# DYNEX CAPITAL INC (DX) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from DYNEX CAPITAL INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/826675/000082667524000011/dx-20231231.htm
Accession: 0000826675-24-000011
Filing date: 2024-02-26
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/DX/
All MD&A years: /company/DX/mda/
Previous year: /company/DX/mda/fy2022/ (FY 2022)
Next year: /company/DX/mda/fy2024/ (FY 2024)

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and the related notes included in Item 8, "Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those disclosed in Item 1A, “Risk Factors” elsewhere in this Annual Report on Form 10-K and in other documents filed with the SEC and otherwise publicly disclosed. Please refer to “Forward-Looking Statements” contained within this Item 7 for additional information. This discussion also contains non-GAAP financial measures, which are discussed in the section “Non-GAAP Financial Measures.”

For a complete description of our business including our operating policies, investment philosophy and strategy, financing and hedging strategies, and other important information, please refer to Item 1 of Part I of this Annual Report on Form 10-K.

EXECUTIVE OVERVIEW

The focus in early 2023 was the rate of inflation and whether the increases in the Federal Funds Target Rate (“Fed Funds rate”), which started in 2022, would be sufficient to tamp down inflation or if more increases would be needed in 2023. The Federal Reserve continued its path of rate increases in early 2023, prompting interest rates across the yield curve to rise. In early March, the U.S. market experienced a regional bank crisis driven by the combination of unhedged low coupon securities and downgrades which spurred large scale and rapid movement of customer deposits. Given the severe liquidity issues caused by the loss of deposits, several institutions either failed and were seized or were taken over by larger more solvent institutions. Interest rates temporarily fell post regional bank crisis before refocusing on inflation and rising throughout most of the year as the Federal Reserve signaled the need for higher interest rates and messaged a need for “higher for longer” U.S. Federal Reserve policy. In the fourth quarter of 2023, many economic forecasts for 2024 predicted rate cuts, and as a result, interest rates fell going into year end. Despite a very volatile 2023 that experienced over a 170 basis point change in the 10-year U.S. Treasury rate from peak to trough, the rate closed out 2023 virtually unchanged from the end of 2022.

Global unrest continues in many parts of the world. The Russia and Ukraine war is ongoing and the attack on Israel by Hamas has created unrest in that region. The economic benefit of the reopening of China post Covid-19

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restrictions did not materialize in 2023, and many are looking to the region to determine what steps China may take to stimulate its economy and work with trade partners on a global basis.

Artificial Intelligence and Machine Learning created much enthusiasm for investors and entrepreneurs looking to leverage and seize the opportunity. This was tempered by regulators who fear unintended consequences and ethical dilemmas based on incorrect results and data bias. The debates over these issues will continue into the future.

Market Data

The charts below show the range of U.S. Treasury rates for the past twelve months and information regarding market spreads as of and for the periods indicated:

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[[GREPCENT_TABLE]]
[["","","Market Spreads as of:","","Change in Spreads YTD"],["Investment Type:","","December 31, 2023","","September 30, 2023","","June 30, 2023","","March 31, 2023","","December 31, 2022"],["Agency RMBS: (1)"],["2.0% coupon","","76","","84","","67","","79","","62","","14"],["2.5% coupon","","78","","88","","72","","79","","68","","10"],["3.0% coupon","","79","","88","","74","","78","","70","","9"],["3.5% coupon","","75","","87","","73","","75","","72","","3"],["4.0% coupon","","74","","87","","73","","74","","62","","12"],["4.5% coupon","","73","","84","","71","","79","","60","","13"],["5.0% coupon","","69","","86","","75","","70","","53","","16"],["5.5% coupon","","66","","87","","76","","68","","50","","16"],["6.0% coupon","","60","","87","","74","","60","","57","","3"],["Agency DUS (Agency CMBS)(2)","","76","","80","","72","","78","","74","","2"],["Freddie K AAA IO (Agency CMBS IO)(2)","","180","","185","","175","","210","","235","","(55)"],["AAA CMBS IO (Non-Agency CMBS IO)(2)","","225","","275","","301","","350","","315","","(90)"]]
[[/GREPCENT_TABLE]]

(1)Option adjusted spreads (“OAS”) are based on Company estimates using third-party models and market data. OAS shown for prior periods may differ from previous disclosures because.the Company regularly updates the third-party model used.

