreciation. To achieve this objective, we have historically invested in the
following:
•Residential mortgage-backed securities ("RMBS") that are guaranteed by a
U.S. government agency such as the Government National Mortgage Association
("Ginnie Mae") or a federally chartered corporation such as the Federal National
Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac") (collectively "Agency RMBS");
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•Commercial mortgage-backed securities ("CMBS") that are guaranteed by a
U.S. government agency such as Ginnie Mae or a federally chartered corporation
such as Freddie Mac or Fannie Mae (collectively "Agency CMBS");
•RMBS that are not guaranteed by a U.S. government agency or a federally
chartered corporation ("non-Agency RMBS");
•CMBS that are not guaranteed by a U.S. government agency or a federally
chartered corporation ("non-Agency CMBS");
•Credit risk transfer securities that are unsecured obligations issued by
government-sponsored enterprises ("GSE CRT");
•Residential and commercial mortgage loans; and
•Other real estate-related financing arrangements.
We elected to be taxed as a real estate investment trust ("REIT") for
U.S. federal income tax purposes under the provisions of the Internal Revenue
Code of 1986. To maintain our REIT qualification, we are generally required to
distribute at least 90% of our REIT taxable income to our stockholders annually.
We operate our business in a manner that permits our exclusion from the
definition of "Investment Company" under the 1940 Act. We are externally managed
and advised by Invesco Advisers, Inc., our Manager, which is an indirect,
wholly-owned subsidiary of Invesco Ltd.
During the quarter ended March 31, 2020, we experienced unprecedented market
conditions as a result of the global COVID-19 pandemic. Due to significant
spread widening in both Agency and non-Agency securities, we received an
unusually high number of margin calls from counterparties. On March 23, 2020, we
notified our financing counterparties that we were not in a position to fund the
margin calls we received on March 23, 2020, and that we did not expect to be in
a position to fund the anticipated volume of future margin calls under our
financing arrangements in the near term as a result of market disruptions
created by the COVID-19 pandemic. We engaged third party financial and legal
advisors to assist us in restructuring our debt with our financing
counterparties. To generate liquidity and reduce leverage,we sold MBS and GSE
CRTs for cash proceeds of $16.2 billion and repaid $11.2 billion of our
repurchase agreements during the quarter ended March 31, 2020. We also
terminated our entire interest rate swap portfolio as our exposure to interest
rate risk decreased as we sold Agency assets.
We have continued to focus on generating liquidity and reducing leverage in the
second quarter of 2020. As of May 31, 2020, we have a cash balance of $327.8
million, approximately $55.3 million of which is posted with FHLBI as collateral
for our remaining secured loans. Between April 1, 2020 and May 31, 2020, we sold
additional MBS and GSE CRTs with a fair value of $6.2 billion at March 31, 2020
for cash proceeds of $5.9 billion and our loan participation interest for cash
proceeds of $21.6 million. As of May 31, 2020, we have a total investment
portfolio, excluding cash and Agency CMBS purchase commitments, of approximately
$1.6 billion consisting of 92% commercial credit investments, 7% residential
credit investments, and 1% Agency mortgage-backed securities. Approximately
$540 million of our investment portfolio is unencumbered. We have elected to
hold our remaining non-Agency CMBS and GSE CRTs for a period of time given our
view that these investments could benefit from actions taken by the federal
government to stimulate the economy and the market for these securities. Our
investment portfolio has not materially changed between May 31, 2020 and the
filing date of this Quarterly Report. In addition, we have not entered into any
interest rate swap contracts during the second quarter as of the filing date of
this Quarterly Report
Between April 1, 2020 and May 31, 2020, we repaid the outstanding balance of our
repurchase agreements (approximately $6.3 billion as of March 31, 2020). In
addition, we repaid $512.5 million of our secured loans, reducing the
outstanding balance of our secured loans to $837.5 million as of the filing date
of this Quarterly Report.
We also paid our dividends that were in arrears on our Series A Preferred,
Series B Preferred, and Series C Preferred Stock on May 22, 2020. We will pay
our first quarter 2020 common stock dividend of $0.50 per share on June 30, 2020
in a combination of cash and common shares. In addition, on June 17, 2020, we
declared a second quarter 2020 common stock cash dividend of $0.02 per common
share that will be paid on July 28, 2020.
While the Federal Reserve (the "Fed") has taken a number of proactive measures
to bolster liquidity in the second quarter of 2020, we expect market conditions
for the mortgage REIT industry to continue to be challenging. We believe our
current cash balances and cash flows from operations will meet our near-term
liquidity requirements. Our secured loans are due by December 2020, and we
intend to repay our secured loans with proceeds from sales of non-Agency CMBS
assets that are currently collateralizing these loans.
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In the near-term, we intend to deploy capital into attractive opportunities in
Agency securities and seek to finance these securities with prudent levels of
debt. Further, we will evaluate potential credit investments that do not rely on
short-term or mark-to-market financing. To further strengthen our balance sheet
and position ourselves for future investment opportunities, we have explored and
will continue to explore additional sources of financing including issuances of
debt and equity securities and other forms of long-term financing arrangements.
However, no assurance can be given that we will be able to access any additional
sources of financing.
Market Conditions
Macroeconomic factors that affect our business include interest rate spread
premiums, governmental policy initiatives, residential and commercial real
estate prices, credit availability, consumer personal income and spending,
corporate earnings, employment conditions, financial conditions and inflation.
During the first quarter of 2020 and continuing into the second quarter,
financial markets experienced significant volatility as a result of the COVID-19
pandemic. On March 11, 2020, the World Health Organization characterized
COVID-19 as a pandemic, and on March 13, 2020 a national emergency in the United
States was declared. Economic activity has been severely impacted as the
pandemic resulted in stay-at-home orders and widespread business shutdowns. The
precipitous decline in business activity has substantially increased
unemployment levels and driven a sharp contraction in GDP to levels not seen in
decades. Reactions to the impacts of the pandemic led to swift and severe
financial market dislocations during the first quarter.
During the first quarter, the significant dislocation in the financial markets
caused, among other things, credit spread widening, a marked decrease in
interest rates and unprecedented illiquidity in Agency and non-Agency MBS
trading and financing markets. We expect this volatility to persist in the near
term due to the continued uncertainty around the COVID-19 pandemic duration and
ultimate impact. Further, we expect the COVID-19 pandemic to negatively impact
real estate markets. The lodging and retail property markets are likely to
experience the greatest impact due to travel restrictions and a sharp slowdown
in discretionary consumption. In the retail sector, despite long-term leases,
tenants that are not open for business may find it difficult to meet rent
obligations, and may forego payments or seek relief in the months ahead. Real
estate loans are likely to experience increased delinquencies and defaults,
which could impact the fundamental performance of our investments.
The Fed responded to the COVID-19 pandemic with a series of measures aimed at
returning stability to the financial markets and fostering economic recovery.
These measures included cutting the federal funds target rate by 150 basis
points to 0%-0.25% on March 15, 2020 and committing to purchases of U.S.
Treasuries and Agency MBS. These actions helped improve Agency RMBS and Agency
CMBS liquidity and, eventually, market prices. Additionally, on March 23, 2020,
the Fed announced it would purchase debt issued by U.S. investment grade rated
companies and established the Term Asset-Backed Securities Loan Facility
("TALF") to support the flow of credit to consumers and businesses. Initially,
the TALF provided financing for asset-backed securities collateralized by
student loans, auto loans, credit card loans and loans guaranteed by the Small
Business Administration. Subsequently, the Fed expanded the TALF to cover
secondary market triple-A rated conduit non-Agency CMBS. Since their inclusion,
triple-A rated non-Agency CMBS has recorded some recovery of the spread widening
experienced in March. We expect this trend to continue as investors look to
capitalize on favorable financing made available by the Fed. We also believe
bonds rated below triple-A have the potential to benefit from increased investor
demand as more senior bonds experience price appreciation.
In addition to the Fed purchases and facilities mentioned above, the repurchase
financing markets for high-quality assets such as Treasuries and Agency RMBS
continued to be supported by substantial Fed action in the form of upsized open
market operations, both in the overnight and term markets. These facilities were
established in late 2019 and were significantly increased in the first quarter
of 2020.
The U.S. Congress has also responded to the COVID-19 pandemic by passing three
rounds of fiscal stimulus measures, the most notable being the $2.2 trillion
Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), which included
relief measures for households and businesses directly or indirectly impacted by
the virus. The CARES Act includes provisions for COVID-19 related temporary
forbearance on federally backed mortgage loans, which allows borrowers of loans
guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae to suspend making principal
and interest payments for a period of up to 360 days if they are facing
hardship. Following the temporary forbearance period, mortgage servicers have to
provide several options to impacted borrowers, including a repayment schedule or
loan modification, depending on the borrowers' circumstances. We believe the
provision of forbearance and loan modifications will substantially reduce
borrower defaults and loan losses relative to levels that would have likely
occurred without these actions.
Despite the unprecedented measures discussed above, market conditions continue
to be challenging for asset classes that have not been directly targeted by
government intervention. While the markets for Agency RMBS and Agency CMBS have
largely recovered in response to large-scale purchases by the Fed, the markets
for non-Agency CMBS, non-Agency RMBS and GSE CRTs have yet to fully recover as
the ultimate impact of the COVID-19 pandemic on these credit assets remains
unclear.
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Proposed Changes to LIBOR
In 2017, the U.K. Financial Conduct Authority (the "FCA"), which regulates
LIBOR, announced that the FCA will no longer persuade or compel banks to submit
rates for the calculation of the LIBOR benchmark after 2021. This announcement
indicates that the continuation of LIBOR will not be guaranteed after 2021. The
Alternative Reference Rates Committee ("ARRC"), which was convened by the
Federal Reserve Board and the New York Fed to help ensure a successful
transition from LIBOR, has proposed that the Secured Overnight Financing Rate
("SOFR") is the rate that represents best practice as the alternative to LIBOR
for use in derivatives and other financial contracts that are currently indexed
to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR,
and organizations are currently working on industry wide and company specific
transition plans as it relates to derivatives and cash markets exposed to LIBOR.
SOFR is an overnight rate unlike LIBOR which is a forward-looking term rate,
making SOFR an inexact replacement for LIBOR. There is currently no perfect way
to create robust, forward-looking, SOFR term rates. Market participants are
still considering how various types of financial instruments and securitization
vehicles should react to a discontinuation of LIBOR. It is possible that not all
of our assets and liabilities will transition away from LIBOR at the same time,
and it is possible that not all of our assets and liabilities will transition to
the same alternative reference rate, in each case increasing the difficulty of
hedging. Switching existing financial instruments and hedging transactions from
LIBOR to SOFR requires calculations of a spread. Industry organizations are
attempting to structure the spread calculation in an objective manner, but there
is no assurance that all asset types or securitization vehicles will use the
same spread. We and other market participants have less experience understanding
and modeling SOFR-based assets and liabilities than LIBOR-based assets and
liabilities, increasing the difficulty of investing, hedging, and risk
management.
We have material contracts that are indexed to LIBOR and are monitoring this
activity and evaluating the related risks. However, it is not possible to
predict the effect of any of these developments, and any future initiatives to
regulate, reform or change the manner of administration of LIBOR could result in
adverse consequences to the rate of interest payable and receivable on, market
value of and market liquidity for LIBOR-based financial instruments.
Our Manager is finalizing its global assessment of exposure in relation to our
LIBOR-based instruments and benchmarks and is prioritizing the mitigation of
risks associated with the forecasted changes to financial instruments and
performance benchmarks referencing existing LIBOR rates.
In October 2019, the IRS and Treasury proposed regulations that are expected to
provide taxpayers relief from adverse impacts resulting from the transition away
from LIBOR to an alternative reference rate. The proposed regulations make clear
that a change in the reference rate (and associated alterations to payment
terms) of a financial instrument is generally not considered a taxable event,
provided the fair value of the modified instrument is substantially equivalent
to the fair value of the unmodified instrument.
The Financial Accounting Standards Board has also issued accounting guidance
that provides optional expedients and exceptions to contracts, hedging
relationships and other transactions impacted by LIBOR transition if certain
criteria are met. The guidance is effective for all entities as of March 12,
2020 through December 31, 2022.
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Investment Activities
As previously discussed, the COVID-19 pandemic caused unprecedented market
disruption in the three months ended March 31, 2020. To raise liquidity and
reduce leverage, we sold MBS and GSE CRTs for cash proceeds of $16.2 billion.
Our equity allocation and investment portfolio composition as of March 31, 2020
were directly impacted by these sales as detailed in the tables below.
The table below shows the allocation of our stockholders' equity as of March 31,
2020, December 31, 2019 and March 31, 2019:
                                                        As of
$ in thousands                March 31, 2020          December 31, 2019      March 31, 2019
Agency RMBS                                 30  %                  44  %               45  %
Agency CMBS                                 20  %                  16  %                5  %
Commercial Credit (1)                       38  %                  28  %               32  %
Residential Credit (2)                      12  %                  12  %               18  %
Total                                      100  %                 100  %              100  %


