# CHIMERA INVESTMENT CORP (CIM) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CHIMERA INVESTMENT CORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1409493/000162828022003020/cim-20211231.htm
Accession: 0001628280-22-003020
Filing date: 2022-02-17
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CIM/
All MD&A years: /company/CIM/mda/
Next year: /company/CIM/mda/fy2022/ (FY 2022)

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes to those statements included in Item 15 of this 2021 Form 10-K. The discussion may contain certain forward-looking statements that involve risks and uncertainties. Forward-looking statements are those that are not historical in nature. As a result of many factors, such as those set forth under “Risk Factors” in this 2021 Form 10-K, our actual results may differ materially from those anticipated in such forward-looking statements.

This section of the 2021 Form 10-K generally discusses 2021 and 2020 items and year-to year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this 2021 Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Executive Summary

We are a publicly traded REIT that is primarily engaged in the business of investing directly or having a beneficial interest in a diversified portfolio of mortgage assets, including residential mortgage loans, Agency RMBS, Non-Agency RMBS, Agency CMBS, and other real estate-related assets. We use leverage to increase returns while managing the difference or spread between longer duration assets and shorter duration financing. Our principal business objective is seeking to provide an opportunity for stockholders to realize attractive risk-adjusted returns through the generation of distributable income and through asset performance linked to residential mortgage credit fundamentals. We selectively invest in residential mortgage assets with a focus on credit analysis, projected prepayment rates, interest rate sensitivity and expected return.

We currently focus our investment activities primarily on acquiring residential mortgage loans, Non-Agency RMBS and Agency mortgage-backed securities, or MBS. At December 31, 2021, based on the fair value of our interest earning assets, approximately 82% of our investment portfolio was residential mortgage loans, 12% of our investment portfolio was Non-Agency RMBS, and 6% of our investment portfolio was Agency MBS. At December 31, 2020, based on the fair value of our interest earning assets, approximately 77% of our investment portfolio was residential mortgage loans, 13% of our investment portfolio was Non-Agency RMBS, and 10% of our investment portfolio was Agency MBS.

We use leverage to seek to increase our potential returns and to finance the acquisition of our assets. We expect to finance our investments using a variety of financing sources, including securitizations, warehouse facilities and repurchase agreements. We may seek to manage our debt and interest rate risk by utilizing interest rate hedges, such as interest rate swaps, caps, options and futures to reduce the effect of interest rate fluctuations related to our financing sources. As of December 31, 2021, we did not own any interest rate hedges.

Our investment strategy is intended to take advantage of opportunities in the current interest rate and credit environment. We update the execution of our strategy to changing market conditions by shifting our asset allocations across various asset classes as interest rates and credit cycles change over time. We expect to take a long-term view of assets and liabilities.

Market Conditions and our Strategy

2021 was a year of uncertainty and anticipation, and of hopes for a return to a degree of normalcy following the onset of the COVID-19 pandemic in 2020. A new administration pursued larger economic stimulus, helping support and propel asset price, record equity market valuations, and increases in personal disposable income. Still, the recovery would be accompanied by labor shortages, supply chain issues and rising inflation. Prices increased especially rapidly in areas such as food and energy, as the US Consumer Price Index jumped 6.8% from a year-earlier and the highest level in nearly four decades. Inflationary pressures came to dominate the overriding Federal Reserve focus later in the year.

Over the year, many investors have gone further out on the risk curve given the historically low level of yields. As a result, credit spreads across all sectors tightened substantially over the year, with a slight moderation at the end of the year. Structured products, including Mortgages (loans and securities), CMBS and Asset Backed Securities or, ABS, benefited from the spread tightening and outperformed for the year.

Mortgages rates remained low, sub 3% for the better part of the year leading to higher prepayments for the year. Mortgage originations for both purchase and refinance activity were at record highs for the first half of the year, given rapid housing price appreciation, substantial purchase activity and low inventory levels.

Strong origination volumes and favorable spread conditions lead to an elevated pace of Prime Jumbo, Agency Eligible Investor, Seasoned Re-Performing, Non-Performing and Non-Qualified Mortgage loans securitizations during the year.

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The fourth quarter of 2021 saw a substantial change in Federal Reserve policy statements with regards to inflation expectations. The tone switched from ‘transitory inflation’ to more ‘persistent inflation’ and as a result, forward interest rates moved substantially higher over the quarter. Supply chain issues, tight labor conditions, as well as rapid increases in commodity prices contributed to inflationary pressures. Mortgage rates also moved higher and agency spreads widened with the expectation of reduced Fed mortgage buying. Mortgage credit spreads, however, continued to remain at record tight levels given strong housing fundamentals driven by the double-digit home price appreciation.

We took advantage of the low rate environment and strong demand for securitized debt to call thirteen outstanding loan securitizations and issued ten new loan securitizations. The average advance rate on the newly issued securitizations was 84% with the average cost of debt around 2.1%, a reduction in the cost of debt of 2.3% from 4.4.% on the previously called debt.

During the fourth quarter we remained active in securitization issuance and issued two new securitizations. On October 4, 2021, we sponsored CIM 2021-R6, a $354 million securitization of seasoned re-performing residential mortgage loans. Securities issued by CIM 2021-R6, with an aggregate balance of approximately $336 million were sold in a private placement to institutional investors. These senior securities represented approximately 95% of the capital structure. We retained subordinate interests in securities with an aggregate balance of approximately $18 million and certain interest-only securities. We also retained an option to call the securitized mortgage loans at any time beginning in September 2026. Our average cost of debt of this securitization is 1.5%. In addition, on November 4, 2021, we sponsored CIM 2021-NR4, a $168 million securitization of seasoned non-REMIC eligible residential mortgage loans. Securities issued by CIM 2021-NR4, with an aggregate balance of approximately $126 million, were sold in a private placement to institutional investors. These senior securities represent approximately 75% of the capital structure. We retained subordinate interest in securities with an aggregate balance of approximately $42 million. We also retained an option to call the securitized mortgage loans at any time beginning in November 2022.

In addition to the RPL/NPL securitizations described above, during the year we completed three prime jumbo securitizations with a total issuance size of $1.2 billion and one agency-eligible investor loan securitization totaling $435 million.

Our investment activity remained robust, especially during the second half of the year. During the year, in total, we committed to acquiring $3.2 billion in residential mortgage loans comprised of $1.3 billion in seasoned re-performing loans, $318 million in business purpose loans, $1.2 billion of prime jumbo loans and $435 million of agency eligible investor loans.

Delinquency rates have continued to drop as economic conditions stabilize and the unemployment rates decrease. Despite improving market conditions, there is still significant uncertainty and risks related to the COVID-19 pandemic and the risk of new variants. See “Risk Factors” in Part I, Item 1A, included elsewhere in this 2021 Form 10-K for additional details on the COVID-19 pandemic's impact on our business. In particular, our residential mortgage loans and non-Agency MBS are subject to significant credit risk, and it is unclear how the conditions created by the COVID-19 pandemic may impact the credit quality of these assets over time.

We have been working remotely since March 2020 and expect that to continue. We have the technology in place for all employees to work remotely with limited change in normal working patterns. We have exercised our business continuity plans effectively to date, with limited operational impact.

The re-securitization activity described earlier added to our liquidity as the advance rates provided by the buyer of the senior debt is higher. Overall, proceeds from new securitizations less payment of debt on called securitizations resulted in a net cash inflow of $911 million during 2021. We were able to use some of the additional liquidity to pay down secured financing further reducing our interest rate risk and exposure to mark-to-market financing. In addition, during the year $52 million of convertible debt reflected as Long-Term Debt on our Balance sheet was extinguished through a combination of cash and stock settlement.

On October 30, 2021, all 5,800,000 issued and outstanding shares of our Series A Cumulative Redeemable Preferred

Stock, or Series A Preferred Stock, with an outstanding liquidation preference of $145 million became callable at a

redemption price equal to the liquidation preference plus accrued and unpaid dividends through, but not including, the

redemption date. The dividend rate on shares of Series A Preferred Stock is 8.00% per annum.

As a result of our improved liquidity position and strong portfolio returns during the year, we increased our dividends by 10% to $0.33 as of the second quarter. Our book value per common share was $11.84 as of December 31, 2021, down from $12.36 as of December 31, 2020. Book value decreased as a result of higher short end rate and slightly wider credit spreads. Our book value is based on December 31, 2021, issued and outstanding common shares.

Business Operations

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Net Income (Loss) Summary

The table below presents our net income (loss) on a GAAP basis for the years ended December 31, 2021, 2020 and 2019.

[[GREPCENT_TABLE]]
[["Net Income (Loss)"],["(dollars in thousands, except share and per share data)"],["(unaudited)"],["","","","For the Year Ended"],["","","","","","December 31, 2021","December 31, 2020","December 31, 2019"],["Net interest income:"],["Interest income (1)","","","","","$","937,546","","$","1,030,250","","$","1,361,110"],["Interest expense (2)","","","","","326,628","","516,181","","758,814"],["Net interest income","","","","","610,918","","514,069","","602,296"],["Increase (decrease) in provision for credit losses","","","","","33","","180","","\u2014"],["Net other-than-temporary credit impairment losses","","","","","\u2014","","\u2014","","(4,853)"],["Other investment gains (losses):"],["Net unrealized gains (losses) on derivatives","","","","","\u2014","","201,000","","(106,209)"],["Realized gains (losses) on terminations of interest rate swaps","","","","","\u2014","","(463,966)","","(359,726)"],["Net realized gains (losses) on derivatives","","","","","\u2014","","(41,086)","","(34,423)"],["Net gains (losses) on derivatives","","","","","\u2014","","(304,052)","","(500,358)"],["Net unrealized gains (losses) on financial instruments at fair value","","","","","437,357","","(110,664)","","409,634"],["Net realized gains (losses) on sales of investments","","","","","45,313","","166,946","","20,360"],["Gains (losses) on extinguishment of debt","","","","","(283,556)","","(54,418)","","9,318"],["Total other gains (losses)","","","","","199,114","","(302,188)","","(61,046)"],["Other expenses:"],["Compensation and benefits","","","","","46,823","","44,811","","48,880"],["General and administrative expenses","","","","","22,246","","22,914","","23,915"],["Servicing and asset manager fees","","","","","36,555","","39,896","","38,930"],["Transaction expenses","","","","","29,856","","15,068","","10,928"],["Total other expenses","","","","","135,480","","122,689","","122,653"],["Income (loss) before income taxes","","","","","674,519","","89,012","","413,744"],["Income taxes","","","","","4,405","","158","","193"],["Net income (loss)","","","","","$","670,114","","$","88,854","","$","413,551"],["Dividends on preferred stock","","","","","73,764","","73,750","","72,704"],["Net income (loss) available to common shareholders","","","","","$","596,350","","$","15,104","","$","340,847"],["Net income (loss) per share available to common shareholders:"],["Basic","","","","","$","2.55","","$","0.07","","$","1.82"],["Diluted","","","","","$","2.44","","$","0.07","","$","1.81"],["Weighted average number of common shares outstanding:"],["Basic","","","","","233,770,474","","212,995,533","","187,156,990"],["Diluted","","","","","245,496,926","","226,438,341","","188,406,444"],["Dividends declared per share of common stock","","","","","$","1.29","","$","1.40","","$","2.00"]]
[[/GREPCENT_TABLE]]

(1) Includes interest income of consolidated VIEs of $586,580, $683,456 and $780,746 for the years ended December 31, 2021, 2020 and 2019, respectively. See Note 9 to consolidated financial statements for further discussion.