(2)Data represents the spread to swap rate on newly issued securities and is sourced from J.P. Morgan.

Summary of Results

The following table provides details about the changes in our financial position during the year ended December 31, 2023:

[[GREPCENT_TABLE]]
[["","Net Change in Fair Value","","Components of Comprehensive Income","","Common Book Value Rollforward","","Per Common Share"],["Balance as of December 31, 2022 (1)","","","","","$","789,828","","","$","14.73"],["Net interest expense","","","$","(7,931)"],["G & A and other operating expenses","","","(32,879)"],["Preferred stock dividends","","","(7,694)"],["Changes in fair value:"],["MBS and loans","$","90,429"],["TBAs","(22,063)"],["U.S. Treasury futures","(12,430)"],["Put options on U.S. Treasury futures","1,588"],["Total net change in fair value","","","57,524"],["Comprehensive income to common shareholders","","","","","9,020","","","0.16"],["Capital transactions:"],["Net proceeds from stock issuance (2)","","","","","46,951","","","(0.02)"],["Common dividends declared","","","","","(86,564)","","","(1.56)"],["Balance as of December 31, 2023 (1)","","","","","$","759,235","","","$","13.31"]]
[[/GREPCENT_TABLE]]

(1)Amounts represent total shareholders' equity less the aggregate liquidation preference of the Company's

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preferred stock, in thousands and on a per common share basis.

(2)Net proceeds from stock issuance include $42.6 million from common stock ATM program and $4.3 million from share-based compensation grants, net of amortization. The amount shown for “per common share” includes the impact of the increase in the number of common shares outstanding.

In all market environments, we seek to pay a consistent dividend and preserve book value for our shareholders. This year, we remained focused on minimizing the impact of volatile interest rates and spreads by actively managing leverage and liquidity. To minimize the loss in fair value of our investments from higher interest rates, we continuously monitored and adjusted our hedge position throughout the year as macroeconomic views and market factors changed. Spread tightening experienced late in the fourth quarter of 2023 favorably impacted the fair value of our investment portfolio because we purchased $3.6 billion in Agency RMBS during 2023 when spreads were wider relative to December 31, 2023. As a result, the net gains on our investment portfolio for the year ended December 31, 2023 exceeded net losses on our interest rate hedges. Comprehensive income to common shareholders for the year ended December 31, 2023 was $9.0 million, or $0.16 per common share. Total economic return to our common shareholders of $0.14 per common share, or 1.0% of beginning book value, consisted of a decline in book value of $(1.42) offset by dividends declared of $1.56.

Realized gains and losses on interest rate hedges are recognized in GAAP net income (loss) in the same reporting period in which the derivative instrument matures or is terminated, but are not included in our earnings available for distribution ("EAD"), a non-GAAP measure, during any reporting period. On a tax basis, realized gains and losses on derivative instruments designated for tax purposes as interest rate hedges are amortized into our REIT taxable income over the original periods hedged by those derivatives. Our estimated REIT taxable income for the year ended December 31, 2023 includes an estimated benefit of approximately $80.5 million, or $1.47 per average common share outstanding, from the amortization of accumulated deferred tax hedge gains, which were estimated to be $861.8 million as of December 31, 2023 compared to $695.2 million as of December 31, 2022. This benefit will be distributable to common shareholders as part of our taxable ordinary income in future periods. Additional information regarding the estimated impact of deferred tax hedge amortization on our estimated REIT taxable income is discussed in “Liquidity and Capital Resources” within this Item 7.