(1)Commercial credit includes non-Agency CMBS, Multifamily GSE CRTs, commercial
loans and investments in unconsolidated ventures.
(2)Residential credit includes non-Agency RMBS, Single Family GSE CRTs and a
loan participation interest.
The table below shows the breakdown of our investment portfolio as of March 31,
2020, December 31, 2019 and March 31, 2019:
                                                                                              As of
$ in thousands                                          March 31, 2020                 December 31, 2019                  March 31, 2019
Agency RMBS:
30 year fixed-rate, at fair value                              1,421,162                         10,524,220                      12,716,636
15 year fixed-rate, at fair value                                 71,166                            292,414                         352,102
Hybrid ARM, at fair value                                          2,672                             56,893                         179,925
Agency CMO, at fair value                                        300,535                            427,512                         327,151
Agency CMBS, at fair value                                     2,278,027                          4,767,930                       2,001,553
Non-Agency CMBS, at fair value                                 2,869,051                          3,823,474                       3,455,806
Non-Agency RMBS, at fair value                                   568,081                            955,671                       1,186,896
GSE CRT, at fair value                                           534,114                            923,672                         907,529
Loan participation interest, at fair value                        21,577                             44,654                          53,827
Commercial loan, at amortized cost                                22,577                             24,055                          24,454
Investments in unconsolidated ventures                            21,088                             21,998                          24,129
Total investment portfolio                                     8,110,050                         21,862,493                      21,230,008



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Prior to disruption in the financial markets caused by the COVID-19 pandemic, we
purchased $4.3 billion of fixed rate Agency RMBS, $435.5 million of Agency CMBS,
$56.6 million of non-Agency CMBS and $99.0 million of GSE CRTs during the three
months ended March 31, 2020. We funded these purchases by leveraging the
proceeds of our February 2020 common stock issuance and with cash proceeds from
paydowns and sales of securities.
As of March 31, 2020, our holdings of 30 year fixed-rate Agency RMBS represented
approximately 18% of our total investment portfolio versus 48% as of
December 31, 2019 and 60% as of March 31, 2019. We have historically focused our
purchases of 30 year fixed-rate Agency RMBS on specified pools priced at modest
pay-ups to generic Agency RMBS because those securities have characteristics
that reduce prepayment risk. We hold approximately $10.1 million of Agency RMBS
as of May 31, 2020.
As of March 31, 2020, our holdings of Agency CMBS represented approximately 28%
of our total investment portfolio versus 22% as of December 31, 2019 and 9% as
of March 31, 2019. Our Agency CMBS holdings as of March 31, 2020 include
approximately $507.2 million (December 31, 2019: $96.2 million; March 31, 2019:
$221.9 million) of Agency CMBS purchase commitments. We have historically
focused our investments in Agency CMBS issued by Freddie Mac, Fannie Mae and
Ginnie Mae that have characteristics that reduce prepayment risk. Our hedging
costs for Agency CMBS are relatively low because they are less sensitive to
interest rate risk given limited extension beyond initial expected maturity
dates and underlying loan prepayment protection. We hold approximately
$192.4 million of Agency CMBS as of May 31, 2020, including $191.6 million of
Agency CMBS purchase commitments. We have sold our Agency CMBS holdings as of
the filing date of this Quarterly Report.
Our investments that have credit exposure include non-Agency CMBS, non-Agency
RMBS, GSE CRTs, a commercial real estate loan, and a loan participation
interest. Rather than relying on the rating agencies, we utilize proprietary
models as well as third party applications to quantify and monitor the credit
risk associated with these holdings. Our analysis generally begins at the
underlying asset level, where we gather detailed information on loan, borrower,
and property characteristics that inform our expectations for future
performance. In addition to base case cash flow projections, we perform a range
of scenario stresses to gauge the sensitivity of returns to potential deviations
in underlying asset behavior. We perform this detailed credit analysis at the
time of initial purchase and regularly throughout the holding period of each
investment.
As of March 31, 2020 our holdings of non-Agency CMBS represented approximately
35% of our total investment portfolio versus 17% as of December 31, 2019 and 16%
as of March 31, 2019. Our non-Agency CMBS portfolio is collateralized by loans
secured by various property types located across the United States including
office, retail, multifamily, industrial warehouses and hotels. The largest
property geographic locations are in New York, California, Texas, Florida and
Illinois as detailed in the tables below. The majority of our non-Agency CMBS
portfolio is comprised of fixed rate credits that are rated investment grade by
a nationally recognized statistical rating organization. The remainder of our
assets were originated during and after 2017. We hold approximately $1.5 billion
of non-Agency CMBS as of May 31, 2020. Over 87% of non-Agency CMBS are rated
single-A (or equivalent) or higher by a nationally recognized statistical rating
organization as of May 31, 2020. Further, over 75% of non-Agency CMBS are rated
double-A (or equivalent) or higher by a nationally recognized statistical rating
organization as of May 31, 2020.
As of March 31, 2020, our holdings of non-Agency RMBS represented approximately
7% of our total investment portfolio versus 4% as of December 31, 2019 and 6% as
of March 31, 2019. We primarily hold non-Agency RMBS securities collateralized
by prime and Alt-A loans. In addition, we have invested in re-securitizations of
real estate mortgage investment conduit ("Re-REMIC") RMBS and securitizations of
reperforming mortgage loans that we expect to provide attractive risk adjusted
returns. We hold approximately $13.2 million of non-Agency RMBS as of May 31,
2020.
As of March 31, 2020, our holdings of GSE CRTs represented approximately 7% of
our total investment portfolio versus 4% as of December 31, 2019 and 4% as of
March 31, 2019. GSE CRTs are unsecured general obligations of the GSEs that are
structured to provide credit protection to the issuer with respect to defaults
and other credit events within pools of mortgage loans secured by single family
properties that collateralize Agency RMBS issued and guaranteed by the GSEs
("Single Family GSE CRT") or within pools of mortgage loans secured by
multifamily properties that collateralize Agency CMBS issued and guaranteed by
the GSEs ("Multifamily GSE CRT"). The majority of our GSE CRT holdings are
concentrated in 2013 and 2014 vintages, where reference loans have significant
embedded home price appreciation. GSE CRTs have the added benefit of paying a
floating rate coupon that reduces our need to hedge interest rate risk. We hold
approximately $94.7 million of GSE CRTs as of May 31, 2020.
We had funded $25.4 million of a participation interest in a secured loan
collateralized by mortgage servicing rights associated with Fannie Mae, Freddie
Mac, and Ginnie Mae loans as of March 31, 2020. We sold our loan participation
interest on April 1, 2020.
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As of March 31, 2020, we held an investment in one commercial real estate
mezzanine loan that matures in 2021 and has a loan-to-value ratio of
approximately 68.3%. We continue to hold this investment as of the filing date
of this Quarterly Report.
As of March 31, 2020, we held investments in two unconsolidated ventures that
are managed by an affiliate of our Manager. The unconsolidated ventures invest
in our target assets. We continue to hold these investments as of the filing
date of this Quarterly Report.
Portfolio Characteristics
The table below illustrates the vintage distribution of our non-Agency RMBS, GSE
CRT and non-Agency CMBS portfolio as of March 31, 2020 as a percentage of the
fair value:

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


(1)Reflects the year in which the re-securitizations were issued. The vintage
distribution of the securities that collateralize our Re-REMIC investments is
0.4% for 2006, and 99.6% for 2007.
The tables below represent the geographic concentration of the underlying
collateral for our non-Agency RMBS, GSE CRT and non-Agency CMBS portfolio as of
March 31, 2020. The geographic markets that we invest in have been and continue
to be severely impacted by the ongoing COVID-19 pandemic.