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(2) Includes interest expense of consolidated VIEs of $203,135, $285,142 and $337,387 for the years ended December 31, 2021, 2020 and 2019, respectively. See Note 9 to consolidated financial statements for further discussion.

See accompanying notes to consolidated financial statements.

Results of Operations for the Years Ended December 31, 2021, 2020 and 2019.

Our primary source of income is interest income earned on our assets, net of interest expense paid on our financing liabilities. For the year ended December 31, 2021, our net income available to common shareholders was $596 million, or $2.55 per average basic common share, compared to a net income of $15 million, or $0.07 per average basic common share, for the same period in 2020. The higher net income available to common shareholders for the year ended December 31, 2021, as compared to same period of 2020, was primarily driven by improvements in our portfolio's asset prices due to continuing recovery in financial markets, lower interest expense due to lower funding rates, and no hedge losses. During the year ended December 31, 2021, we had net interest income of $611 million and unrealized gains on financial instruments at fair value of $437 million, partially offset by losses on extinguishment of debt of $284 million and other expenses of $135 million. Additionally, there were no losses on derivatives for the year ended December 31, 2021, as compared to a $304 million net losses on derivatives for the same period in 2020.

Interest Income

The changes in our interest income for the year ended December 31, 2021, as compared to the same period in 2020, were primarily driven by the selling of our Agency RMBS portfolio and reducing our Agency CMBS and Loans held for investment portfolios during 2020, and prepayment penalties and early paydowns received during 2021.

For the year ended December 31, 2021, interest income decreased by $93 million, or 9%, to $938 million as compared to $1.0 billion for the same period of 2020. We reduced our average interest earning asset balances by $3.9 billion to $14.4 billion as compared to $18.3 billion from the same period of 2020 to respond to market conditions driven by COVID-19 disruptions. The sale of the Agency RMBS portfolio and reduction in our Loans held for investment, Agency CMBS, and Non-Agency RMBS portfolios decreased our interest income earned on Loans held for investment by $71 million, Agency RMBS by $43 million, Agency CMBS by $27 million, and Non-Agency RMBS by $23 million for the year ended December 31, 2021, as compared to the same period in 2020. This decrease was partially offset by an increase in prepayment penalties and early paydowns received of $73 million on Agency CMBS and Non-Agency RMBS portfolios during the year ended December 31, 2021, as compared to $8 million for the same period in 2020.

Interest Expense

The changes in our interest expense for the year ended December 31, 2021, as compared to the same period in 2020, were primarily driven by our de-levering efforts to reduce secured financing agreements balances, lower financing rates on secured financing agreements and calls of our higher rate securitized debt financing, replacing it with lower rates currently available.

For the year ended December 31, 2021, interest expense decreased by $189 million, or 37%, to $327 million as compared to $516 million for the same period of 2020. During the year ended December 31, 2021 we reduced our average interest bearing liability balances by $3.6 billion to $12.2 billion, as compared to $15.8 billion, from the same period of 2020. During the year ended December 31, 2021 interest expense on securitized debt decreased by $74 million and the average cost of funding on this same debt decreased by 90 basis points as compared to the same period of 2020. Additionally, due to lower average balances and financing rates our interest expense on secured financing agreements collateralized by Loans held for investment, Non-Agency RMBS, Agency RMBS and Agency CMBS decreased by $44 million, $31 million, $27 million, and $15 million, respectively, as compared to the same period of 2020.

Interest expense for GAAP reporting does not include the periodic costs of our derivatives, which are reported separately in our GAAP financial statements.

Economic Net Interest Income

Our Economic net interest income is a non-GAAP financial measure that equals GAAP net interest income adjusted for net realized gains or losses on interest rate swaps, interest expense on long term debt and any interest earned on cash. Realized gains or losses on our interest rate swaps are the periodic net settlement payments made or received. For the purpose of computing Economic net interest income and ratios relating to cost of funds measures throughout this section, interest expense includes net payments on our interest rate swaps, which is presented as a part of Net realized gains (losses) on derivatives in our Consolidated Statements of Operations. Interest rate swaps are used to manage the increase in interest paid on secured financing

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agreements in a rising rate environment. Presenting the net contractual interest payments on interest rate swaps with the interest paid on interest bearing liabilities reflects our total contractual interest payments. We believe this presentation is useful to investors because it depicts the economic value of our investment strategy by showing all components of interest expense and net interest income. However, Economic net interest income should not be viewed in isolation and is not a substitute for net interest income computed in accordance with GAAP. Where indicated, interest expense, adjusting for interest payments on interest rate swaps, is referred to as Economic interest expense. Where indicated, net interest income reflecting interest payments on interest rate swaps, is referred to as Economic net interest income.

The following table reconciles the Economic net interest income to GAAP net interest income and Economic interest expense to GAAP interest expense for the periods presented.

[[GREPCENT_TABLE]]
[["","GAAP Interest Income","","GAAP Interest Expense","Net Realized (Gains) Losses on Interest Rate Swaps","Interest Expense on Long Term Debt","Economic Interest Expense","","GAAP Net Interest Income","Net Realized Gains (Losses) on Interest Rate Swaps","Other (1)","Economic Net Interest Income"],["For the Year Ended December 31, 2021","$","937,546","","","$","326,628","","$","\u2014","","$","(2,274)","","$","324,354","","","$","610,918","","$","\u2014","","$","2,208","","$","613,126"],["For the Year Ended December 31, 2020","$","1,030,250","","","$","516,181","","$","6,385","","$","(7,082)","","$","515,484","","","$","514,069","","$","(6,385)","","$","5,755","","$","513,439"],["For the Year Ended December 31, 2019","$","1,361,110","","","$","758,814","","$","(3,012)","","$","\u2014","","$","755,802","","","$","602,296","","$","3,012","","$","(7,938)","","$","597,370"],["For the Quarter Ended December 31, 2021","$","221,162","","","$","66,598","","$","\u2014","","$","\u2014","","$","66,598","","","$","154,564","","$","\u2014","","$","(12)","","$","154,552"],["For the Quarter Ended September 30, 2021","$","220,579","","","$","71,353","","$","\u2014","","$","(239)","","$","71,114","","","$","149,226","","$","\u2014","","$","220","","$","149,446"],["For the Quarter Ended June 30, 2021","$","252,677","","","$","80,610","","$","\u2014","","$","(959)","","$","79,651","","","$","172,067","","$","\u2014","","$","936","","$","173,003"],["For the Quarter Ended March 31, 2021","$","243,127","","","$","108,066","","$","\u2014","","$","(1,076)","","$","106,990","","","$","135,061","","$","\u2014","","$","1,065","","$","136,126"]]
[[/GREPCENT_TABLE]]

(1) Primarily interest expense on Long term debt and interest income on cash and cash equivalents.

Net Interest Rate Spread

The following table shows our average earning assets held, interest earned on assets, yield on average interest earning assets, average debt balance, economic interest expense, economic average cost of funds, economic net interest income and net interest rate spread for the periods presented.

49

[[GREPCENT_TABLE]]
[["","For the Quarter Ended"],["","December 31, 2021","","December 31, 2020"],["","(dollars in thousands)","","(dollars in thousands)"],["","Average Balance","Interest","Average Yield/Cost","","Average Balance","Interest","Average Yield/Cost"],["Assets:"],["Interest-earning assets (1):"],["Agency RMBS","$","104,684","","$","71","","0.3","%","","$","121,440","","$","479","","1.6","%"],["Agency CMBS","851,886","","27,711","","13.0","%","","1,455,855","","15,400","","4.2","%"],["Non-Agency RMBS","1,406,876","","51,644","","14.7","%","","1,650,268","","56,259","","13.6","%"],["Loans held for investment","11,498,173","","141,724","","4.9","%","","12,770,508","","163,998","","5.1","%"],["Total","$","13,861,619","","$","221,150","","6.4","%","","$","15,998,071","","$","236,136","","5.9","%"],["Liabilities and stockholders' equity:"],["Interest-bearing liabilities:"],["Secured financing agreements collateralized by:"],["Agency RMBS","$","23,824","","$","40","","0.7","%","","$","71,689","","$","173","","1.0","%"],["Agency CMBS","731,577","","346","","0.2","%","","1,323,972","","738","","0.2","%"],["Non-Agency RMBS","839,898","","5,837","","2.8","%","","1,069,348","","13,797","","5.2","%"],["Loans held for investment","1,872,915","","13,281","","2.8","%","","2,200,314","","26,627","","4.8","%"],["Securitized debt","8,009,117","","47,094","","2.4","%","","8,630,854","","77,753","","3.6","%"],["Total","$","11,477,331","","$","66,598","","2.3","%","","$","13,296,177","","$","119,088","","3.6","%"],["Economic net interest income/net interest rate spread","","$","154,552","","4.1","%","","","$","117,048","","2.3","%"],["Net interest-earning assets/net interest margin","$","2,384,288","","","4.5","%","","$","2,701,894","","","2.9","%"],["Ratio of interest-earning assets to interest bearing liabilities","1.21","","","","","1.20"],["(1) Interest-earning assets at amortized cost"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","For the Year Ended"],["","December 31, 2021","","December 31, 2020"],["","(dollars in thousands)","","(dollars in thousands)"],["","Average Balance","Interest","Average Yield/Cost","","Average Balance","Interest","Average Yield/Cost"],["Assets:"],["Interest-earning assets (1):"],["Agency RMBS","$","110,173","","$","924","","0.8","%","","$","1,519,071","","$","44,319","","2.9","%"],["Agency CMBS","1,084,880","","108,237","","10.0","%","","1,909,846","","81,831","","4.3","%"],["Non-Agency RMBS","1,483,482","","227,847","","15.4","%","","1,745,703","","231,099","","13.2","%"],["Loans held for investment","11,752,615","","600,472","","5.1","%","","13,140,311","","671,674","","5.1","%"],["Total","$","14,431,150","","$","937,480","","6.5","%","","$","18,314,931","","$","1,028,923","","5.6","%"],["Liabilities and stockholders' equity:"],["Interest-bearing liabilities(2):"],["Secured financing agreements collateralized by:"],["Agency RMBS","$","47,155","","$","371","","0.8","%","","$","1,407,713","","$","27,723","","2.0","%"],["Agency CMBS","963,894","","1,569","","0.2","%","","1,818,721","","16,585","","0.9","%"],["Non-Agency RMBS","888,160","","32,755","","3.7","%","","1,220,248","","63,366","","5.2","%"],["Loans held for investment","2,038,719","","70,414","","3.5","%","","2,869,663","","114,669","","4.0","%"],["Securitized debt","8,306,335","","219,245","","2.6","%","","8,449,048","","293,141","","3.5","%"],["Total","$","12,244,263","","$","324,354","","2.6","%","","$","15,765,393","","$","515,484","","3.3","%"],["Economic net interest income/net interest rate spread","","$","613,126","","3.9","%","","","$","513,439","","2.3","%"],["Net interest-earning assets/net interest margin","$","2,186,887","","","4.2","%","","$","2,549,538","","","2.8","%"],["Ratio of interest-earning assets to interest bearing liabilities","1.18","","","","","1.16"],["(1) Interest-earning assets at amortized cost"],["(2) Interest includes net cash paid/received on swaps"]]
[[/GREPCENT_TABLE]]