Current Outlook

Global growth expectations are muted as we enter 2024. Chinese officials appear likely to increase fiscal and monetary policy in early 2024, as the consensus forecast for GDP growth is below the pre-pandemic trend. From South Korea to Australia, economies in the region are trending for sub-trend growth. Inflation pressures in Asia remain more muted than in the rest of the world, and we believe European growth will continue to slow. Inflation in most of the Eurozone is trending lower, and most forecasts suggest price pressures will continue to ease throughout 2024.

U.S. growth expectations are subdued, with the median of Federal Reserve officials’ expectations for 2024 real GDP growth at just 1.4%. Except for the economic downturn in 2020 during the height of the COVID-19 pandemic, 1.4% would be the slowest pace of real GDP growth since the Global Financial Crisis in 2009. As we started 2024, market expectations for inflation were in the range of 2.0-2.5%. That said, growth and inflation are running higher than those forecasted in late 2023, which suggests that GDP growth could be higher than the Federal Reserve officials’ expectations for 2024.

Financial conditions eased dramatically in late 2023 and that has continued in the first few weeks of 2024. Futures markets are expecting easier monetary policy in 2024 and even into 2025, with as much as 150 basis points of Fed Funds rate cuts. This could be seen largely as an adjustment. The real level of the Fed Funds policy rate is historically high. Even considering a modest upside risk to consensus inflation forecasts, the Federal Reserve’s target appears to have room to adjust rates lower. However, the extent and timing of the cuts remain debatable. Growth and inflation could surprise to the upside in the first half of 2024, allowing the Federal Reserve to act less than markets suggested. Moreover, the presidential election in November could be a factor with the Federal Reserve not wanting to be seen as politically motivated.

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Early in 2024, certain representatives of the Federal Reserve suggested they could consider reducing their quantitative tightening measures, a term used for the plan to shrink the Fed’s balance sheet. If the steady pace of declines in the Federal Reserve’s holdings of U.S. Treasuries and Agency MBS slows or even stops, the availability of U.S. dollar liquidity and financial conditions could improve.

Overall, yields on fixed-income spread products tightened relative to U.S. Treasuries in December 2023 as investors tried to get ahead of the January tightening typically experienced in prior years. Investors may expect lower interest-rate volatility amid less monetary tightening and possibly even easing in 2024. That would likely offer a tailwind for risky assets, especially Agency MBS, which repriced significantly in the previous two years on the expectation of declining Federal Reserve holdings. Corporate bond yields remain tighter relative to MBS, suggesting MBS could retain a bid even if corporate bonds were finally repriced for the risk of higher credit losses in a recession scenario.

Historically, yield curves have steepened as the Federal Reserve starts to ease policy. Trend models started to suggest a new steepening trend in late 2023 and early 2024. A steeper yield curve has usually proven positive for mortgages. Moreover, investors owning leveraged MBS positions could benefit from hedging in longer maturity U.S. Treasuries as the curve steepens.

Risks to the outlook remain high as we enter 2024. The ongoing war in Ukraine and the war between Hamas and the state of Israel highlight the risk of human conflict. The rapid adoption of artificial intelligence technologies has introduced multi-layered risks for 2024. Capital investment could boost developed world economies, while security risks could overwhelm emerging economies and even developed ones. Fiscal imbalances, especially in those critical to the global financial system like the U.S., will likely continue to grow in 2024. These risks remain top of mind for 2024.

Despite these risks, our outlook for 2024 is a positive one. We expect monetary policy to be less restrictive this year with lower interest rate volatility. Yield spreads relative to U.S. Treasuries should remain wider than when the Federal Reserve was more active in its purchases of MBS. Still, the spreads of MBS offer attractive leveraged returns for long-term holders. Moreover, we expect tactical opportunities to increase amid moderate spread volatility in 2024. We will likely have opportunities to actively manage our coupon exposure as markets re-price for the new liquidity environment. Finally, we see the potential for opportunities to re-introduce compelling yield opportunities in CMBS and other segments of the RMBS market.