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


Financing and Other Liabilities
We have historically used repurchase agreements to finance the majority of our
target assets and expect to use repurchase agreements to finance Agency
investments in the future. Repurchase agreements are generally settled on a
short-term basis, usually from one to six months, and bear interest at rates
that have historically moved in close relationship to LIBOR. As of March 31,
2020, we had entered into repurchase agreements totaling $6.3 billion
(December 31, 2019: $17.5 billion) that were secured by our mortgage-backed and
credit risk transfer securities and an investment in a loan participation
interest. We repaid all of our repurchase agreements as of May 7, 2020 with
proceeds from asset sales and the return of cash margin previously pledged on
our repurchase agreements.
Our wholly-owned subsidiary, IAS Services LLC, is a member of the Federal Home
Loan Bank of Indianapolis ("FHLBI") and has borrowed funds from the FHLBI in the
form of secured loans. As of March 31, 2020, IAS Services LLC had $1.35 billion
in outstanding secured loans that are due by December 2020. As of May 31, 2020,
we reduced the balance of
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our secured loans to $837.5 million. We intend to repay the remaining balance of
our secured loans with proceeds from sales of assets collateralizing the secured
loans. As discussed in Note 5 - "Other Assets," IAS Services LLC is required to
purchase and hold a certain amount of FHLBI stock, which is based, in part, upon
the outstanding principal balance of secured loans from the FHLBI. FHLBI
redeemed a portion of our stock in connection with the repayment of our secured
loans discussed above. The balance of our FHLBI stock is $37.7 million as of the
filing date of this Quarterly Report.
The following table presents the amount of collateralized borrowings outstanding
under repurchase agreements and secured loans as of the end of each quarter, the
average amount outstanding during the quarter and the maximum balance
outstanding during the quarter:
$ in thousands                                             Collateralized 

borrowings under repurchase agreements and secured loans


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



We have committed to invest up to $125.1 million in unconsolidated ventures that
are sponsored by an affiliate of our Manager. As of March 31, 2020, $118.7
million of our commitment to these unconsolidated ventures has been called. We
are committed to fund $6.4 million in additional capital to fund future
investments and cover future expenses should they occur.
Hedging Instruments
We enter into interest rate swap agreements that are designed to mitigate the
effects of increases in interest rates for a portion of our borrowings. Under
these swap agreements, we pay fixed interest rates and receive floating interest
rates indexed off of one- or three-month LIBOR.
We actively manage our swap portfolio by terminating and entering into new swaps
as the size and composition of our investment portfolio changes. During the
three months ended March 31, 2020, we terminated existing swaps with a notional
amount of $107.7 billion and entered into new swaps with a notional amount of
$93.7 billion to hedge repurchase agreement debt associated with purchases of
Agency RMBS and Agency CMBS securities. We terminated all of our remaining
interest rate swaps in March 2020 as we positioned our portfolio in response to
unprecedented market conditions associated with the COVID-19 pandemic. Our
exposure to interest rate risk decreased as we sold Agency assets and repaid
borrowings. We realized a net loss of $904.7 million on interest rate swaps
during the three months ended March 31, 2020 primarily due to falling interest
rates in 2020.
We enter into currency forward contracts to help mitigate the potential impact
of changes in foreign currency exchange rates on investments denominated in
foreign currencies. As of March 31, 2020, we had €20.8 million or $22.7 million
(December 31, 2019: €20.8 million or $23.1 million) of notional amount of
forward contracts denominated in Euro related to our investment in an
unconsolidated venture. During the three months ended March 31, 2020, we settled
currency forward contracts of €20.8 million or $23.1 million (March 31, 2019:
€20.3 million or $23.1 million) in notional amount and realized a net gain of
$484,000 (March 31, 2019: $185,000 net gain).
Capital Activities
On February 6, 2020, we completed a public offering of 20,700,000 shares of
common stock at the price of $16.78 per share. Total net proceeds were
approximately $347.0 million after deducting estimated offering costs.
We may sell up to 17,000,000 shares of our common stock and 7,000,000 shares of
our preferred stock from time to time in at-the-market or privately negotiated
transactions under our equity distribution agreements. We did not sell any
shares under these agreements during the quarter ended March 31, 2020.
On February 18, 2020, we declared the following dividends:
•a dividend of $0.4844 per share of Series B Preferred Stock. On March 24, 2020
we announced that we would delay the payment of this dividend to preserve
liquidity. On May 9, 2020 we announced that we would pay this dividend on
May 22, 2020 to stockholders of record as of the close of business on March 5,
2020; and
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•a dividend of $0.46875 per share of Series C Preferred Stock. On March 24, 2020
we announced that we would delay the payment of this dividend to preserve
liquidity. On May 9, 2020 we announced that we would pay this dividend on
May 22, 2020 to stockholders of record as of the close of business on March 5,
2020.
On March 17, 2020, we declared the following dividends:
•a dividend of $0.50 per share of common stock. On March 24, 2020 we announced
that we would delay the payment of this dividend to preserve liquidity. On May
9, 2020 we announced that we would pay this dividend on June 30, 2020 in a
combination of cash and common shares to stockholders of record as of the close
of business on May 21, 2020; and
•a dividend of $0.4844 per share of Series A Preferred Stock paid. On March 24,
2020 we announced that we would delay the payment of this dividend to preserve
liquidity. On May 9, 2020, we announced that we would pay this dividend on
May 22, 2020 to stockholders of record as of the close of business on April 1,
2020.
On May 9, 2020, we declared the following dividends:
•a dividend of $0.4844 per share of Series B Preferred Stock to be paid on June
29, 2020 to stockholders of record as of the close of business on June 5, 2020;
and
•a dividend of $0.46875 per share of Series C Preferred Stock to be paid on June
29, 2020 to stockholders of record as of the close of business on June 5, 2020.
On June 17, 2020, we declared the following dividends:
•a dividend of $0.02 per share of common stock to be paid on July 28, 2020 to
stockholders of record as of the close of business on July 6, 2020; and
•a dividend of $0.4844 per share of Series A Preferred Stock to be paid on July
27, 2020 to stockholders of record as of the close of business on July 1, 2020.
During the three months ended March 31, 2020, we did not repurchase any shares
of our common stock.
Book Value per Common Share
We calculate book value per common share as follows:
                                                                                       As of
$ in thousands except per share amounts                             March 31, 2020              December 31, 2019
Numerator (adjusted equity):
Total equity                                                               1,410,381                    2,931,899
Less: Liquidation preference of Series A Preferred Stock                    (140,000)                    (140,000)
Less: Liquidation preference of Series B Preferred Stock                    (155,000)                    (155,000)
Less: Liquidation preference of Series C Preferred Stock                    (287,500)                    (287,500)
Total adjusted equity                                                        827,881                    2,349,399

Denominator (number of shares):
Common stock outstanding                                                     164,966                      144,256

Book value per common share                                                     5.02                        16.29


Our book value per common share decreased 69.2% as of March 31, 2020 compared to
December 31, 2019 primarily due to significant interest rate spread widening in
both Agency and non-Agency assets. In particular, premiums over generic
collateral on our Agency MBS specified pools decreased 2 to 4 points, as rapid
deleveraging in the sector, given its relative liquidity, impacted valuations.
In addition, prices of our credit holdings were severely impacted by the lack of
liquidity and uncertainty surrounding the economic impact of the COVID-19
pandemic. Lastly, forced selling in order to fund margin calls was a significant
detriment to book value as sales were executed at distressed levels. "Refer to
Item 3. "Quantitative and Qualitative Disclosures About Market Risk" for
interest rate risk and its impact on fair value.
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Critical Accounting Policies
There have been no significant changes to our critical accounting policies that
are disclosed in our most recent Form 10-K for the year ended December 31, 2019
except as discussed in Note 2 - "Summary of Significant Accounting Polices" to
our condensed consolidated financial statements included in Part I, Item 1 of
this report on Form 10-Q.
Recent Accounting Standards
See Part I, Item 1, Financial Statements Note 2 - "Accounting Pronouncements
Recently Adopted".