Economic Net Interest Income and the Average Earning Assets

Our Economic net interest income (which is a non-GAAP measure, see “Economic net interest income” discussion earlier for details) increased by $100 million to $613 million for the year ended December 31, 2021 from $513 million for the same period of 2020. Our net interest rate spread, which equals the yield on our average interest-earning assets less the economic average cost of funds, increased by 160 basis points for the year ended December 31, 2021, as compared to the same period of 2020. The net interest margin, which equals the Economic net interest income as a percentage of the net average balance of our interest-earning assets less our interest-bearing liabilities, increased by 140 basis points for the year ended December 31, 2021, as compared to the same period of 2020. Our Average net interest-earning assets decreased by $363 million to $2.2 billion for the year ended December 31, 2021, compared to $2.5 billion for the same period of 2020. The increase in our net interest rate spread is primarily due to the change in our portfolio composition and a combination of prepayment penalties and early paydowns received on our Agency CMBS and Non-Agency RMBS portfolios during the year ended December 31, 2021. We sold lower yielding Agency assets and retained higher yielding Non-Agency RMBS and Loans held for investment. Following the sale of our Agency RMBS portfolio and reduction in our Agency CMBS and Loans held for investment, we have worked to replace higher cost funding with more efficient and lower cost financing during the year ended December 31, 2021.

Economic Interest Expense and the Cost of Funds

The borrowing rate at which we are able to finance our assets using secured financing agreements and securitized debt is typically correlated to LIBOR and the term of the financing. The table below shows our average borrowed funds, Economic interest expense, average cost of funds (inclusive of realized losses on interest rate swaps), average one-month LIBOR, average three-month LIBOR and average one-month LIBOR relative to average three-month LIBOR.

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[[GREPCENT_TABLE]]
[["","Average Debt Balance","Economic Interest Expense (1)","Average Cost of Funds","Average One-Month LIBOR","Average Three-Month LIBOR","Average One-Month LIBOR Relative to Average Three-Month LIBOR"],["","(Ratios have been annualized, dollars in thousands)"],["For The Year Ended December 31, 2021","$","12,244,263","","$","324,354","","2.65","%","0.10","%","0.16","%","(0.06)","%"],["For The Year Ended December 31, 2020","$","15,765,393","","$","515,484","","3.27","%","0.52","%","0.65","%","(0.13)","%"],["For The Year Ended December 31, 2019","$","22,469,397","","$","755,802","","3.36","%","2.22","%","2.33","%","(0.11)","%"],["For the Quarter Ended December 31, 2021","$","11,477,331","","$","66,598","","2.32","%","0.09","%","0.16","%","(0.07)","%"],["For the Quarter Ended September 30, 2021","$","11,902,369","","$","71,114","","2.39","%","0.09","%","0.13","%","(0.04)","%"],["For the Quarter Ended June 30, 2021","$","12,422,089","","$","79,651","","2.56","%","0.10","%","0.16","%","(0.06)","%"],["For the Quarter Ended March 31, 2021","$","13,148,481","","$","106,990","","3.25","%","0.12","%","0.20","%","(0.08)","%"]]
[[/GREPCENT_TABLE]]

(1) Includes effect of realized losses on interest rate swaps.

Average interest-bearing liabilities decreased by $3.6 billion for the year ended December 31, 2021, as compared to the same period of 2020. Economic interest expense decreased by $191 million for the year ended December 31, 2021, as compared to the same period of 2020. The decrease in average interest-bearing liabilities and Economic interest expense during the year ended December 31, 2021 as compared to the same period of 2020, is a result of the decrease in the amount of our secured financing agreements, the decrease in average one-month and three-month LIBOR, and replacing our higher cost securitized debt with lower cost securitized debt. While we may use interest rate hedges to mitigate changes in interest rate risks, the hedges may not fully offset interest expense movements.

Provision for Credit Losses

For the year ended December 31, 2021 and 2020, we recorded a net increase in provision of credit losses of $33 thousand and $180 thousand, respectively. The increase in the allowance for credit losses for the year ended December 31, 2021 and 2020, is primarily due to increases in expected losses and delinquencies. In addition, certain Non-Agency RMBS positions, which had previously been in an unrealized gain position as of the prior year-end, are now in an unrealized loss position as of the end of the current period due to the decline in fair value. These Non-Agency RMBS positions now in an unrealized loss have resulted in the recognition of an allowance for credit losses which was previously limited by unrealized gains on these investments.

Net Gains (losses) on derivatives

We did not have any derivative positions during the year ended December 31, 2021. Our interest rate swaps are primarily used to economically hedge the effects of changes in interest rates on our portfolio, specifically our secured financing agreements. Therefore, we included the periodic interest costs of the interest rate swaps for the year ended December 31, 2020 on these economic hedges in our presentation of Economic net interest income and our net interest spreads. As we do not account for these as hedges for GAAP presentation, we present these gains and losses separately in the Consolidated Statements of Operations. We had no net gains (losses) on derivatives instruments for the year ended December 31, 2021. We had net losses of $304 million on derivative instruments for the year ended December 31, 2020.

The net gains and losses on our derivatives include both unrealized and realized gains and losses. Realized gains and losses include the net cash paid and received on our interest rate swaps during the period as well as sales and settlements of our Treasury Futures and swaptions. All of our interest rate swaps pay a fixed rate of interest and receive a floating rate of interest. Therefore, as the floating rate leg of the swap declines, the fair value of the interest rate swaps also declines.

Unrealized gains and losses include the change in market value, period over period, on our derivatives portfolio, including reversals of any mark-to-market losses taken on derivatives in prior periods upon settlement. We paid $464 million to terminate interest rate swaps with a notional value of $4.1 billion during the year ended December 31, 2020. The terminated swaps had original maturities from 2023 to 2048. We closed our short Treasury futures positions during the first quarter of 2020. We had net realized losses of $35 million on our short Treasury futures positions for the year ended December 31, 2020. The realized loss on Treasury futures was driven by the declines in interest rates which reduces the value of our short Treasury futures. Treasury futures are not included in our Economic interest expense and Economic net interest income.

Net Unrealized Gains (Losses) on Financial Instruments at Fair Value

52

The continued recovery of financial markets during the year, as well as the relatively lower interest rates, stronger housing price appreciation and tightening of credit spreads with a slight moderation at the end of the year helped asset pricing, primarily in our Non-Agency and Loans held for investment portfolios. We recorded Net unrealized gains on financial instruments at fair value of $437 million for the year ended December 31, 2021, as compared to the Net unrealized losses on financial instruments at fair value of $111 million for the year ended December 31, 2020.

Gains and Losses on Sales of Assets and Extinguishment of Securitized Debt

We do not forecast sales of investments as we generally expect to invest for long term gains. However, from time to time, we may sell assets to create liquidity necessary to pursue new opportunities, achieve targeted leverage ratios as well as for gains when prices indicate a sale is most beneficial to us, or is the most prudent course of action to maintain a targeted risk adjusted yield for our investors.

In response to the disruptions in the financial market and to strengthen our liquidity position, we sold all of our Agency RMBS portfolio and reduced our Agency CMBS and Non-Agency RMBS during 2020. Additionally, we sold some of our Agency CMBS and Non-Agency RMBS investments during the year ended December 31, 2021. For the years ended December 31, 2021 and 2020, we had net realized gains on sales of investments of $45 million and $167 million, respectively.

When we acquire our outstanding securitized debt, we extinguish the outstanding debt and recognize a gain or loss based on the difference between the carrying value of the debt and the cost to acquire the debt which is reflected in the Consolidated Statements of Operations as a gain or loss on extinguishment of debt.

During the year ended December 31, 2021, we acquired securitized debt collateralized by Non-Agency RMBS with an amortized cost balance of $370 thousand for $478 thousand. This transaction resulted in net loss on extinguishment of debt of $108 thousand. We did not acquire any securitized debt collateralized by Non-Agency RMBS during the year ended December 31, 2020.

During the year ended December 31, 2021, we acquired securitized debt collateralized by Loans held for investment with an amortized cost balance of $3.9 billion for $4.2 billion. This transaction resulted in net loss on extinguishment of debt of $259 million. During the year ended December 31, 2020, we acquired securitized debt collateralized by Loans held for investment with an amortized cost balance of $785 million for $784 million. This transaction resulted in a net gain on extinguishment of debt of $1 million.

Long Term Debt Expense

As of December 31, 2021, approximately $358 million of the our 7.00% Convertible Senior Notes due 2023, or the Notes, have been converted into approximately 55 million shares of our common stock. During the year ended December 31, 2021, we acquired $16 million of the Notes for $37 million, this transaction resulted in a loss on extinguishment of debt of $21 million. As of December 31, 2021 there was no outstanding principal amount, unamortized deferred debt issuance cost and accrued interest payable on the Notes. As of December 31, 2020, the outstanding principal amount of these Notes was $53 million, unamortized deferred debt issuance cost was $1 million, and accrued interest payable was $1 million. The net interest expense for the year ended December 31, 2021 and 2020 was $2 million and $7 million, respectively.

Compensation, General and Administrative Expenses and Transaction Expenses

The table below shows our total compensation and benefit expense, general and administrative, or G&A expenses, and transaction expenses as compared to average total assets and average equity for the periods presented.

53

[[GREPCENT_TABLE]]
[["","Total Compensation, G&A and Transaction Expenses","Total Compensation, G&A and Transaction Expenses/Average Assets","Total Compensation, G&A and Transaction Expenses/Average Equity"],["","(Ratios have been annualized, dollars in thousands)"],["For The Year Ended December 31, 2021","$","98,925","","0.61","%","2.67","%"],["For The Year Ended December 31, 2020","$","82,793","","0.41","%","2.29","%"],["For The Year Ended December 31, 2019","$","83,723","","0.30","%","2.14","%"],["For the Quarter Ended December 31, 2021","$","21,275","","0.54","%","2.24","%"],["For the Quarter Ended September 30, 2021","$","21,426","","0.54","%","2.29","%"],["For the Quarter Ended June 30, 2021","$","21,148","","0.52","%","2.35","%"],["For the Quarter Ended March 31, 2021","$","35,074","","0.82","%","3.82","%"]]
[[/GREPCENT_TABLE]]

Compensation and benefit costs were approximately $47 million and $45 million for the years ended December 31, 2021 and 2020, respectively. The increase in compensation and benefit costs were primarily driven by employee severance expense.