FINANCIAL CONDITION

Investment Portfolio

Our investment portfolio (including TBAs) as of December 31, 2023 increased 27% compared to December 31, 2022. The increase during the year ended December 31, 2023 was due to our strategy of deploying capital during periods of wider spreads into higher coupon Agency RMBS with higher forward returns relative to the investments held as of December 31, 2022. We purchased Agency RMBS with a cost basis of $3.6 billion during the year ended December 31, 2023.

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The following charts compare the composition of our MBS portfolio including TBA securities as of the dates indicated:

We frequently change the coupon distribution in our Agency RMBS and TBA portfolios in order to minimize losses due to spread volatility. We expect spreads will remain volatile and range-bound in the intermediate term while the Federal Reserve continues reducing MBS from its balance sheet. Longer term, as investors return to the MBS market and demand improves, we expect the fair value of our investment portfolio to increase and our book value to trend higher.

The following tables compare our fixed-rate Agency RMBS investments, including TBA dollar roll positions, as of the dates indicated:

[[GREPCENT_TABLE]]
[["","","December 31, 2023"],["","","Par/Notional","","Amortized Cost/Implied Cost Basis (1)(3)","","Fair Value (2)(3)","","Weighted Average"],["Coupon","","","","","Loan Age(in months)(4)","","3 MonthCPR (4)(5)","","Estimated Duration (6)","","Market Yield (7)"],["30-year fixed-rate:","","($s in thousands)"],["2.0%","","$","708,528","","","$","720,611","","","$","586,361","","","39","","4.4","%","","6.81","","4.60","%"],["2.5%","","608,580","","","632,343","","","525,018","","","40","","4.5","%","","6.62","","4.59","%"],["4.0%","","354,382","","","354,965","","","339,212","","","34","","5.5","%","","5.65","","4.67","%"],["4.5%","","1,383,019","","","1,350,697","","","1,348,108","","","15","","5.0","%","","5.08","","4.88","%"],["5.0%","","2,070,473","","","2,035,088","","","2,057,309","","","9","","4.7","%","","4.24","","5.10","%"],["5.5%","","897,520","","","900,218","","","907,524","","","8","","5.0","%","","3.58","","5.29","%"],["TBA 4.0%","","262,000","","","240,641","","","248,040","","","n/a","","n/a","","5.89","","4.72","%"],["TBA 4.5%","","223,000","","","210,940","","","216,415","","","n/a","","n/a","","4.75","","4.92","%"],["TBA 5.0%","","518,000","","","490,466","","","512,982","","","n/a","","n/a","","3.98","","5.15","%"],["TBA 5.5%","","200,000","","","191,926","","","201,047","","","n/a","","n/a","","2.81","","5.36","%"],["TBA 6.0%","","200,000","","","193,369","","","203,219","","","n/a","","n/a","","2.15","","5.37","%"],["Total","","$","7,425,502","","","$","7,321,264","","","$","7,145,235","","","17","","4.8","%","","4.72","","","4.98","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","","December 31, 2022"],["","","Par/Notional","","Amortized Cost/Implied Cost Basis (1)(3)","","Fair Value (2)(3)","","Weighted Average"],["Coupon","","","","","Loan Age(in months)(4)","","3 MonthCPR (4)(5)","","Estimated Duration (6)","","Market Yield (7)"],["30-year fixed-rate:","","($s in thousands)"],["2.0%","","$","1,193,344","","","$","1,210,065","","","$","982,387","","","23","","5.2","%","","7.14","","4.53","%"],["2.5%","","659,181","","","685,838","","","566,525","","","28","","5.9","%","","6.67","","4.59","%"],["4.0%","","325,726","","","329,725","","","309,940","","","25","","7.2","%","","5.56","","4.75","%"],["4.5%","","803,043","","","799,786","","","782,319","","","4","","4.4","%","","5.02","","4.89","%"],["5.0%","","123,204","","","125,460","","","121,707","","","4","","7.2","%","","3.99","","5.19","%"],["TBA 4.0%","","1,539,000","","","1,454,263","","","1,447,286","","","n/a","","n/a","","5.47","","4.80","%"],["TBA 4.5%","","380,000","","","371,173","","","366,759","","","n/a","","n/a","","4.79","","4.99","%"],["TBA 5.0%","","950,000","","","947,484","","","937,523","","","n/a","","n/a","","4.24","","5.20","%"],["Total","","$","5,973,498","","","$","5,923,794","","","$","5,514,446","","","18","","5.4","%","","5.54","","","4.83","%"]]
[[/GREPCENT_TABLE]]