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Results of Operations
The table below presents certain information from our condensed consolidated
statements of operations for the three months ended March 31, 2020 and 2019.
                                                                                              Three Months Ended March 31,
$ in thousands, except share data                                                           2020                         2019
Interest Income
Mortgage-backed and credit risk transfer securities                                            185,536                      185,492
Commercial and other loans                                                                       1,163                        1,582
Total interest income                                                                          186,699                      187,074
Interest Expense
Repurchase agreements                                                                           79,042                      101,875
Secured loans                                                                                    6,646                       11,144
Total interest expense                                                                          85,688                      113,019
Net interest income                                                                            101,011                       74,055
Other Income (loss)
Gain (loss) on investments, net                                                               (755,483)                     268,382
Equity in earnings (losses) of unconsolidated ventures                                             170                          692
Gain (loss) on derivative instruments, net                                                    (910,779)                    (201,460)
Realized and unrealized credit derivative income (loss), net                                   (33,052)                       7,884
Net loss on extinguishment of debt                                                              (4,806)                           -
Other investment income (loss), net                                                                803                        1,029
Total other income (loss)                                                                   (1,703,147)                      76,527

Expenses


Management fee - related party                                                                  10,953                        9,534
General and administrative                                                                       3,103                        2,258
Total expenses                                                                                  14,056                       11,792
Net income (loss)                                                                           (1,616,192)                     138,790

Dividends to preferred stockholders                                                             11,107                       11,107
Net income (loss) attributable to common stockholders                                       (1,627,299)                     127,683

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

                                                                                           (10.38)                        1.05
Diluted                                                                                         (10.38)                        1.05
Weighted average number of shares of common stock:
Basic                                                                                      156,771,279                  121,097,686
Diluted                                                                                    156,771,279                  121,109,259



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Interest Income and Average Earning Asset Yields
The table below presents information related to our average earning assets and
earning asset yields for the three months ended March 31, 2020 and 2019.
                                                               Three Months Ended March 31,
$ in thousands                                                    2020                      2019
Average Earning Assets (1):
Agency RMBS:
15 year fixed-rate, at amortized cost                                    232,551           371,228
30 year fixed-rate, at amortized cost                                  8,422,795        11,780,005
Hybrid ARM, at amortized cost                                             35,768           243,813

Agency - CMO, at amortized cost                                          365,936           291,914
Agency CMBS, at amortized cost                                         3,543,594         1,129,227
Non-Agency CMBS, at amortized cost                                     3,552,164         3,361,132
Non-Agency RMBS, at amortized cost                                       751,090         1,084,721
GSE CRT, at amortized cost                                               876,341           808,296

Loan participation interest                                               33,545            54,763
Commercial loans, at amortized cost                                       23,965            27,375
Average earning assets                                                17,837,749        19,152,474
Average Earning Asset Yields (2):
Agency RMBS:
15 year fixed-rate                                                          3.74  %           3.50  %
30 year fixed-rate                                                          3.75  %           3.38  %
Hybrid ARM                                                                  4.35  %           3.48  %
Agency - CMO                                                                3.74  %           3.56  %
Agency CMBS                                                                 3.65  %           3.52  %
Non-Agency CMBS                                                             5.32  %           4.98  %
Non-Agency RMBS                                                             7.17  %           6.71  %
GSE CRT (3)                                                                 3.11  %           3.67  %

Loan participation interest                                                 5.95  %           6.14  %
Commercial loans                                                           10.31  %          11.08  %
Average earning asset yields                                                4.19  %           3.91  %


(1)Average balances for each period are based on weighted month-end average
earning assets.
(2)Average earning asset yields for the period were calculated by dividing
interest income, including amortization of premiums and discounts, by the
average month-end earning assets based on the amortized cost of the investments.
All yields are annualized.
(3)GSE CRT average earning asset yields exclude coupon interest associated with
embedded derivatives on securities not accounted for under the fair value option
that is recorded as realized and unrealized credit derivative income (loss), net
under U.S. GAAP.
Our primary source of income is interest earned on our investment portfolio. We
had average earning assets of approximately $17.8 billion for the three months
ended March 31, 2020 (March 31, 2019: $19.2 billion). Average earning assets
decreased for the three months ended March 31, 2020 primarily due to the sale of
MBS and GSE CRTs for cash proceeds of $16.2 billion as previously discussed in
the Executive Summary section of this Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Our average earning assets for the three months ended March 31, 2020 are not
indicative of our future ability to generate interest income because the sales
referred to above primarily occurred during the latter part of March 2020, and
we sold additional MBS and GSE CRTs with a fair value of $6.2 billion as of
March 31, 2020 for cash proceeds of $5.9 billion between April 1, 2020 and May
31, 2020.
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We earned total interest income of $186.7 million (March 31, 2019: $187.1 million) for the three months ended March 31, 2020. Our interest income includes coupon interest and net premium amortization on MBS and GSE CRTs as well as interest income on commercial and other loans as shown in the table below.


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


MBS and GSE CRT interest income increased $44,000 for the three months ended
March 31, 2020 compared to 2019 primarily due to a $9.7 million increase in
coupon interest reflecting a 28 basis point increase in average earning asset
yields. Average earnings asset yields rose due to purchases of 30 year
fixed-rate Agency RMBS securities at higher yields. Higher coupon interest was
offset by a $9.6 million increase in net premium amortization due to faster
prepayment speeds driven by cuts in the federal funds interest rate over the
past twelve months.
Interest income on our commercial and other loans decreased $419,000 during the
three months ended March 31, 2020 primarily due to principal payments on
commercial loans totaling $7.1 million in 2019.
Prepayment Speeds
Our RMBS and GSE CRT portfolio is subject to inherent prepayment risk primarily
driven by changes in interest rates, which impacts the amount of premium and
discount on the purchase of these securities that is recognized into interest
income. Expected future prepayment speeds on our RMBS and GSE CRT portfolio are
estimated on a quarterly basis. Generally, in an environment of falling interest
rates, prepayment speeds will increase as homeowners are more likely to prepay
their existing mortgage and refinance into a lower borrowing rate. If the actual
prepayment speed during the period is faster than estimated, the amortization on
securities purchased at a premium to par value will be accelerated, resulting in
lower interest income recognized. Conversely, for securities purchased at a
discount to par value, interest income will be reduced in periods where
prepayment speeds were slower than expected. The standard measure of prepayment
speeds is the constant prepayment rate, also known as the conditional prepayment
rate or "CPR". The table below provides the three month constant prepayment rate
for our RMBS and GSE CRTs as of March 31, 2020, December 31, 2019, and March 31,
2019.
                                                                                             As of
                                                                  March 31, 2020            December 31, 2019       March 31, 2019
15 year fixed-rate Agency RMBS                                                16.0                    12.5                   7.1
30 year fixed-rate Agency RMBS                                                11.9                    18.1                   4.9
Hybrid ARM Agency RMBS                                                         1.6                    28.7                  15.7
Non-Agency RMBS                                                               18.4                    17.2                   8.3
GSE CRT                                                                       15.6                    20.1                   6.6
Weighted average CPR                                                          14.2                    18.1                   5.7


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


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


Net premium amortization increased $9.6 million for the three months ended
March 31, 2020 compared to the same period in 2019 primarily due to faster
prepayment speeds on Agency RMBS. Higher premium amortization was partially
offset by discount accretion on purchases of non-Agency CMBS over the last
twelve months.
Our interest income is subject to interest rate risk. Refer to Item 3.
"Quantitative and Qualitative Disclosures about Market Risk" for more
information relating to interest rate risk and its impact on our operating
results.
Interest Expense and Cost of Funds
The table below presents the components of interest expense for the three months
ended March 31, 2020 and 2019:
                                                                                          Three Months Ended March 31,
$ in thousands                                                                           2020                      2019
Interest Expense
Interest expense on repurchase agreement borrowings                                         89,109                  107,726

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

                                                                                 (10,067)                  (5,851)
Repurchase agreements interest expense                                                      79,042                  101,875
Secured loans                                                                                6,646                   11,144

Total interest expense                                                                      85,688                  113,019


We have historically entered into repurchase agreements to finance the majority
of our target assets. These agreements are secured by our mortgage-backed and
credit risk transfer securities. These agreements are generally settled on a
short-term basis, usually from one to six months, and bear interest at rates
that have historically moved in close relationship to LIBOR. At each settlement
date, we typically refinance each repurchase agreement at the market interest
rate at that time.
Our interest expense on repurchase agreement borrowings decreased $18.6 million
for the three months ended March 31, 2020 compared to 2019 due to lower average
borrowings and a lower average cost of funds reflecting decreases in the federal
funds interest rate. Average borrowings decreased primarily due to repayment of
$11.2 billion of repurchase agreements with proceeds from asset sales due to
financial market disruption caused by the COVID-19 pandemic as previously
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations. Average borrowings also decreased due to repayment of
$300.0 million of secured loans in February 2020 due to a scheduled maturity.
Our repurchase agreement interest expense as reported in our condensed
consolidated statement of operations includes amortization of net deferred gains
and losses on de-designated interest rate swaps as summarized in the table
above. Amortization of net deferred gains on de-designated interest rate swaps
decreased our total interest expense by $10.1 million during the three months
ended March 31, 2020 and $5.9 million during the three months ended March 31,
2019. Amounts recorded in AOCI before we discontinued cash flow hedge accounting
for our interest rate swaps are reclassified to interest expense on repurchase
agreements on the condensed consolidated statements of operations as interest is
accrued and paid on the related repurchase agreements over the remaining life of
the interest rate swap agreements. We increased the amount of gains and losses
reclassified as a decrease to interest expense during the three months ended
March 31, 2020 by $4.2 million because it is probable that the original
forecasted repurchase agreement transactions will not occur by the end of the
originally specified time period. During the next twelve months, we estimate
that $19.1 million of net deferred gains on de-designated interest rate swaps
will be reclassified from other comprehensive income and recorded as a decrease
to interest expense.
During the three months ended March 31, 2020, interest expense for our secured
loans decreased $4.5 million compared to the same period in 2019 due to lower
borrowing rates and repayment of $300.0 million of secured loans in February
2020.
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Borrowing rates on our secured loans are based on the three-month FHLB swap rate
plus a spread. For the three months ended March 31, 2020, the weighted average
borrowing rate on our secured loans was 1.83% as compared to 2.70% for the three
months ended March 31, 2019.
Our total interest expense during the three months ended March 31, 2020
decreased $27.3 million from the same period in 2019 primarily due to the $23.1
million decrease in interest expense on repurchase agreements borrowings and
secured loans in the 2020 period as discussed above.
The table below presents information related to our borrowings and cost of funds
for the three months ended March 31, 2020 and 2019:
                                                                                             Three Months Ended March 31,
$ in thousands                                                                             2020                        2019
Average Borrowings(1):
Agency RMBS (2)                                                                             8,521,865                  11,664,156
Agency CMBS                                                                                 3,523,998                   1,074,917
Non-Agency CMBS (2)                                                                         3,049,547                   2,663,941
Non-Agency RMBS                                                                               689,249                     886,554
GSE CRT                                                                                       722,179                     717,482