G&A expenses were approximately $22 million and $23 million for the years ended December 31, 2021 and 2020, respectively. The G&A expenses are primarily comprised of legal, market data and research, auditing, consulting, information technology, and independent investment consulting expenses.

We incurred transaction expenses in relation to securitizations of $30 million and $15 million for the years ended December 31, 2021 and 2020, respectively. The increase in transaction expenses for the year ended December 31, 2021 is driven by higher call and securitization activity as compared to the same period of 2020.

Servicing and Asset Manager Fees

Servicing fees and asset manager expenses were $37 million and $40 million for the years ended December 31, 2021 and 2020, respectively. These servicing fees are primarily related to the servicing costs of the whole loans held in consolidated securitization vehicles and are paid from interest income earned by the VIEs. The servicing fees generally range from 11 to 50 basis points of unpaid principal balances of our consolidated VIEs.

Earnings available for distribution

Commencing in the third quarter of 2021, we no longer report our non-GAAP measure of core earnings (and by calculation, core earnings per adjusted diluted common share). Instead, we are reporting the new measure Earnings available for distribution (and by calculation, earnings available for distribution per adjusted diluted common share).

Earnings available for distribution is a non-GAAP measure and is defined as GAAP net income excluding unrealized gains or losses on financial instruments carried at fair value with changes in fair value recorded in earnings, realized gains or losses on the sales of investments, gains or losses on the extinguishment of debt, interest expense on long term debt, changes in the provision for credit losses, and transaction expenses incurred. In addition, stock compensation expense charges incurred on awards to retirement eligible employees is reflected as an expense over a vesting period (36 months) rather than reported as an immediate expense.

As defined, Earnings available for distribution is the economic net interest income, as defined previously, reduced by compensation and benefits expenses (adjusted for awards to retirement eligible employees), general and administrative expenses, servicing and asset manager fees, income tax benefits or expenses incurred during the period, as well as the preferred dividend charges. We view Earnings available for distribution as a consistent measure of our investment portfolio's ability to generate income for distribution to common stockholders. Earnings available for distribution is one of the metrics, but not the exclusive metric, that our board of directors uses to determine the amount, if any, of dividends on our common stock. In addition, Earnings available for distribution is different than REIT taxable income and the determination of whether we have met the requirement to distribute at least 90% of our annual REIT taxable income (subject to certain adjustments) to our stockholders in order to maintain qualification as a REIT is not based on Earnings available for distribution. Therefore, Earnings available for distribution should not be considered as an indication of our REIT taxable income, a guaranty of our ability to pay dividends, or as a proxy for the amount of dividends we may pay, because Earnings available for distribution excludes certain items that impact our cash needs. We believe Earnings available for distribution as described above helps us and investors evaluate our financial performance period over period without the impact of certain transactions. Therefore, Earnings available for distribution should not be viewed in isolation and is not a substitute for net income or net income per basic share computed in accordance with GAAP. In addition, our methodology for calculating Earnings available for distribution may differ from the methodologies employed by other REITs to calculate the same or similar supplemental

54

performance measures, and accordingly, our Earnings available for distribution may not be comparable to the Earnings available for distribution reported by other REITs.

The following table provides GAAP measures of net income and net income per diluted share available to common stockholders for the periods presented and details with respect to reconciling the line items to Earnings available for distribution and related per average diluted common share amounts. Earnings available for distribution is presented on an adjusted dilutive shares basis. Certain prior period amounts have been reclassified to conform to the current period's presentation.

[[GREPCENT_TABLE]]
[["","For the Year Ended"],["","December 31, 2021","December 31, 2020","December 31, 2019"],["","(dollars in thousands, except per share data)"],["GAAP Net income available to common stockholders","596,350","","15,104","","340,847"],["Adjustments:"],["Net unrealized (gains) losses on financial instruments at fair value","(437,357)","","110,664","","(409,634)"],["Net realized (gains) losses on sales of investments","(45,313)","","(166,946)","","(20,360)"],["(Gains) losses on extinguishment of debt","283,556","","54,418","","(9,318)"],["Interest expense on long term debt","2,274","","7,083","","\u2014"],["Increase (decrease) in provision for credit losses/OTTI","33","","180","","4,853"],["Net unrealized (gains) losses on derivatives","\u2014","","(201,000)","","106,209"],["Net realized (gains) losses on derivatives - Futures(1)","\u2014","","34,700","","37,032"],["Realized (gains) losses on terminations of interest rate swaps","\u2014","","463,966","","359,726"],["Transaction Expenses","29,856","","15,068","","10,928"],["Stock Compensation expense for retirement eligible rewards","(432)","","414","","1,199"],["Earnings available for distribution","428,967","","333,651","","421,482"],["GAAP net income per diluted common share","$","2.44","","$","0.07","","$","1.81"],["Earnings available for distribution per adjusted diluted common share","$","1.78","","$","1.46","","$","2.24"]]
[[/GREPCENT_TABLE]]

(1) Included in net realized gains (losses) on derivatives in the Consolidated

The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted average adjusted diluted shares used for Earnings available for distribution for the years ended December 31, 2021, 2020 and 2019.

[[GREPCENT_TABLE]]
[["","For the Years Ended"],["","December 31, 2021","December 31, 2020","December 31, 2019"],["Weighted average diluted shares - GAAP","245,496,926","","226,438,341","","188,406,444"],["Conversions from Convertible Debt","\u2014","","14,259,495","","\u2014"],["Non-participating Warrants","(5,070,543)","","(11,415,711)","","\u2014"],["Adjusted weighted average diluted shares - Earnings available for distribution","240,426,383","","229,282,125","","188,406,444"]]
[[/GREPCENT_TABLE]]

55

[[GREPCENT_TABLE]]
[["","For the Quarters Ended"],["","December 31, 2021","September 30, 2021","June 30, 2021","March 31, 2021","December 31, 2020"],["","(dollars in thousands, except per share data)"],["GAAP Net income (loss) available to common stockholders","$","(718)","","$","313,030","","$","144,883","","$","139,153","","$","128,797"],["Adjustments:"],["Net unrealized (gains) losses on financial instruments at fair value","108,286","","(239,524)","","(36,108)","","(270,012)","","(61,379)"],["Net realized (gains) losses on sales of investments","\u2014","","\u2014","","(7,517)","","(37,796)","","329"],["(Gains) losses on extinguishment of debt","(980)","","25,622","","21,777","","237,137","","(919)"],["Interest expense on long term debt","\u2014","","238","","959","","1,076","","1,197"],["Increase (decrease) in provision for credit losses","92","","(386)","","453","","(126)","","13"],["Transaction expenses","4,241","","3,432","","5,745","","16,437","","3,827"],["Stock Compensation expense for retirement eligible awards","(363)","","(365)","","(361)","","661","","(225)"],["Earnings available for distribution","$","110,558","","$","102,047","","$","129,831","","$","86,530","","$","71,640"],["GAAP net income (loss) per diluted common share","$","(0.00)","","$","1.30","","$","0.60","","$","0.54","","$","0.49"],["Earnings available for distribution per adjusted diluted common share","$","0.46","","$","0.42","","$","0.54","","$","0.36","","$","0.29"]]
[[/GREPCENT_TABLE]]

The table below summarizes the reconciliation from weighted-average diluted shares under GAAP to the weighted-average adjusted diluted shares used for Earnings available for distribution for the periods reported below.

[[GREPCENT_TABLE]]
[["","For the Quarters Ended"],["","December 31, 2021 (1)","September 30, 2021","June 30, 2021","March 31, 2021","December 31, 2020"],["Weighted average diluted shares - GAAP","239,568,905","","240,362,602","","241,739,536","","261,435,081","","264,882,701"],["Conversions from Convertible Debt","\u2014","","\u2014","","\u2014","","\u2014","","\u2014"],["Non-participating Warrants","\u2014","","\u2014","","\u2014","","(20,282,173)","","(20,278,970)"],["Adjusted weighted average diluted shares - Earnings available for distribution","239,568,905","","240,362,602","","241,739,536","","241,152,908","","244,603,731"]]
[[/GREPCENT_TABLE]]

(1) Includes weighted average dilutive shares - GAAP of 236,896,212 shares and 2,672,393 of potentially dilutive shares related to restricted stock units and performance stock units excluded from the computation of weighted average GAAP diluted shares because their effect would have been anti-dilutive given the net loss available to common shareholders for the quarter-ended December 31, 2021.

Our Earnings available for distribution for the year ended December 31, 2021 were $429 million, or $1.78 per average diluted common share, and increased by $95 million, or $0.32 per average diluted common share, as compared to $334 million, or $1.46 per average diluted common share, for the year ended December 31, 2020. The increase in Earnings available for distribution was driven by lower interest expense driven by lower financing rate on our securitized debt and secured financing agreements and higher net interest income due to prepayment penalties and early paydowns during the year ended December 31, 2021 as compared to the same period of 2020.

Net Income (Loss) and Return on Total Stockholders' Equity

The table below shows our Net Income and Economic net interest income as a percentage of average stockholders' equity and Earnings available for distribution as a percentage of average common stockholders' equity. Return on average equity is defined as our GAAP net income (loss) as a percentage of average equity.  Average equity is defined as the average of our beginning and ending stockholders' equity balance for the period reported. Economic net interest income and Earnings available for distribution are non-GAAP measures as defined in previous sections.

56

[[GREPCENT_TABLE]]
[["","Return on Average Equity","Economic Net Interest Income/Average Equity *","Earnings available for distribution/Average Common Equity"],["","(Ratios have been annualized)"],["For the Year Ended December 31, 2021","18.05","%","16.52","%","15.42","%"],["For the Year Ended December 31, 2020","2.46","%","14.21","%","12.43","%"],["For the Year Ended December 31, 2019","10.56","%","15.26","%","13.93","%"],["For the Quarter Ended December 31, 2021","1.87","%","16.30","%","15.45","%"],["For the Quarter Ended September 30, 2021","35.47","%","15.99","%","14.54","%"],["For the Quarter Ended June 30, 2021","18.16","%","19.24","%","19.47","%"],["For the Quarter Ended March 31, 2021","17.16","%","14.82","%","12.62","%"]]
[[/GREPCENT_TABLE]]

* Includes effect of realized losses on interest rate swaps and excludes long term debt expense.

Return on average equity increased by 1,559 basis points for the year ended December 31, 2021, as compared to the same period of 2020. This increase is driven primarily by higher unrealized asset pricing gains on our financial instruments, lower financing rate on our securitized debt and secured financing agreements, and prepayment penalties and early paydowns received during the year ended December 31, 2021 as compared to the same period of 2020. Economic net interest income as a percentage of average equity increased by 231 basis points for the year ended December 31, 2021 compared to the year ended December 31, 2020. Earnings available for distribution as a percentage of average common equity increased by 299 basis points for the year ended December 31, 2021 compared to the same period of 2020. This increase in Earnings available for distribution as a percentage of average common equity for the year ended December 31, 2021 as compared to the same period of 2020, was primarily driven by a decrease in interest expense driven by lower financing rates on secured debt and secured financing agreements and higher net interest income due to prepayment penalties and early paydowns received.