(1)Implied cost basis of TBAs represents the forward price to be paid for the underlying Agency MBS.

(2)Fair value of TBAs is the implied market value of the underlying Agency security as of the end of the period.

(3)TBAs are included on the consolidated balance sheet within “derivative assets/liabilities” at their net carrying value which is the difference between their implied market value and implied cost basis. Please refer to Note 5 of the Notes to the Consolidated Financial Statements for additional information.

(4)TBAs are excluded from this calculation as they do not have a defined weighted-average loan balance or age until mortgages have been assigned to the pool.

(5)Constant prepayment rate (“CPR”) represents the 3-month CPR of Agency RMBS held as of date indicated.

(6)Duration measures the sensitivity of a security's price to the change in interest rates and represents the percent change in price of a security for a 100-basis point increase in interest rates. We calculate duration using third-party financial models and empirical data. Different models and methodologies can produce different estimates of duration for the same securities.

(7)Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the date indicated and assuming zero volatility.

Less than 4% of our MBS portfolio as of December 31, 2023 is comprised of Agency CMBS, Agency CMBS IO, and non-Agency CMBS IO. Our Agency CMBS and Agency CMBS IO are backed by loans collateralized by multifamily properties, which have performed well for the last decade versus other sectors of the commercial real estate market. Our Agency CMBS IO are Class X1 from Freddie Mac Series K deals from which interest continues to be advanced even in the event of an underlying default up until liquidation. According to Freddie Mac, 99.8% of the loans in K-deals are current as of November 2023. Our non-Agency CMBS IO were all originated prior to 2018 with a weighted average remaining life of less than 2 years. The underlying loans for the non-Agency CMBS IO securities are collateralized by a number of different property types including: 28% retail, 25% office, 15% multifamily, 12% hotel and 20% all other real estate categories. In the current macroeconomic environment, we are not actively purchasing CMBS or CMBS IO as current risk versus reward remains unattractive relative to Agency RMBS.

The following table provides certain information regarding our CMBS and CMBS IO as of the dates indicated:

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[[GREPCENT_TABLE]]
[["","December 31, 2023"],["($s in thousands)","Amortized Cost","","Fair Value","","WAVG Life Remaining (1)","","WAVG Market Yield (2)"],["Agency CMBS","$","121,799","","","$","115,595","","","4.1","","4.74","%"],["Agency CMBS IO","140,824","","","133,302","","","5.9","","5.19","%"],["Non-Agency CMBS IO","26,490","","","26,416","","","1.1","","13.32","%"],["Total","$","289,113","","","$","275,313"],["","December 31, 2022"],["($s in thousands)","Amortized Cost","","Fair Value","","WAVG Life Remaining (1)","","WAVG Market Yield (2)"],["Agency CMBS","$","132,333","","","$","124,690","","","4.8","","4.50","%"],["Agency CMBS IO","179,734","","","168,147","","","6.3","","5.32","%"],["Non-Agency CMBS IO","59,107","","","56,839","","","2.1","","8.54","%"],["Total","$","371,174","","","$","349,676"],["(1) Represents the weighted average life remaining in years based on contractual cash flows as of the dates indicated."],["(2) Represents the weighted average market yield projected using cash flows generated off the forward curve based on market prices as of the dates indicated and assuming zero volatility."]]
[[/GREPCENT_TABLE]]

Repurchase Agreements

We have not experienced any difficulty in securing financing with any of our counterparties, and our repurchase agreement counterparties have not indicated any concerns regarding leverage or credit. Please refer to Note 4 of the Notes to the Consolidated Financial Statements contained within this Annual Report on Form 10-K as well as “Results of Operations” and “Liquidity and Capital Resources” contained within this Item 7 for additional information relating to our repurchase agreement borrowings.