Loan participation interest                                                                    25,159                      41,072
Total average borrowings                                                                   16,531,997                  17,048,122
Maximum borrowings during the period (3)                                                   23,132,234                  18,474,387
Average Cost of Funds (4):
Agency RMBS (2)                                                                                  2.30  %                     2.59  %
Agency CMBS                                                                                      2.17  %                     2.64  %
Non-Agency CMBS (2)                                                                              2.34  %                     3.24  %
Non-Agency RMBS                                                                                  2.67  %                     3.54  %
GSE CRT                                                                                          2.54  %                     3.49  %

Loan participation interest                                                                      3.52  %                     4.15  %
Cost of funds                                                                                    2.07  %                     2.65  %
Effective cost of funds (non-GAAP measure) (5)                                                   2.02  %                     2.68  %


(1)Average borrowings for each period are based on weighted month-end balances.
(2)Agency RMBS and non-Agency CMBS average borrowings and average cost of funds
include borrowings under repurchase agreements and secured loans.
(3)Amount represents the maximum borrowings at month-end during each of the
respective periods.
(4)Average cost of funds is calculated by dividing annualized interest expense
excluding amortization of net deferred gain (loss) on de-designated interest
rate swaps by our average borrowings.
(5)For a reconciliation of cost of funds to effective cost of funds, see
"Non-GAAP Financial Measures."
Total average borrowings decreased $516.1 million in the three months ended
March 31, 2020 compared to 2019 primarily because we repaid $11.2 billion of
repurchase agreements and $300.0 million of secured loans in the three months
ended March 31, 2020 as discussed above. Our average cost of funds decreased 58
basis points for three months ended March 31, 2020 versus 2019 primarily due to
decreases in the federal funds rate over the past twelve months.
Our average borrowings for the three months ended March 31, 2020 are not
indicative of our future interest expense because we repaid the $11.2 billion of
repurchase agreements referred to above during the latter part of March 2020. In
addition, we repaid the balance of our repurchase agreements on May 7, 2020 and
an additional $512.5 million of secured loans as of April 30, 2020.
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Net Interest Income
The table below presents the components of net interest income for the three
months ended March 31, 2020 and 2019:
                                                                                           Three Months Ended March 31,
$ in thousands                                                                            2020                      2019
Interest Income
Mortgage-backed and credit risk transfer securities                                         185,536                  185,492
Commercial and other loans                                                                    1,163                    1,582
Total interest income                                                                       186,699                  187,074
Interest Expense
Interest expense on repurchase agreement borrowings                                          89,109                  107,726

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

                                                                                  (10,067)                  (5,851)
Repurchase agreements interest expense                                                       79,042                  101,875
Secured loans                                                                                 6,646                   11,144

Total interest expense                                                                       85,688                  113,019
Net interest income                                                                         101,011                   74,055
Net interest rate margin                                                                       2.12  %                  1.26  %


Our net interest income, which equals interest income less interest expense,
totaled $101.0 million (March 31, 2019: $74.1 million) for the three months
ended March 31, 2020. The increase in net interest income for the three months
ended March 31, 2020 was primarily due to a lower cost of funds driven by cuts
in the federal funds interest rate as discussed above.
Our net interest rate margin, which equals the yield on our average assets for
the period less the average cost of funds for the period, was 2.12% (March 31,
2019: 1.26%) for the three months ended March 31, 2020. The increase in net
interest rate margin for the three months ended March 31, 2020 compared to the
same period in 2019 was primarily due to decreases in the federal funds rate
throughout 2019 that had a greater impact on our average cost of funds than on
our average earning asset yields. Our cost of funds on all of our borrowings is
influenced by changes in short term interest rates, whereas approximately 86% of
the Company's investments were fixed rate assets as of March 31, 2020.
Gain (Loss) on Investments, net
The table below summarizes the components of gain (loss) on investments, net for
the three months ended March 31, 2020 and 2019:
                                                                                               Three Months Ended March 31,
$ in thousands                                                                                2020                      2019
Net realized gains (losses) on sale of investments                                               (4,285)                 (11,115)

Impairment of investments the Company intends to sell or more likely than not will be required to sell before recovery of amortized cost basis

                            (78,834)                       -
Other-than-temporary impairment losses                                                                -                   (1,776)

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

                                                                                         (514,503)                 280,039

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

                                                                                   (152,369)                   1,234

Net unrealized gains (losses) on commercial loan and loan participation interest

                                                                                         (5,492)                       -
Total gain (loss) on investments, net                                                          (755,483)                 268,382



As previously discussed, we experienced unprecedented market conditions as a
result of the global COVID-19 pandemic during the three months ended March 31,
2020. To generate liquidity and reduce leverage, we sold MBS and GSE CRTs for
cash proceeds of $16.2 billion (March 31, 2019: $734.8 million) and realized net
losses of $4.3 million (March 31, 2019: net losses of $11.1 million). A portion
of these sales were involuntary liquidations at significantly distressed market
prices as certain of our repurchase agreement counterparties seized and sold our
securities when we were unable to meet margin calls on March 23, 2020.
We recorded $78.8 million of impairment on non-Agency RMBS and CMBS securities
during the three months ended March 31, 2020 because we intended to sell or more
likely than not would be required to sell the securities before recovery of
amortized cost basis. We still held these securities as of March 31, 2020. We
assess our investment securities for credit losses
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and impairment on a quarterly basis. For additional information regarding our
accounting policy for credit losses and impairment, refer to Note 2 - "Summary
of Significant Accounting Policies" of our condensed consolidated financial
statements included in Part I. Item 1. of this Quarterly Report.
We have elected the fair value option for all of our RMBS interest-only
securities, our MBS purchased on or after September 1, 2016 and our GSE CRTs
purchased on or after August 24, 2015. Under the fair value option, changes in
fair value are recognized in income in the condensed consolidated statements of
operations and are reported as a component of gain (loss) on investments, net.
As of March 31, 2020, $5.3 billion (December 31, 2019: $17.4 billion) or 65%
(December 31, 2019: 80%) of our MBS and GSE CRT are accounted for under the fair
value option. Our percentage of MBS and GSE CRTs accounted for under the fair
value option declined as of March 31, 2020 due to sales of securities accounted
for under the fair value option during the three months ended March 31, 2020.
We recorded net unrealized losses on our MBS portfolio accounted for under the
fair value option of $514.5 million in the three months ended March 31, 2020
compared to net unrealized gains of $280.0 million in the three months ended
March 31, 2019. Net unrealized losses in the three months ended March 31, 2020
reflect lower interest rates and wider interest rate spreads on our Agency and
non-Agency assets. We also recorded net unrealized losses on our GSE CRT
portfolio accounted for under the fair value option of $152.4 million in the
three months ended March 31, 2020 compared to net unrealized gains of $1.2
million in the three months ended March 31, 2019. Net unrealized losses in the
three months ended March 31, 2020 reflect declines in valuations due to wider
interest rate spreads.
We recorded an unrealized loss of $3.8 million on our loan participation
interest and an unrealized loss of $1.7 million on our commercial loan in the
three months ended March 31, 2020. We valued our loan participation interest
based on the price that we sold the participation interest for on April 1, 2020.
We valued our commercial loan based upon a valuation from an independent pricing
service.
Equity in Earnings (Losses) of Unconsolidated Ventures
For the three months ended March 31, 2020, we recorded equity in earnings of
unconsolidated ventures of $170,000 (March 31, 2019: equity in earnings of
$692,000). We recorded equity in earnings for the three months ended March 31,
2020 and 2019 primarily due to realized and unrealized gains on the underlying
portfolio investments.
Gain (Loss) on Derivative Instruments, net
Our objectives in using interest rate derivatives are to add stability to
interest expense and to manage our exposure to interest rate movements on our
floating rate repurchase agreements and secured loans. To accomplish these
objectives, we primarily use interest rate derivative instruments, including
interest rate swaps and U.S. Treasury futures contracts as part of our interest
rate risk management strategy.
We also use currency forward contracts to help mitigate the potential impact of
changes in foreign currency exchange rates on our unconsolidated joint venture
investment denominated in Euros.
The tables below summarize our realized and unrealized gain (loss) on derivative
instruments, net for the following periods:






$ in thousands                                                          

Three Months Ended March 31, 2020


            Derivative              Realized gain (loss)           Contractual net                                           Gain (loss) on
         not designated as             on derivative               interest income              Unrealized gain          derivative instruments,
        hedging instrument            instruments, net                (expense)                   (loss), net                      net
Interest Rate Swaps                          (904,704)                       11,924                     (18,532)                     (911,312)

Currency Forward Contracts                        484                             -                          49                           533

Total                                        (904,220)                       11,924                     (18,483)                     (910,779)