Financial Condition

Portfolio Review

During the year ended December 31, 2021, the financial markets showed signs of improvement from the disruptions driven by the COVID-19 pandemic during the previous year. We focused our efforts on reducing the cost of funding by calling and resecuritizing certain of our higher rate debt with lower rates available in the financing markets. During the year ended December 31, 2021, on an aggregate basis, we purchased $3.1 billion of investments, sold $1.9 billion of investments and received $3.7 billion in principal payments related to our Agency MBS, Non-Agency RMBS and Loans held for investment portfolio.

The following table summarizes certain characteristics of our portfolio at December 31, 2021 and December 31, 2020.

[[GREPCENT_TABLE]]
[["","December 31, 2021","December 31, 2020"],["Interest earning assets at period-end (1)","$","14,893,829","","$","17,093,949"],["Interest bearing liabilities at period-end","$","11,075,655","","$","13,513,580"],["GAAP Leverage at period-end","3.0:1","3.6:1"],["GAAP Leverage at period-end (recourse)","0.9:1","1.2:1"]]
[[/GREPCENT_TABLE]]

(1) Excludes cash and cash equivalents.

57

[[GREPCENT_TABLE]]
[["","December 31, 2021","December 31, 2020","","December 31, 2021","December 31, 2020"],["Portfolio Composition","Amortized Cost","","Fair Value"],["Non-Agency RMBS","10.1","%","10.2","%","","12.1","%","12.6","%"],["Senior","4.5","%","5.0","%","","6.5","%","7.5","%"],["Subordinated","4.2","%","3.6","%","","4.4","%","3.6","%"],["Interest-only","1.4","%","1.6","%","","1.2","%","1.5","%"],["Agency RMBS","0.8","%","0.7","%","","0.4","%","0.5","%"],["Pass-through","\u2014","%","\u2014","%","","\u2014","%","\u2014","%"],["Interest-only","0.8","%","0.7","%","","0.4","%","0.5","%"],["Agency CMBS","5.3","%","10.0","%","","5.2","%","10.2","%"],["Project loans","4.2","%","9.9","%","","4.2","%","10.0","%"],["Interest-only","1.1","%","0.1","%","","1.0","%","0.2","%"],["Loans held for investment","83.8","%","79.1","%","","82.3","%","76.7","%"],["Fixed-rate percentage of portfolio","95.4","%","94.9","%","","94.4","%","93.2","%"],["Adjustable-rate percentage of portfolio","4.6","%","5.1","%","","5.6","%","6.8","%"]]
[[/GREPCENT_TABLE]]

GAAP leverage at period-end is calculated as a ratio of our secured financing agreements and securitized debt liabilities over GAAP book value. GAAP recourse leverage is calculated as a ratio of our secured financing agreements over stockholders equity.

The following table presents details of each asset class in our portfolio at December 31, 2021 and December 31, 2020. The principal or notional value represents the interest income earning balance of each class. The weighted average figures are weighted by each investment’s respective principal/notional value in the asset class.

[[GREPCENT_TABLE]]
[["","December 31, 2021"],["","Principal or Notional Value at Period-End (dollars in thousands)","Weighted Average Amortized Cost Basis","Weighted Average Fair Value","Weighted Average Coupon","Weighted Average Yield at Period-End (1)","Weighted Average 3 Month Prepay Rate at Period-End","Weighted Average 12 Month Prepay Rate at Period-End","","Weighted Average 3 Month CDR at Period-End","Weighted Average 12 Month CDR at Period-End","Weighted Average Loss Severity(2)","Weighted Average Credit Enhancement"],["Non-Agency Mortgage-Backed Securities"],["Senior","$","1,283,788","","$","48.02","","$","76.78","","4.5","%","18.0","%","14.1","%","14.6","%","","1.6","%","1.9","%","23.6","%","2.8","%"],["Subordinated","$","845,432","","$","68.10","","$","77.12","","3.8","%","7.1","%","18.6","%","19.3","%","","0.2","%","0.5","%","28.9","%","3.6","%"],["Interest-only","$","3,904,665","","$","4.90","","$","4.42","","1.7","%","13.2","%","22.2","%","25.5","%","","1.0","%","1.8","%","23.4","%","\u2014","%"],["Agency RMBS"],["Interest-only","$","992,978","","$","10.37","","$","6.09","","1.3","%","0.3","%","25.6","%","26.6","%","","N/A","N/A","N/A","N/A"],["Agency CMBS"],["Project loans","$","560,565","","$","101.77","","$","109.61","","4.3","%","4.1","%","\u2014","%","\u2014","%","","N/A","N/A","N/A","N/A"],["Interest-only","$","2,578,640","","$","5.70","","$","5.69","","0.7","%","4.6","%","14.0","%","30.9","%","","N/A","N/A","N/A","N/A"],["Loans held for investment","$","11,519,255","","$","99.22","","$","106.58","","5.5","%","4.9","%","16.1","%","15.0","%","","0.9","%","0.4","%","50.5","%","N/A"]]
[[/GREPCENT_TABLE]]

(1) Bond Equivalent Yield at period-end. Weighted Average Yield is calculated using each investment's respective amortized cost.

(2) Calculated based on reported losses to date, utilizing widest data set available (i.e., life-time losses, 12-month loss, etc.)

58

[[GREPCENT_TABLE]]
[["","December 31, 2020"],["","Principal or Notional Value at Period-End (dollars in thousands)","Weighted Average Amortized Cost Basis","Weighted Average Fair Value","Weighted Average Coupon","Weighted Average Yield at Period-End (1)","Weighted Average 3 Month Prepay Rate at Period-End","Weighted Average 12 Month Prepay Rate at Period-End","","Weighted Average 3 Month CDR at Period-End","Weighted Average 12 Month CDR at Period-End","Weighted Average Loss Severity(2)","Weighted Average Credit Enhancement"],["Non-Agency Mortgage-Backed Securities"],["Senior","$","1,560,136","","$","50.65","","$","81.90","","4.5","%","16.9","%","13.4","%","11.0","%","","2.8","%","2.9","%","47.2","%","2.8","%"],["Subordinated","$","905,674","","$","62.46","","$","67.43","","3.8","%","6.3","%","16.0","%","12.5","%","","0.8","%","0.7","%","22.1","%","3.3","%"],["Interest-only","$","5,628,240","","$","4.43","","$","4.66","","1.5","%","16.2","%","27.3","%","23.0","%","","2.1","%","1.8","%","27.8","%","\u2014","%"],["Agency RMBS"],["Interest-only","$","1,262,963","","$","9.41","","$","7.18","","1.7","%","1.6","%","23.8","%","20.6","%","","N/A","N/A","N/A","N/A"],["Agency CMBS"],["Project loans","$","1,527,621","","$","101.81","","$","112.23","","4.1","%","3.8","%","\u2014","%","\u2014","%","","N/A","N/A","N/A","N/A"],["Interest-only","$","1,326,665","","$","1.78","","$","1.95","","0.6","%","8.4","%","10.0","%","8.0","%","","N/A","N/A","N/A","N/A"],["Loans held for investment","$","12,640,195","","$","98.69","","$","103.85","","5.6","%","5.2","%","11.9","%","9.7","%","","0.9","%","1.2","%","39.6","%","N/A"]]
[[/GREPCENT_TABLE]]

(1) Bond Equivalent Yield at period- end. Weighted Average Yield is calculated using each investment's respective amortized cost.

(2) Calculated based on reported losses to date, utilizing widest data set available (i.e., life-time losses, 12-month loss, etc.)

Based on the projected cash flows for our Non-Agency RMBS that are not of high credit quality, a portion of the original purchase discount is designated as Accretable Discount, which reflects the purchase discount expected to be accreted into interest income, and a portion is designated as Non-Accretable Difference, which represents the contractual principal on the security that is not expected to be collected. The amount designated as Non-Accretable Difference may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security is more favorable than previously estimated, a portion of the amount designated as Non-Accretable Difference may be transferred to accretable discount and accreted into interest income over time. Conversely, if the performance of a security is less favorable than previously estimated, a provision for credit loss may be recognized resulting in an increase in the amounts designated as Non-Accretable Difference.

The following table presents changes to Accretable Discount (net of premiums) as it pertains to our Non-Agency RMBS portfolio, excluding premiums on interest-only investments, during the previous five quarters.

[[GREPCENT_TABLE]]
[["","For the Quarters Ended"],["","(dollars in thousands)"],["Accretable Discount (Net of Premiums)","December 31, 2021","September 30, 2021","June 30, 2021","March 31, 2021","December 31, 2020"],["Balance, beginning of period","$","352,545","","$","338,024","","$","358,562","","$","409,690","","$","422,981"],["Accretion of discount","(22,172)","","(21,820)","","(37,986)","","(24,023)","","(21,281)"],["Purchases","\u2014","","1,995","","(3,453)","","\u2014","","758"],["Sales and deconsolidation","\u2014","","\u2014","","(17,123)","","(41,651)","","98"],["Transfers from/(to) credit reserve, net","3,173","","34,346","","38,024","","14,546","","7,134"],["Balance, end of period","$","333,546","","$","352,545","","$","338,024","","$","358,562","","$","409,690"]]
[[/GREPCENT_TABLE]]

We invest a significant majority of our capital in pools of Non-Agency RMBS and Loans held for investment. These investments carry risk for credit losses. As we are exposed to risk for credit losses, it is important for us to closely monitor credit losses incurred, as well as how expectations of credit losses are expected to change. We estimate future credit losses based on historical experience, market trends, current delinquencies as well as expected recoveries. The net present value of these expected credit losses can change, sometimes significantly from period to period as new information becomes available. When credit loss experience and expectations improve, we will collect more principal on our investments. If credit loss experience deteriorates, we will collect less principal on our investments. The favorable or unfavorable changes in credit losses are reflected in the yield on our investments in mortgage loans and recognized in earnings over the remaining life of our investments. The following table presents changes to net present value of expected credit losses for our Non-Agency RMBS and Loans held for investment portfolios during the previous five quarters. Gross losses are discounted at the rate used to amortize any discounts or premiums on our investments into income. A decrease (negative balance) in the "Increase/(decrease)" line item in the tables below represents a favorable change in expected credit losses. An increase (positive balance) in the "Increase/(decrease)" line item in the tables below represents an unfavorable change in expected credit losses.

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[[GREPCENT_TABLE]]
[["","For the Quarters Ended"],["","(dollars in thousands)"],["Non-Agency RMBS","December 31, 2021","September 30, 2021","June 30, 2021","March 31, 2021","December 31, 2020"],["Balance, beginning of period","$","107,686","","$","129,053","","$","133,607","","$","157,527","","$","163,369"],["Realized losses","(987)","","(229)","","(2,482)","","(3,927)","","(4,984)"],["Accretion","2,928","","3,374","","3,466","","4,152","","4,242"],["Purchased losses","\u2014","","1,006","","3,066","","\u2014","","4,007"],["Sold losses","\u2014","","\u2014","","(678)","","(733)","","(2,928)"],["Increase/(decrease)","(3,387)","","(25,518)","","(7,926)","","(23,412)","","(6,179)"],["Balance, end of period","$","106,240","","$","107,686","","$","129,053","","$","133,607","","$","157,527"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","For the Quarters Ended"],["","(dollars in thousands)"],["Loans held for investment","December 31, 2021","September 30, 2021","June 30, 2021","March 31, 2021","December 31, 2020"],["Balance, beginning of period","$","340,431","","$","420,323","","$","448,763","","$","511,190","","$","536,016"],["Realized losses","(8,368)","","(7,641)","","(13,244)","","(8,512)","","(14,373)"],["Accretion","4,074","","4,487","","4,795","","3,420","","5,702"],["Increase/(decrease) (1)","32,891","","(76,738)","","(19,991)","","(57,335)","","(16,155)"],["Balance, end of period","$","369,028","","$","340,431","","$","420,323","","$","448,763","","$","511,190"]]
[[/GREPCENT_TABLE]]

(1) Increase/(decrease) includes any additional losses from acquisitions of loan pools during the quarter.

Liquidity and Capital Resources

General

Liquidity measures our ability to meet cash requirements, including ongoing commitments to repay our borrowings, purchase RMBS, residential mortgage loans and other assets for our portfolio, pay dividends and other general business needs. Our principal sources of capital and funds for additional investments primarily include earnings, principal paydowns and sales from our investments, borrowings under securitizations and re-securitizations, secured financing agreements and other financing facilities including warehouse facilities, and proceeds from equity or other securities offerings. 

As discussed throughout this Annual Report on Form 10-K, the financial markets have continued to show improvements with continued declines in unemployment rates and a strong real estate market. During the year ended December 31, 2021, we observed price appreciation in our Loans held for investment portfolio and Non-Agency RMBS portfolios as delinquency rates continued to drop from prior year highs. Despite improving conditions, there is still significant uncertainty and risks related to the COVID-19 pandemic and potentially new, more infectious variants. If infection rates become more pronounced, we may experience an adverse impact on our liquidity. See the “Market Conditions and our Strategy” section of this “Part II. Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations” and related “Special Note Regarding Forward-Looking Statements” for more information on how the COVID-19 pandemic may impact our liquidity and capital resources. As discussed in greater detail above in “Part II. Item - 7 Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Conditions and our Strategy,” we have sought longer-term, more durable financing since 2020 to reduce our risk to margin calls related to shorter-term repurchase financing.

Our ability to fund our operations, meet financial obligations and finance target asset acquisitions may be impacted by our ability to secure and maintain our master secured financing agreements, warehouse facilities and secured financing agreements facilities with our counterparties. Because secured financing agreements and warehouse facilities are short-term commitments of capital, lenders may respond to market conditions making it more difficult for us to renew or replace on a continuous basis our maturing short-term borrowings and have and may continue to impose more onerous conditions when rolling forward such financings. If we are not able to renew our existing facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under our financing facilities or if we are required to post more collateral or face larger haircuts, we may have to curtail our asset acquisition activities and dispose of assets.

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To meet our short term (one year or less) liquidity needs, we expect to continue to borrow funds in the form of secured financing agreements and, subject to market conditions, other types of financing. The terms of the secured financing transaction borrowings under our master secured financing agreement generally conform to the terms in the standard master secured financing agreement as published by the Securities Industry and Financial Markets Association, or SIFMA, or similar market accepted agreements, as to repayment and margin requirements. In addition, each lender typically requires that we include supplemental terms and conditions to the standard master secured financing agreement. Typical supplemental terms and conditions include changes to the margin maintenance requirements, net asset value, required haircuts or the percentage that is subtracted from the value of MBS that collateralizes the financing, purchase price maintenance requirements, and requirements that all disputes related to the secured financing agreement be litigated or arbitrated in a particular jurisdiction. These provisions may differ for each of our lenders. 

Based on our current portfolio, leverage ratio and available borrowing arrangements, we believe our assets will be sufficient to enable us to meet anticipated short-term liquidity requirements. If our cash resources are insufficient to satisfy our liquidity requirements, we may have to sell additional investments, potentially at a loss, issue debt or additional common or preferred equity securities.

To meet our longer-term liquidity needs (greater than one year), we expect our principal sources of capital and funds to continue to be provided by earnings, principal paydowns and sales from our investments, borrowings under securitizations and re-securitizations, secured financing agreements and other financing facilities, as well as proceeds from equity or other securities offerings.

In addition to the principal sources of capital described above, we may enter into warehouse facilities and use longer dated structured secured financing agreements. The use of any particular source of capital and funds will depend on market conditions, availability of these facilities, and the investment opportunities available to us.

Current Period

We held cash and cash equivalents of approximately $386 million and $269 million at December 31, 2021 and December 31, 2020, respectively. As a result of our operating, investing and financing activities described below, our cash position increased

by $117 million from December 31, 2020 to December 31, 2021.

Our operating activities provided net cash of approximately $519 million and $258 million for the years ended December 31, 2021 and 2020, respectively. The cash flows from operations were primarily driven by interest received in excess of interest paid of $681 million during the year ended December 31, 2021. For the year ended December 31, 2020 interest received net of interest paid was $590 million. In addition, during the year ended December 31, 2020 we used cash of $464 million for payments on swap terminations, which was offset by cash received for derivative margin of $326 million.

Our investing activities provided cash of $2.5 billion and $8.3 billion for the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, we received cash from sale of investments of $1.9 billion primarily consisting of Loans held for investment of $1.7 billion and principal repayments on our Agency MBS, Non-Agency RMBS, and Loans held for investment of $3.7 billion. This cash provided was offset in part by cash used on investment purchases of $3.1 billion, primarily consisting of Loans held for investment of $2.9 billion and Agency CMBS funding of $217 million. During the year ended December 31, 2020, we received cash from sale of primarily Agency MBS investments of $7.2 billion, and principal repayments on our Agency MBS, Non-Agency RMBS, and Loans held for investments of $2.9 billion. This cash provided was offset in part by cash used on investment purchases of $3.0 billion, consisting of $2.6 billion in purchases of Loans held for investments, $433 million in Agency CMBS funding, and $33 million in Non-Agency RMBS purchases.

Our financing activities used cash of $3.0 billion and $8.4 billion for the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, our financing efforts were focused on taking advantage of a low interest rate environment to collapse and securitize debt borrowings that significantly reduce our cost of funding. During the year ended December 31, 2021, we primarily used cash for repayment of principal on our securitized debt of $6.5 billion, net payments on our secured financing agreements of $1.4 billion, settlement of warrants of $221 million, and paid common and preferred dividends of $372 million. This cash paid was offset in part by cash received for securitized debt collateralized by loans issuance of $5.5 billion. During the year ended December 31, 2020, we used cash for net payments on our secured financing agreements of $8.8 billion, repayment of principal on our securitized debt of $2.6 billion, and paid common and preferred dividends of $396 million. This cash paid was offset in part by cash received for securitized debt collateralized by loans issuance of $3.0 billion and convertible debt issuance of $361 million.

Our recourse leverage was 0.9:1 and 1.2:1 at December 31, 2021 and at December 31, 2020, respectively. The reduction in recourse leverage was a result of our continuing efforts to de-lever our financial position reducing our secured financing

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agreements liability. Our recourse leverage excludes the securitized debt which can only be repaid from the proceeds on the assets securing this debt in their respective VIEs. Our recourse leverage is presented as a ratio of our secured financing agreements, which are recourse to our assets and our equity.

At December 31, 2021 and 2020, the remaining maturities and borrowing rates on our RMBS and loan secured financing agreements were as follows.

[[GREPCENT_TABLE]]
[["","December 31, 2021","","December 31, 2020"],["","(dollars in thousands)"],["","Principal (1)","Weighted Average Borrowing Rates","Range of Borrowing Rates","","Principal (1)","Weighted Average Borrowing Rates","Range of Borrowing Rates"],["Overnight","$","\u2014","","NA","\u2014% - \u2014%","","$","\u2014","","NA","NA"],["1 to 29 days","1,018,670","","0.73%","0.11% - 1.95%","","1,521,134","","0.38%","0.20% - 2.72%"],["30 to 59 days","379,031","","1.66%","1.55% - 1.70%","","481,257","","4.35%","2.42% - 6.61%"],["60 to 89 days","342,790","","1.86%","0.90% - 2.35%","","352,684","","2.78%","1.34% - 6.30%"],["90 to 119 days","67,840","","1.66%","1.66% - 1.66%","","301,994","","7.97%","7.97% - 7.97%"],["120 to 180 days","157,944","","1.38%","0.95% - 1.45%","","595,900","","5.29%","2.40% - 6.26%"],["180 days to 1 year","895,210","","3.70%","1.95% - 4.38%","","345,204","","3.60%","3.25% - 4.50%"],["1 to 2 years","143,239","","3.05%","3.05% - 3.05%","","\u2014","","NA","NA"],["2 to 3 years","\u2014","","NA","NA","","642,696","","4.91%","1.65% - 7.00%"],["Greater than 3 years","256,889","","5.56%","5.56% - 5.56%","","395,978","","5.56%","5.56% - 5.56%"],["Total","$","3,261,613","","2.30%","","","$","4,636,847","","3.41%"]]
[[/GREPCENT_TABLE]]

(1) The values for secured financing agreements in the table above is net of $3 million and $8 million of deferred financing cost as of December 31, 2021 and December 31, 2020, respectively.

[[GREPCENT_TABLE]]
[["Average remaining maturity of Secured financing agreements secured by:"],["","December 31, 2021","December 31, 2020"],["Agency RMBS (in thousands)","4 Days","12 days"],["Agency CMBS (in thousands)","13 Days","11 days"],["Non-Agency RMBS and Loans held for investment (in thousands)","257 Days","458 days"]]
[[/GREPCENT_TABLE]]

We collateralize the secured financing agreements we use to finance our operations with our MBS investments and mortgage loans held in trusts controlled by us. Our counterparties negotiate a ‘haircut’, which is the difference expressed in percentage terms between the fair value of the collateral and the amount the counterparty will lend to us, when we enter into a financing transaction. The size of the haircut reflects the perceived risk and market volatility associated with holding the MBS by the lender. The haircut provides lenders with a cushion for daily market value movements that reduce the need for a margin call to be issued or margin to be returned as normal daily increases or decreases in MBS market values occur. Haircuts have stabilized, or even declined, during 2021 as markets have continued to show improvement and liquidity has become more available. At December 31, 2021, the weighted average haircut on our remaining secured financing agreements collateralized by Agency RMBS IOs was 15.0%, Agency CMBS was 6.7% and Non-Agency RMBS and Loans held for investment was 27.9%. At December 31, 2020, the weighted average haircut on our remaining secured financing agreements collateralized by Agency RMBS IOs was 25.0%, Agency CMBS was 5.2% and Non-Agency RMBS and Loans held for investment was 31.8%.