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$ in thousands                                                           

Three Months Ended March 31, 2019


            Derivative              Realized gain (loss)           Contractual net                                           Gain (loss) on
         not designated as             on derivative               interest income              Unrealized gain          derivative instruments,
        hedging instrument            instruments, net                (expense)                   (loss), net                      net
Interest Rate Swaps                          (165,884)                        4,509                      12,991                      (148,384)
Futures Contracts                             (66,688)                            -                      12,944                       (53,744)
Currency Forward Contracts                        185                             -                         483                           668

Total                                        (232,387)                        4,509                      26,418                      (201,460)



During the three months ended March 31, 2020, we terminated existing swaps with
a notional amount of $107.7 billion and entered into new swaps with a notional
amount of $93.7 billion to hedge repurchase agreement debt associated with
purchases of Agency RMBS and Agency CMBS securities. We did not have any
interest rate swap contracts as of March 31, 2020. We terminated all of our
remaining interest rate swaps in March 2020 as we positioned our portfolio in
response to unprecedented market conditions associated with the COVID-19
pandemic. Our exposure to interest rate risk decreased as we sold Agency assets
and repaid borrowings. We realized a net loss of $904.7 million for the three
months ended March 31, 2020, respectively, on interest rate swaps primarily due
to falling interest rates.
As of December 31, 2019, we held the following interest rate swaps whereby we
receive interest at a one-month and three-month LIBOR rate:
$ in thousands                                                                                               As of December 31, 2019
                                                                                                 Average Fixed Pay         Average Receive
          Derivative instrument                                      

Notional Amounts                  Rate                     Rate               Average Maturity (Years)
Interest Rate Swaps                                                          14,000,000                     1.47  %                  1.79  %                               5.2



We were not a party to any futures contracts in the three months ended March 31,
2020. During the three months ended March 31, 2019, we settled futures contracts
with a notional amount of $1.7 billion. We realized a net loss of $66.7 million
on the settlement of futures contracts for the three months ended March 31, 2019
due to falling interest rates. Daily variation margin payment for futures is
characterized as settlement of the derivative itself rather than collateral and
is recorded as a realized gain or loss in our condensed consolidated statement
of operations.
Realized and Unrealized Credit Derivative Income (Loss), net
The table below summarizes the components of realized and unrealized credit
derivative income (loss), net for the three months ended March 31, 2020 and
2019.
                                                                                            Three Months Ended March 31,
$ in thousands                                                                              2020                     2019
GSE CRT embedded derivative coupon interest                                                     4,718                  5,350
Gain (loss) on settlement of GSE CRT embedded derivatives                                       2,283                      -
Change in fair value of GSE CRT embedded derivatives                                          (40,053)                 2,534

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

                   (33,052)                 7,884


In the three months ended March 31, 2020, we recorded a decrease of $40.9
million in realized and unrealized credit derivative income (loss), net compared
to the same periods in 2019. The decrease was primarily driven by a decline in
the fair value of our GSE CRT embedded derivatives in the three months ended
March 31, 2020 as asset prices dropped due to spread widening.
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Net Loss on Extinguishment of Debt
As discussed in Note 7 - "Borrowings" of our condensed consolidated financial
statements include in Part I. Item 1. of this report on Form 10-Q, certain of
our counterparties seized and sold securities that we had posted as collateral
for our repurchase agreements between March 23, 2020 and March 31, 2020. We
recorded early termination and legal fees paid to our counterparties that were
associated with the termination of these repurchase agreements as a loss on
extinguishment of debt in our condensed consolidated statement of operations.
Other Investment Income (Loss), net
Our other investment income (loss), net during the three months ended March 31,
2020 and 2019 primarily consists of quarterly dividends from FHLBI stock. We are
required to purchase and hold a certain amount of FHLBI stock, which is based,
in part, upon the outstanding principal balance of secured advances from the
FHLBI. We earn dividend income on our investment in FHLBI stock, and the amount
of our dividend income varies based upon the number of shares that we are
required to own and the dividend declared per share.




Expenses

We incurred management fees of $11.0 million (March 31, 2019: $9.5 million) for
the three months ended March 31, 2020. Management fees increased for the three
months ended March 31, 2020 compared to the same period in 2019 due to a higher
management fee base. Our management fees are calculated quarterly in arrears.
Our management fee will be lower in the three months ended June 30, 2020 because
the majority of realized losses on our derivative contracts and unrealized
losses on our investments due to spread widening did not occur until March 2020.
Realized losses on sales of investments in the three months ended June 30, 2020
will further reduce the management fee base in the three months ended September
30, 2020. Refer to Note 11 - "Related Party Transactions" of our condensed
consolidated financial statements for a discussion of our relationship with our
Manager and a description of how our fees are calculated.
Our general and administrative expenses not covered under our management
agreement amounted to $3.1 million (March 31, 2019: $2.3 million) for the three
months ended March 31, 2020. General and administrative expenses primarily
consist of directors and officers insurance, legal costs, accounting, auditing
and tax services, filing fees, and miscellaneous general and administrative
costs. General and administrative costs were higher for the three months ended
March 31, 2020 compared to the same period in 2019 primarily due to fees paid
for third-party legal and advisory services in connection with navigating market
disruption associated with the COVID-19 pandemic totaling $1.1 million.
Net Income (Loss) attributable to Common Stockholders
For the three months ended March 31, 2020, our net loss attributable to common
stockholders was $1.6 billion (March 31, 2019: $127.7 million net income
attributable to common stockholders) or $10.38 basic and diluted net loss per
average share available to common stockholders (March 31, 2019: $1.05 basic and
diluted net income per average share available to common stockholders). The
change in net income (loss) attributable to common stockholders was primarily
due to (i) net losses on derivative instruments of $910.8 million in the 2020
period compared to net losses on derivative instruments of $201.5 million in the
2019 period; (ii) a net loss on investments of $755.5 million in the 2020 period
compared to a net gains on investments of $268.4 million in the 2019 period;
(iii) credit derivative net losses of $33.1 million in the 2020 period compared
to credit derivative net income of $7.9 million in the 2019 period; and (iv) a
$27.0 million increase in net interest income.
For further information on the changes in net gains (loss) on derivative
instruments, net gain (loss) on investments, realized and unrealized credit
derivative income (loss), net and net interest income, see preceding discussion
under "Gain (Loss) on Derivative Instruments, net," "Gain (Loss) on Investments,
net," "Realized and Unrealized Credit Derivative Income (Loss), net," and "Net
Interest Income."
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Non-GAAP Financial Measures
We have historically used the following non-GAAP financial measures to analyze
the Company's operating results and believe these financial measures are useful
to investors in assessing our performance as further discussed below:
•core earnings (and by calculation, core earnings per common share),
•effective interest income (and by calculation, effective yield),
•effective interest expense (and by calculation, effective cost of funds),
•effective net interest income (and by calculation, effective interest rate
margin), and
•repurchase agreement debt-to-equity ratio.
The most directly comparable U.S. GAAP measures are:
•net income (loss) attributable to common stockholders (and by calculation,
basic earnings (loss) per common share),
•total interest income (and by calculation, earning asset yields),
•total interest expense (and by calculation, cost of funds),
•net interest income (and by calculation, net interest rate margin), and
•debt-to-equity ratio.
We are not presenting core earnings for the three months ended March 31, 2020
("first quarter 2020 core earnings") because core earnings excludes the material
adverse impact that the market disruption caused by the COVID-19 pandemic has
had on our financial condition. In addition, first quarter 2020 core earnings
are not indicative of the reduced earnings potential of our current investment
portfolio. We intend to resume reporting core earnings when its presentation
provides a useful measure of our portfolio's earning capacity.

We are also not presenting a repurchase agreement debt-to-equity ratio because
this ratio as of March 31, 2020 is not indicative of how we have historically
managed our business prior to the market disruption caused by the COVID-19
pandemic. In addition, we do not have any repurchase agreements as of the date
of this release.
The non-GAAP financial measures used by management should be analyzed in
conjunction with U.S. GAAP financial measures and should not be considered
substitutes for U.S. GAAP financial measures. In addition, the non-GAAP
financial measures may not be comparable to similarly titled non-GAAP financial
measures of our peer companies.
Effective Interest Income / Effective Yield / Effective Interest Expense /
Effective Cost of Funds / Effective Net Interest Income / Effective Interest
Rate Margin
We calculate effective interest income (and by calculation, effective yield) as
U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon
interest that is recorded as realized and unrealized credit derivative income
(loss), net. We include our GSE CRT embedded derivative coupon interest in
effective interest income because GSE CRT coupon interest is not accounted for
consistently under U.S. GAAP. We account for GSE CRTs purchased prior to August
24, 2015 as hybrid financial instruments, but we have elected the fair value
option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP,
coupon interest on GSE CRTs accounted for using the fair value option is
recorded as interest income, whereas coupon interest on GSE CRTs accounted for
as hybrid financial instruments is recorded as realized and unrealized credit
derivative income (loss). We add back GSE CRT embedded derivative coupon
interest to our total interest income because we consider GSE CRT embedded
derivative coupon interest a current component of our total interest income
irrespective of whether we elected the fair value option for the GSE CRT or
accounted for the GSE CRT as a hybrid financial instrument.
We calculate effective interest expense (and by calculation, effective cost of
funds) as U.S. GAAP total interest expense adjusted for contractual net interest
income (expense) on our interest rate swaps that is recorded as gain (loss) on
derivative instruments, net and the amortization of net deferred gains (losses)
on de-designated interest rate swaps that is recorded as repurchase agreements
interest expense. We view our interest rate swaps as an economic hedge against
increases in future market interest rates on our floating rate borrowings. We
add back the net payments we make on our interest rate swap agreements to our
total U.S. GAAP interest expense because we use interest rate swaps to add
stability to interest expense. We exclude the amortization of net deferred gains
(losses) on de-designated interest rate swaps from our calculation of effective
interest expense because we do not consider the amortization a current component
of our borrowing costs.
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We calculate effective net interest income (and by calculation, effective
interest rate margin) as U.S. GAAP net interest income adjusted for contractual
net interest income (expense) on our interest rate swaps that is recorded as
gain (loss) on derivative instruments, amortization of net deferred gains
(losses) on de-designated interest rate swaps that is recorded as repurchase
agreements interest expense and GSE CRT embedded derivative coupon interest that
is recorded as realized and unrealized credit derivative income (loss), net.
We believe the presentation of effective interest income, effective yield,
effective interest expense, effective cost of funds, effective net interest
income and effective interest rate margin measures, when considered together
with U.S. GAAP financial measures, provide information that is useful to
investors in understanding our borrowing costs and operating performance.
The following tables reconcile total interest income to effective interest
income and yield to effective yield for the following periods:
                                                                                                   Three Months Ended March 31,
                                                                             2020                                                                               2019
$ in thousands                                           Reconciliation    