The fair value of the Non-Agency MBS is more difficult to determine in current financial conditions, as well as more volatile period to period than Agency MBS, the Non-Agency MBS typically requires a larger haircut. In addition, when financing assets using standard form of SIFMA Master Repurchase Agreements, the counterparty to the agreement typically nets its exposure to us on all outstanding repurchase agreements and issues margin calls if movement of the fair values of the assets in the aggregate exceeds their allowable exposure to us. A decline in asset fair values could create a margin call or may create no margin call depending on the counterparty’s specific policy. In addition, counterparties consider a number of factors, including their aggregate exposure to us as a whole and the number of days remaining before the repurchase transaction closes prior to issuing a margin call. To minimize the risk of margin calls, as of December 31, 2021, we have entered into $1.2 billion of financing arrangements for which the collateral cannot be adjusted as a result of changes in market value, minimizing the risk of a margin call as a result in price volatility. We refer to these agreements as non mark-to-market (non-MTM) facilities. These non-MTM facilities generally have higher costs of financing, but lower the risk of a margin call which could result in sales of our assets at

62

distressed prices. All non-MTM facilities are collateralized by non-agency RMBS collateral, which tends to have increased volatile price changes during periods of market stress. We believe these non-MTM facilities significantly reduce our financing risks. See Note 5 to our Consolidated Financial Statements for a discussion on how we determine the fair values of the RMBS collateralizing our secured financing agreements.

At December 31, 2021, the weighted average borrowing rates for our secured financing agreements collateralized by Agency RMBS IOs was 0.7%, Agency CMBS was 0.2% and Non-Agency MBS and Loans held for investment was 2.8%. At December 31, 2020, the weighted average borrowing rates for our secured financing agreements collateralized by Agency RMBS was 0.9%, Agency CMBS was 0.2%, and Non-Agency MBS and Loans held for investment was 4.8%.

The table below presents our average daily secured financing agreements balance and the secured financing agreements balance at each period end for the periods presented. Our balance at period-end tends to fluctuate from the average daily balances due to the adjusting of the size of our portfolio by using leverage.

[[GREPCENT_TABLE]]
[["Period","Average secured financing agreements balances","Secured financing agreements balance at period end"],["","(dollars in thousands)"],["Year Ended December 31, 2021","$","3,937,929","","$","3,261,613"],["Year Ended December 31, 2020","$","7,316,345","","$","4,636,837"],["Year Ended December 31, 2019","$","14,492,386","","$","13,427,545"],["Quarter End December 31, 2021","$","3,468,212","","$","3,261,613"],["Quarter End September 30, 2021","$","3,824,615","","$","3,788,336"],["Quarter End June 30, 2021","$","3,792,547","","$","3,554,428"],["Quarter End March 31, 2021","$","4,560,057","","$","4,045,912"]]
[[/GREPCENT_TABLE]]

We are not required to maintain any specific leverage ratio. We believe the appropriate leverage for the particular assets we are financing depends on the credit quality and risk of those assets. At December 31, 2021 and December 31, 2020, the carrying value of our total interest-bearing debt was approximately $11.1 billion and $13.5 billion, respectively, which represented a leverage ratio of approximately 3.0:1 and 3.6:1, respectively. We include our secured financing agreements and securitized debt in the numerator of our leverage ratio and stockholders’ equity as the denominator.

At December 31, 2021, we had secured financing agreements with 11 counterparties. All of our secured financing agreements are secured by Agency MBS, Non-Agency RMBS and Loans held for investment and cash. Under these secured financing agreements, we may not be able to reclaim our collateral but will still be obligated to pay our repurchase obligations. We mitigate this risk by ensuring our counterparties are highly rated. As of December 31, 2021 and December 31, 2020, we had $4.4 billion and $6.7 billion, respectively, of securities or cash pledged against our secured financing agreements obligations.

We expect to enter into new secured financing agreements at maturity. When we renew our secured financing agreements, there is a risk that we will not be able to renew them or obtain favorable interest rates and haircuts as a result of uncertainty in the market including, but not limited to, uncertainty as a result of the COVID-19 pandemic.

On October 30, 2021, all 5,800,000 issued and outstanding shares of Series A Preferred Stock with an outstanding liquidation preference of $145 million became callable at a redemption price equal to the liquidation preference plus accrued and unpaid dividends through, but not including, the redemption date. The dividend rate on shares of Series A Preferred Stock is 8.00% per annum.

Exposure to Financial Counterparties

We actively manage the number of secured financing agreements counterparties to reduce counterparty risk and manage our liquidity needs. The following table summarizes our exposure to our secured financing agreements counterparties at December 31, 2021:

63

[[GREPCENT_TABLE]]
[["December 31, 2021"],["Country","Number of Counterparties","Secured Financing Agreement","","Exposure (1)"],["(dollars in thousands)"],["United States","7","2,183,494","","","884,005"],["Japan","1","746,001","","","206,789"],["Canada","1","218,855","","","46,523"],["Netherlands","1","57,042","","","1,377"],["South Korea","1","56,221","","","2,812"],["Total","11","$","3,261,613","","","$","1,141,506"]]
[[/GREPCENT_TABLE]]

(1) Represents the amount of securities and/or cash pledged as collateral to each counterparty less the aggregate of secured financing agreement and unrealized loss on swaps for each counterparty.

We regularly monitor our exposure to financing counterparties for credit risk and allocate assets to these counterparties based, in part, on the credit quality and internally developed metrics measuring counterparty risk. Our exposure to a particular counterparty is calculated as the excess collateral which is pledged relative to the secured financing agreement balance. If our exposure to our financing counterparties exceeds internally developed thresholds, we develop a plan to reduce the exposure to an acceptable level. At December 31, 2021, we did not have any exposure to a counterparty which exceeded 10% of our equity.

At December 31, 2021, we did not use credit default swaps or other forms of credit protection to hedge the exposures summarized in the table above.

Stockholders’ Equity

In February 2021, our Board of Directors increased the authorization of our share repurchase program, or the Repurchase Program, to $250 million. Such authorization does not have an expiration date, and at present, there is no intention to modify or otherwise rescind such authorization. Shares of our common stock may be purchased in the open market, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act. The timing, manner, price and amount of any repurchases will be determined at our discretion and the program may be suspended, terminated or modified at any time for any reason. Among other factors, we intend to only consider repurchasing shares of our common stock when the purchase price is less than the last publicly reported book value per common share. In addition, we do not intend to repurchase any shares from directors, officers or other affiliates. The program does not obligate us to acquire any specific number of shares, and all repurchases will be made in accordance with Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of stock repurchases.

We repurchased approximately 161 thousand shares of our common stock at an average price of $11.39 per share for a total of $2 million during the year ended December 31, 2021. We repurchased approximately 1.4 million shares of our common stock at an average price of $15.34 per share for a total of $22 million during the year ended December 31, 2020. The approximate dollar value of shares that may yet be purchased under the Repurchase Program is $226 million as of December 31, 2021.

During the year ended December 31, 2021, we issued approximately 6 million shares of our common stock upon conversion of the $37 million Notes. During the year ended December 31, 2020, we issued approximately 49 million shares of our common stock upon conversion of the $321 million Notes. Additionally, we issued shares of our common stock as discussed below under “Restricted Stock Grants,” and a de minimis amount under our Dividend Reinvestment Plan.

We declared dividends to common shareholders of $308 million, or $1.29 per share, and $301 million, or $1.40 per share, during the years ended December 31, 2021 and 2020, respectively.

We declared dividends to Series A preferred stockholders of $12 million, or $2.00 per preferred share, during the years ended December 31, 2021 and 2020, respectively.

We declared dividends to Series B preferred stockholders of $26 million, or $2.00 per preferred share, during the years ended December 31, 2021 and 2020, respectively.

We declared dividends to Series C preferred stockholders of $20 million, or $1.937500 per preferred share, during the years ended December 31, 2021 and 2020, respectively.

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We declared dividends to Series D preferred stockholders of $16 million, or $2.00 per preferred share, during the years ended December 31, 2021 and 2020, respectively.

Restricted Stock Unit and Performance Share Unit Grants

Grants of Restricted Stock Units, or RSUs

During the year ended December 31, 2021 and 2020, we granted RSU awards to senior management. These RSU awards are designed to reward our senior management for services provided to us. Generally, the RSU awards vest equally over a three-year period beginning from the grant date and will fully vest after three years. For employees who are retirement eligible, defined as years of service to us plus age, is equal to or greater than 65, the service period is considered to be fulfilled and all grants are expensed immediately. The RSU awards are valued at the market price of our common stock on the grant date and generally the employees must be employed by us on the vesting dates to receive the RSU awards. We granted 393 thousand RSU awards during the year ended December 31, 2021, with a grant date fair value of $5 million, respectively. We granted 414 thousand RSU awards during the year ended December 31, 2020, with a grant date fair value of $5 million.

In addition, during the year ended December 31, 2021, we granted certain of our senior management 1 million RSU awards that vest in five equal tranches with one tranche vested immediately and the remaining four will vest equally over a four-year period. These additional RSUs are not subject to retirement eligible provisions and had a grant date fair value of $10 million.

Grants of Performance Share Units, or PSUs

PSU awards are designed to align compensation with our future performance. The PSU awards granted during the year ended December 31, 2021 and 2020, include a three-year performance period ending on December 31, 2023 and December 31, 2022, respectively. The final number of shares awarded will be between 0% and 200% of the PSUs granted based on our Economic Return compared to a peer group. Our three-year Economic Return is equal to our change in book value per common share plus common stock dividends. Compensation expense will be recognized on a straight-line basis over the three-year vesting period based on an estimate of our Economic Return in relation to the entities in the peer group and will be adjusted each period based on our best estimate of the actual number of shares awarded. During the year ended December 31, 2021, we granted 182 thousand PSU awards to senior management with a grant date fair value of $2 million. During the year ended December 31, 2020, we granted 173 thousand PSU awards to senior management with a grant date fair value of $3 million.

At December 31, 2021 and December 31, 2020, there were approximately 2.8 million and 2.1 million unvested shares of RSUs and PSUs issued to our employees, respectively.

Contractual Obligations and Commitments

The following tables summarize our contractual obligations at December 31, 2021 and December 31, 2020. The estimated principal repayment schedule of the securitized debt is based on expected cash flows of the residential mortgage loans or RMBS, as adjusted for expected principal write-downs on the underlying collateral of the debt.

[[GREPCENT_TABLE]]
[["December 31, 2021"],["(dollars in thousands)"],["Contractual Obligations","Within One Year","One to Three Years","Three to Five Years","Greater Than or Equal to Five Years","Total"],["Secured financing agreements","$","2,861,485","","$","143,239","","$","256,889","","$","\u2014","","$","3,261,613"],["Securitized debt, collateralized by Non-Agency RMBS","4,374","","2,361","","949","","82","","7,766"],["Securitized debt at fair value, collateralized by Loans held for investment","2,031,445","","2,886,255","","1,697,760","","1,145,995","","7,761,455"],["Interest expense on MBS secured financing agreements (1)","7,687","","352","","1,270","","\u2014","","9,309"],["Interest expense on securitized debt (1)","170,798","","223,316","","117,998","","101,367","","613,479"],["Total","$","5,075,789","","$","3,255,523","","$","2,074,866","","$","1,247,444","","$","11,653,622"]]
[[/GREPCENT_TABLE]]

(1) Interest is based on variable rates in effect as of December 31, 2021.

65

[[GREPCENT_TABLE]]
[["December 31, 2020"],["(dollars in thousands)"],["Contractual Obligations","Within One Year","One to Three Years","Three to Five Years","Greater Than or Equal to Five Years","Total"],["Secured financing agreements","$","3,598,173","","$","642,696","","$","395,978","","$","\u2014","","$","4,636,847"],["Securitized debt, collateralized by Non-Agency RMBS","13,552","","11,229","","1,589","","305","","26,675"],["Securitized debt at fair value, collateralized by Loans held for investment","1,837,055","","2,819,646","","1,774,273","","2,170,253","","8,601,227"],["Interest expense on MBS secured financing agreements (1)","19,177","","2,743","","2,018","","\u2014","","23,938"],["Interest expense on securitized debt (1)","265,516","","364,443","","217,727","","270,046","","1,117,732"],["Total","$","5,733,473","","$","3,840,757","","$","2,391,585","","$","2,440,604","","$","14,406,419"]]
[[/GREPCENT_TABLE]]

(1) Interest is based on variable rates in effect as of December 31, 2020.

Not included in the table above are the unfunded construction loan commitments of $23 million and $106 million as of December 31, 2021 and December 31, 2020, respectively. We expect the majority of these commitments will be paid within one year and are reported under Payable for investments purchased in our Consolidated Statements of Financial Condition.

Capital Expenditure Requirements

At December 31, 2021 and December 31, 2020, we had no material commitments for capital expenditures.

Dividends

To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our taxable income (subject to certain adjustments). Before we pay any dividend, we must first meet any operating requirements and scheduled debt service on our financing facilities and other debt payable.

Critical Accounting Policies and Estimates

Accounting policies are integral to understanding our Management’s Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in accordance with GAAP requires management to make certain judgments and assumptions, on the basis of information available at the time of the financial statements, in determining accounting estimates used in the preparation of these statements. Our significant accounting policies and accounting estimates are described in Note 2 to the Consolidated Financial Statements. Critical accounting policies are described in this section. An accounting policy is considered critical if it requires management to make assumptions or judgments about matters that are highly uncertain at the time the accounting estimate was made or require significant management judgment in interpreting the accounting literature. If actual results differ from our judgments and assumptions, or other accounting judgments were made, this could have a significant and potentially adverse impact on our financial condition, results of operations and cash flows. These critical accounting policies were developed by management, and reviewed by our auditors, prior to being presented to and discussed with the Audit Committee of the Board of Directors.

The accounting policies and estimates which we consider most critical relate to the recognition of revenue on our investments, including recognition of any losses, and the determination of fair value of our financial instruments.

The consolidated financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries, and variable interest entities, or VIEs, for which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although our estimates contemplate current conditions and how we expect them to change in the future, it is reasonably possible that actual conditions could be

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different than anticipated in those estimates, which could materially adversely impact our results of operations and our financial condition. Management has made significant estimates in several areas, including current expected credit losses of Non-Agency RMBS, valuation of Loans held for investments, Agency and Non-Agency MBS and interest rate swaps and income recognition on Loans held for investments and Non-Agency RMBS. Actual results could differ materially from those estimates.

Recognition of Revenue

We primarily invest in pools of mortgage loans. All mortgage loans are carried at fair value with changes in fair value recognized in earnings. Our investments in mortgage loans pay principal and interest which is accrued when due. We also invest in MBS representing interests in obligations backed by pools of mortgage loans. Our investments in MBS includes investments in both Agency MBS and Non-Agency MBS. We delineate between (1) Agency MBS and (2) Non-Agency RMBS as follows: The Agency MBS are mortgage pass-through certificates, collateralized mortgage obligations, or CMOs, and other RMBS representing interests in or obligations backed by pools of residential mortgage loans issued or guaranteed as to principal and/or interest repayment by agencies of the U.S. Government or federally chartered corporations such as Ginnie Mae, Freddie Mac or Fannie Mae. The Non-Agency RMBS are not issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae and are therefore subject to credit risk. We also invests in Interest Only Agency MBS strips and Interest Only Non-Agency RMBS strips, or IO MBS strips. IO MBS strips represent our right to receive a specified proportion of the contractual interest flows of the collateral.

Income on our investments is recognized based on an effective interest rate we expect to earn over the life of the investment. The effective interest rate is determined based on the cost of the investment and the expectation of future cash flows. To determine the future cash flows, we estimate the amount and timing of principal and interest, referred to as the repayment rate, and our expectations of defaults on payments of principal and interest. These estimates require significant judgment which change over time as our expectations change due to changes in market conditions and changes in our investments as principal and interest, other cash flows or losses are experiences. These estimates are compared to actual results of the investment and other similar investments on a regular basis and updated as necessary. These comparisons may result in a favorable or unfavorable change in the effective interest rate expected to be collected. Any favorable or unfavorable changes are reflected as a change in income. Our estimates of the timing and amount of principal and interest, including our expectation of defaults on payments of principal and interest are critical to accurately reporting interest income.

Our accounting policies for recognition of interest income and current expected credit losses related to MBS investments are described in further detail in Note 2 of the consolidated financial statements.

Determination of Fair Value

Substantially all of our investments are carried at fair value. In accordance with current accounting guidance, fair value of our financial instruments represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the financial statement reporting date. We use internally developed models to determine fair value of our investments.

We determine the fair value of all of our Non-Agency RMBS investment securities, including Non-Agency represented as securitized debt, based on discounted cash flows utilizing an internal pricing model that incorporates factors such as coupon, repayment speeds, expected losses, expected loss severity, discount rates and other factors. Estimates of repayment speeds, expected losses and expected loss severity, require significant judgment and are based on what we believe a market participant would use to determine the cash flows. To corroborate that the estimates of fair values generated by these internal models are reflective of current market prices, we compare the fair values generated by the model to non-binding independent prices provided by an independent third party pricing services.

We estimate the fair value of our Loans held for investment consisting of seasoned subprime residential mortgage loans on a loan by loan basis using an internally developed model which compares the loan held by us with a loan currently offered in the market. The loan price is adjusted in the model by considering the loan factors which would impact the value of a loan. These loan factors include loan coupon as compared to coupon currently available in the market, FICO, loan-to-value ratios, delinquency history, owner occupancy, and property type, among other factors. A baseline is developed for each significant loan factor and adjusts the price up or down depending on how that factor for each specific loan compares to the baseline rate. Generally, the most significant impact on loan value is the loan interest rate as compared to interest rates currently available in the market and delinquency history. The determination of the baseline, the market expectation, requires significant judgment. To corroborate that the estimates of fair values generated by these internal models are reflective of current market prices, we compare the fair values generated by the model to non-binding independent prices provided by an independent third party pricing service.

To the extent the inputs used to estimate fair value are observable, the values would be categorized in Level 2 of the fair value hierarchy; otherwise they would be categorized as Level 3. Our fair value estimation process utilizes inputs other than quoted prices that are observed in the market. Our estimates are deemed to be significant to the fair value measurement process, which

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renders the resulting Non-Agency fair value estimates Level 3 inputs in the fair value hierarchy. Level 3 assets represent approximately 93% and 89% of total assets measured at fair value on a recurring basis as of December 31, 2021 and 2020, respectively. Level 3 liabilities represent approximately 100% of total liabilities measured at fair value on a recurring basis as of December 31, 2021 and 2020, respectively.

Our accounting policies for the determination of fair value of our investments are described in further detail in Note 2 and Note 5 of the consolidated financial statements.

Variable Interest Entities

VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary and is generally the entity with (i) the power to direct the activities that most significantly impact the VIE’s economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE. For VIEs’ that do not have substantial on-going activities, the power to direct the activities that most significantly impact the VIEs’ economic performance may be determined by an entity’s involvement with the design of the VIE.

Our Consolidated Statements of Financial Condition contain the assets and liabilities related to thirty consolidated variable interest entities or VIEs. Due to the non-recourse nature of these VIEs our net exposure to loss from investments in these entities is limited to our retained beneficial interests.

At December 31, 2021, we consolidated twenty-seven residential mortgage loan securitizations and three RMBS re-securitization transactions which are VIEs. The residential mortgage loan securitizations contain jumbo prime and Non-QM residential mortgage loans. The RMBS re-securitization transactions contain Non-Agency RMBS comprised of primarily first lien mortgages of 2005-2007 vintages.

Our determination to consolidate these thirty VIEs was significantly influenced by management’s judgment related to the activities that most significantly impact the economic performance of these entities and the identification of the party with the power over such activities. For the residential mortgage loan securitizations, we determined that our ability to remove the servicer without cause resulted in us having the power that most significantly impacts the economic performance of the VIE. For the three consolidated RMBS re-securitization transactions, we determined that no party has power over any ongoing activities of the entities and therefore the determination of the primary beneficiary should be based on involvement with the initial design of the entity. Since we transferred the RMBS to the securitization entities, we determined we had the power over the design of the entity, which resulted in us being considered the primary beneficiary. This determination was influenced by the amount of economic exposure to the financial performance of the entity and required a significant management judgment in determining that we should consolidate these three entities.

Due to the consolidation of these VIEs, our actual ownership interests in the securitization and re-securitizations have been eliminated in consolidation and the Consolidated Statements of Financial Condition reflect both the assets held and non-recourse debt issued to third parties by these VIEs. In addition, our operating results and cash flows include the gross amounts related to the assets and liabilities of the VIEs as opposed to the actual economic interests we own in these VIEs. Our interest in these VIEs is restricted to the beneficial interests we retained in these transactions. We are not obligated to provide any financial support to these VIEs.

Our Consolidated Statements of Financial Condition separately present: (i) our direct assets and liabilities, and (ii) the assets and liabilities of our consolidated securitization vehicles net of intercompany eliminations representing securities from the securitization trusts retained by us. Assets of all consolidated VIEs can only be used to satisfy the obligations of those VIEs, and the liabilities of consolidated VIEs are non-recourse to us.

We have aggregated all the assets and liabilities of the consolidated securitization vehicles due to our determination that these entities are substantively similar and therefore a further disaggregated presentation would not be more meaningful. The notes to our consolidated financial statements describe our direct assets and liabilities and the assets and liabilities of our consolidated securitization vehicles. See Note 9 to our consolidated financial statements for additional information related to our investments in VIEs.

Recent Accounting Pronouncements

Refer to Note 2 in the Notes to Consolidated Financial Statements for a discussion of accounting guidance we have recently adopted or expect to be adopted in the future.

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