        Yield/Effective Yield             Reconciliation                Yield/Effective Yield
Total interest income                                             186,699                           4.19  %                    187,074                                 3.91  %
Add: GSE CRT embedded derivative coupon interest
recorded as realized and unrealized credit
derivative income (loss), net                                       4,718                           0.10  %                      5,350                                 0.11  %
Effective interest income                                         191,417                           4.29  %                    192,424                                 4.02  %





Our effective interest income decreased $1.0 million in the three months ended
March 31, 2020 versus the same period in 2019 due to lower average earning
assets. Our average earning assets decreased to $17.8 billion for the three
months ended March 31, 2020 from $19.2 billion primarily because we sold MBS and
GSE CRTs in March 2020 for cash proceeds of $16.2 billion due to disruption in
the financial markets caused by the COVID-19 pandemic as previously discussed.
The following tables reconcile total interest expense to effective interest
expense and cost of funds to effective cost of funds for the following periods.
                                                                                          Three Months Ended March 31,
                                                                           2020                                                                     2019
                                                                                     Cost of Funds /                                        Cost of Funds /
                                                                                    Effective Cost of                                      Effective Cost of
$ in thousands                                            Reconciliation                  Funds                  Reconciliation                  Funds
Total interest expense                                              85,688                     2.07  %                    113,019                   

2.65 % Add (Less): Amortization of net deferred gain (loss) on de-designated interest rate swaps

                                10,067                     0.24  %                      5,851                    0.14  %
Add (Less): Contractual net interest expense
(income) on interest rate swaps recorded as gain
(loss) on derivative instruments, net                              (11,924)                   (0.29) %                     (4,509)                  (0.11) %
Effective interest expense                                          83,831                     2.02  %                    114,361                    2.68  %





Our effective interest expense and effective cost of funds decreased during the
three months ended March 31, 2020 compared to the same period in 2019 primarily
due to lower interest expense paid on our repurchase agreements as well as
higher net interest income earned on our interest rate swaps. We paid interest
expense of $85.7 million during the three months ended March 31, 2020 compared
to $113.0 million for the same period in 2019 due to lower average borrowings
and a lower federal funds target interest rate. We earned contractual net
interest income on interest rate swaps of $11.9 million during the three months
ended March 31, 2020 compared to $4.5 million for the same period in 2019. Our
higher contractual net interest income on interest rate swaps was driven by
falling interest rates. For further information on interest expense and cost of
funds, see the preceding discussion under "Interest Expense and Cost of Funds".
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The following tables reconcile net interest income to effective net interest
income and net interest rate margin to effective interest rate margin for the
following periods.
                                                                                          Three Months Ended March 31,
                                                                           2020                                                                     2019
                                                                                                                                           Net Interest Rate
                                                                                    Net Interest Rate                                          Margin /
                                                                                    Margin / Effective                                         Effective
                                                                                      Interest Rate                                          Interest Rate
$ in thousands                                            Reconciliation                  Margin                 Reconciliation                 Margin
Net interest income                                                101,011                     2.12  %                     74,055                   

1.26 % Add (Less): Amortization of net deferred (gain) loss on de-designated interest rate swaps

                               (10,067)                   (0.24) %                     (5,851)                  (0.14) %
Add: GSE CRT embedded derivative coupon interest
recorded as realized and unrealized credit
derivative income (loss), net                                        4,718                     0.10  %                      5,350                    0.11  %
Add (Less): Contractual net interest income
(expense) on interest rate swaps recorded as gain
(loss) on derivative instruments, net                               11,924                     0.29  %                      4,509                    0.11  %
Effective net interest income                                      107,586                     2.27  %                     78,063                    1.34  %





Effective net interest income and effective interest rate margin for the three
months ended March 31, 2020 increased from the same period in 2019 primarily due
to lower average borrowings, lower effective interest expense driven by cuts in
the federal funds interest rate and higher contractual net interest income on
interest rate swaps as previously discussed.

Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements,
including ongoing commitments to pay dividends, fund investments, repay
borrowings and fund other general business needs. Our primary sources of funds
for liquidity consist of the net proceeds from our common and preferred equity
offerings, net cash provided by operating activities, proceeds from repurchase
agreements and other financing arrangements and future issuances of equity
and/or debt securities.
The COVID-19 pandemic-driven disruptions in the real estate, mortgage and
financial markets have negatively affected and are expected to continue to
negatively affect our liquidity. Under the terms of our repurchase agreements
and secured loans, our lenders have the contractual right to mark the underlying
securities that we post as collateral to fair value as determined in their sole
discretion. In addition, our lenders have the contractual right to increase the
"haircut", or percentage amount by which collateral value must exceed the amount
of borrowings, as market conditions become more volatile. As a result of
significant spread widening in both Agency and non-Agency securities in March
2020, valuations of our portfolio assets declined sharply in a short period of
time, leading to an exceptional increase in the frequency and magnitude of
margin calls. Additionally, our lenders raised required haircuts on our
collateral for new repurchase agreements, driving further liquidity needs. We
sold portfolio assets in order to generate liquidity, in many cases at
significantly distressed market prices. These events have required us to
maintain higher levels of cash and unencumbered assets. See Part I. Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Part II. Other Information - Item 1A. Risk Factors in this
Quarterly Report for more information on how the COVID-19 pandemic has impacted
and may continue to impact our liquidity and capital resources.
We held cash, cash equivalents and restricted cash of $365.0 million at
March 31, 2020 (March 31, 2019: $83.5 million). As previously discussed, we
increased our cash, cash equivalents and restricted cash balances at March 31,
2020 to improve our liquidity in light of market disruption created by the
COVID-19 pandemic. Our operating activities provided net cash of $110.0 million
for the three months ended March 31, 2020 (March 31, 2019: $68.4 million).
Our investing activities provided net cash of $11.6 billion in the three months
ended March 31, 2020 compared to net cash used by investing activities of $3.5
billion in the three months ended March 31, 2019. Our primary source of cash
from investing activities for the three months ended March 31, 2020 was proceeds
from sales of MBS and GSE CRTs of $16.2 billion (March 31, 2019: $734.8 million)
to improve liquidity. We also generated $636.5 million from principal payments
of MBS and GSE CRTs during the three months ended March 31, 2020 (March 31,
2019: $300.2 million). Prior to disruption in the financial markets caused by
the COVID-19 pandemic, we invested $4.4 billion in MBS and GSE CRTs during the
three months ended March 31, 2020 (2019: $4.3 billion). We used cash of $904.2
million to terminate derivative contracts in the three months ended March 31,
2020 (March 31, 2019: $232.4 million) as we sold our Agency securities and our
sensitivity to interest rates decreased.
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Our financing activities used net cash of $11.6 billion for the three months
ended March 31, 2020 primarily because we repaid our repurchase agreement
borrowings with proceeds from asset sales (2019: net cash provided by financing
activities of $3.4 billion). We repaid net repurchase agreement borrowing of
$11.2 billion (March 31, 2019: net proceeds provided $3.2 billion). In addition,
we repaid $300.0 million of secured loans from the FHLBI upon their maturity on
February 11, 2020. We also used cash of $74.8 million for the three months ended
March 31, 2020 (March 31, 2019: $58.0 million) to pay dividends. Proceeds from
issuance of common stock provided $347.3 million for the three months ended
March 31, 2020 (March 31, 2019: $259.0 million).
As of March 31, 2020, the average margin requirement (weighted by borrowing
amount), or the percentage amount by which the collateral value must exceed the
loan amount (also referred to as the "haircut") under our repurchase agreements
was 5.2% for Agency RMBS, 5.4% for Agency CMBS, 17.1% for non-Agency RMBS, 20.7%
for GSE CRT and 21.0% for non-Agency CMBS. Across our repurchase agreement
facilities, the haircuts ranged from a low of 5.0% to a high of 8.0% for Agency
RMBS, a low of 5.0% to a high of 10.0% for Agency CMBS, a low of 8.0% to a high
of 35.0% for non-Agency RMBS, a low of 13.0% to a high of 50.0% for GSE CRT and
a low of 10.0% to a high of 40.0% for non-Agency CMBS. Our repurchase agreement
counterparties increased haircuts during the three months ended March 31, 2020
as financial conditions deteriorated and the fair value of our securities became
more difficult to determine.
Forward-Looking Statements Regarding Liquidity
As previously discussed, we repaid all of our repurchase agreement borrowings on
May 7, 2020 and reduced the balance of our secured loans from $1.35 billion at
March 31, 2020 to $837.5 million as of May 31, 2020.
As of May 31, 2020, our investment portfolio is primarily composed of credit
assets that are financed by FHLBI. Our secured loans are due by December 2020,
and we intend to repay FHLBI with proceeds from sales of assets that are
currently collateralizing our secured loans.
We have approximately $540 million of unencumbered securities as of May 31, 2020
and unrestricted cash of $272.5 million. We intend to finance the purchase of
new Agency investments with a moderate amount of repurchase agreement borrowings
or other financing arrangements. We will determine the amount of leverage on new
investments based upon the type of investment and market conditions at the time
of investment.
Based upon our current portfolio, existing borrowing arrangements and
anticipated proceeds from sales of assets that are currently collateralizing our
secured loans, we believe that cash flow from operations, and available
borrowing capacity will be sufficient to enable us to meet anticipated
short-term (one year or less) liquidity requirements to fund our investment
activities, pay fees under our management agreement, fund our required
distributions to stockholders and fund other general corporate expenses.
Our ability to meet our long-term (greater than one year) liquidity and capital
resource requirements will be subject to obtaining additional debt financing. We
may increase our capital resources by obtaining long-term credit facilities or
through public or private offerings of equity or debt securities, possibly
including classes of preferred stock, common stock, senior or subordinated notes
and convertible notes. Such financing will depend on market conditions for
capital raises and our ability to invest such offering proceeds. If we are
unable to renew, replace or expand our sources of financing on substantially
similar terms, it may have an adverse effect on our business and results of
operations.
Contractual Obligations
We have entered into an agreement with our Manager under which our Manager is
entitled to receive a management fee and the reimbursement of certain operating
expenses incurred on our behalf. The management fee is calculated and payable
quarterly in arrears in an amount equal to 1.50% of our stockholders' equity,
per annum. Refer to Note 11 - "Related Party Transactions" of our condensed
consolidated financial statements for additional information on how our
management fee is calculated. Our Manager uses the proceeds from its management
fee in part to pay compensation to its officers and personnel who,
notwithstanding that certain of those individuals are also our officers, receive
no cash compensation directly from us. We are required to reimburse our Manager
for operating expenses related to us incurred by our Manager, including certain
salary expenses and other expenses relating to legal, accounting, due diligence
and other services. Our reimbursement obligation is not subject to any dollar
limitation. Refer to Note 11 - "Related Party Transactions" of our condensed
consolidated financial statements for details of our reimbursements to our
Manager.
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As of March 31, 2020, we had the following contractual obligations:


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

Repurchase agreements (1)                          6,287,746                 6,287,746                       -                       -                         -
Secured loans (2)                                  1,350,000                   100,000                       -                       -                 1,250,000
Interest expense on repurchase agreements
(3)                                                   11,596                    11,596                       -                       -                 

-


Interest expense on secured loans (2) (3)             84,800                    33,343                  30,936                  19,594                       927
Total (4)                                          7,734,142                 6,432,685                  30,936                  19,594                 1,250,927



(1)We repaid all of our repurchase agreements as of May 7, 2020.
(2)The FHLBI modified the terms of our secured loans in the second quarter of
2020 as discussed in Note 15 - "Subsequent Events". The balance of our secured
loans is due by December 2020.
(3)Interest expense is calculated based on variable rates in effect at March 31,
2020.
(4)Excluded from total contractual obligations are the amounts due to our
Manager under the management agreement, as those obligations do not have fixed
and determinable payments.
The above table does not include total commitments of approximately $510.2
million to fund the purchase of Agency CMBS securities because those securities
are reported as an investment related payable in our condensed consolidated
balance sheet as of March 31, 2020. We have sold our Agency CMBS holdings as of
the filing date of this Quarterly Report.
Off-Balance Sheet Arrangements
We have committed to invest up to $125.1 million in unconsolidated ventures that
are sponsored by an affiliate of our Manager. As of March 31, 2020, $118.7
million of our commitment to these unconsolidated ventures had been called. We
are committed to fund $6.4 million in additional capital to fund future
investments and cover future expenses should they occur.
As of March 31, 2020, we had an unfunded commitment on a loan participation
interest in a secured loan of $49.6 million. We sold our loan participation
interest on April 1, 2020 and no longer have any future financing commitments
related to this loan participation interest.
Dividends
To maintain our qualification as a REIT, U.S. federal income tax law generally
requires that we distribute at least 90% of our REIT taxable income annually,
determined without regard to the deduction for dividends paid and excluding net
capital gains. We must pay tax at regular corporate rates to the extent that we
annually distribute less than 100% of our taxable income. Before we pay any
dividend, whether for U.S. federal income tax purposes or otherwise, we must
first meet both our operating requirements and debt service on our repurchase
agreements and other debt payable. If our cash available for distribution is
less than our taxable income, we could be required to sell assets or borrow
funds to make cash distributions, or we may make a portion of the required
distribution in the form of a taxable stock distribution or distribution of debt
securities.
As discussed above, our distribution requirements are based on REIT taxable
income rather than U.S. GAAP net income. The primary differences between our
REIT taxable income and U.S. GAAP net income are: (i) unrealized gains and
losses on investments that we have elected the fair value option for that are
included in current U.S. GAAP income but are excluded from taxable income until
realized or settled; (ii) gains and losses on derivative instruments that are
included in current U.S. GAAP net income but are excluded from taxable income
until realized; and (iii) temporary differences related to amortization of
premiums and discounts on investments. For additional information regarding the
characteristics of our dividends, refer to Note 12 - "Stockholders' Equity" of
our annual report on Form 10-K for the year ended December 31, 2019.
Inflation
Virtually all of our assets and liabilities are sensitive to interest rates. As
a result, interest rates and other factors influence our performance far more
than inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates.
Unrelated Business Taxable Income
We have not engaged in transactions that would result in a portion of our income
being treated as unrelated business taxable income.
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Exposure to Financial Counterparties
We historically finance a substantial portion of our investment portfolio
through repurchase agreements. Under these agreements, we pledge assets from our
investment portfolio as collateral. Additionally, certain counterparties may
require us to provide cash collateral in the event the market value of the
assets declines to maintain a contractual repurchase agreement collateral ratio.
If a counterparty were to default on its obligations, we would be exposed to
potential losses to the extent the fair value of collateral pledged by us to the
counterparty including any accrued interest receivable on such collateral
exceeded the amount loaned to us by the counterparty plus interest due to the
counterparty.
As of March 31, 2020, two counterparties held collateral that exceeded the
amounts borrowed under the related repurchase agreements by more than $70.5
million, or 5% of our stockholders' equity. We repaid all of our repurchase
agreement borrowings in May 2020 and do not have any repurchase agreement
borrowings as of the filing date of this Quarterly Report.
The following table summarizes our exposure to counterparties by geographic
concentration as of March 31, 2020.
                                                                                                Repurchase Agreement
$ in thousands                                     Number of Counterparties                          Financing                                Exposure
North America                                                          10                                3,763,424                                440,519
Europe (excluding United Kingdom)                                       5                                1,140,260                                137,350
Asia                                                                    3                                  447,803                                 43,529
United Kingdom                                                          4                                  936,259                                115,482
Total                                                                  22                                6,287,746                                736,880



Other Matters
We believe that we satisfied each of the asset tests in Section 856(c)(4) of the
Internal Revenue Code of 1986, as amended (the "Code") for the period ended
March 31, 2020, and that our proposed method of operation will permit us to
satisfy the asset tests, gross income tests, and distribution and stock
ownership requirements for our taxable year that will end on December 31, 2020.
At all times, we intend to conduct our business so that neither we nor our
Operating Partnership nor the subsidiaries of our Operating Partnership are
required to register as an investment company under the 1940 Act. If we were
required to register as an investment company, then our use of leverage would be
substantially reduced. Because we are a holding company that conducts our
business through our Operating Partnership and the Operating Partnership's
wholly-owned or majority-owned subsidiaries, the securities issued by these
subsidiaries that are excepted from the definition of "investment company" under
Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other
investment securities the Operating Partnership may own, may not have a combined
value in excess of 40% of the value of the Operating Partnership's total assets
(exclusive of U.S. government securities and cash items) on an unconsolidated
basis, which we refer to as the 40% test. This requirement limits the types of
businesses in which we are permitted to engage in through our subsidiaries. In
addition, we believe neither we nor the Operating Partnership are considered an
investment company under Section 3(a)(1)(A) of the 1940 Act because they do not
engage primarily or hold themselves out as being engaged primarily in the
business of investing, reinvesting or trading in securities. Rather, through the
Operating Partnership's wholly-owned or majority-owned subsidiaries, we and the
Operating Partnership are primarily engaged in the non-investment company
businesses of these subsidiaries. IAS Asset I LLC and certain of the Operating
Partnership's other subsidiaries that we may form in the future rely upon the
exclusion from the definition of "investment company" under the 1940 Act
provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate." This exclusion
generally requires that at least 55% of each subsidiary's portfolio be comprised
of qualifying assets and at least 80% be comprised of qualifying assets and real
estate-related assets (and no more than 20% comprised of miscellaneous assets).
("percentage tests"). The SEC staff has issued a "no-action" letter in which it
confirmed that it would not recommend enforcement action if an issuer continues
to rely on the exclusion provided by Section 3(c)(5)(C) of the 1940 Act if the
issuer does not meet the percentage tests if: (1) the inability to meet those
tests is the result of the sale of an underlying asset; (2) proceeds from the
sale are invested in government securities, certificates of deposit, or other
securities appropriate for the purpose of preserving value pending the
investment of the proceeds in assets that meet the percentage tests; and (3) the
issuer intends to purchase assets that meet the percentage tests as soon as
possible but generally within one year. (Medidentic Mortgage Investors, SEC
No-Action Letter (May 23, 1984)). In light of this analysis, we believe that as
of March 31, 2020, we conducted our business so as not to be regulated as an
investment company under the 1940 Act.
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