Derivative Assets and Liabilities

The table below discloses details on the Company's interest rate hedges held as of December 31, 2023 compared to hedging portfolio held as of December 31, 2022:

[[GREPCENT_TABLE]]
[["Notional Amount Long (Short)","","December 31, 2023","","December 31, 2022"],["($s in thousands)"],["30-year U.S. Treasury futures","","$","(700,000)","","","$","\u2014"],["10-year U.S. Treasury futures","","(4,180,000)","","","(4,180,000)"],["5-year U.S. Treasury futures","","\u2014","","","(740,000)"],["Put options on 10-year U.S. Treasury futures","","\u2014","","","250,000"]]
[[/GREPCENT_TABLE]]

Please refer to Note 5 of the Notes to the Consolidated Financial Statements for details on our interest rate hedging instruments as well as “Quantitative and Qualitative Disclosures about Market Risk” in Item 7A of this Annual Report on Form 10-K.

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RESULTS OF OPERATIONS

Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Net Interest Income (Expense)

Net interest income and net interest spread declined for the year ended December 31, 2023 compared to year ended December 31, 2022 due to higher borrowing costs resulting from the Federal Reserve’s increases in the Fed Funds rate during 2023. The increase in our borrowing costs has been partially offset by an increase in our average balance of investments with higher yields and our increased investment in cash equivalents. The following table presents information about our interest-earning assets and interest-bearing liabilities and their performance for the periods indicated:

[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 31,"],["","2023","","2022"],["($s in thousands)","Interest Income/Expense","","Average Balance (1)(2)","","Effective Yield/Cost ofFunds (3)(4)","","Interest Income/Expense","","Average Balance (1)(2)","","Effective Yield/Cost ofFunds (3)(4)"],["Agency RMBS","$","177,695","","","$","4,621,304","","","3.85","%","","$","62,942","","","$","2,871,291","","","2.19","%"],["Agency CMBS","3,713","","","124,157","","","2.96","%","","3,592","","","162,538","","","2.17","%"],["CMBS IO (5)","9,666","","","202,261","","","4.78","%","","15,555","","","267,984","","","5.80","%"],["Non-Agency MBS and other investments","128","","","2,377","","","5.28","%","","350","","","4,072","","","8.55","%"],["MBS and loans","$","191,202","","","$","4,950,099","","","3.86","%","","$","82,439","","","$","3,305,885","","","2.49","%"],["Cash equivalents","16,315","","","","","","","4,256"],["Total interest income","$","207,517","","","","","","","$","86,695"],["Repurchase agreement financing","(215,448)","","","4,034,561","","","(5.27)","%","","(43,612)","","","2,603,712","","","(1.65)","%"],["Net interest (expense) income/net interest spread","$","(7,931)","","","","","(1.41)","%","","$","43,083","","","","","0.84","%"]]
[[/GREPCENT_TABLE]]

(1)Average balance for assets is calculated as a simple average of the daily amortized cost and excludes securities pending settlement if applicable.

(2)Average balance for liabilities is calculated as a simple average of the daily borrowings outstanding during the period.

(3)Effective yield is calculated by dividing interest income by the average balance of asset type outstanding during the reporting period. Unscheduled adjustments to premium/discount amortization/accretion, such as for prepayment compensation, are not annualized in this calculation.

(4)Cost of funds is calculated by dividing annualized interest expense by the total average balance of borrowings outstanding during the period with an assumption of 360 days in a year.

(5)Includes Agency and non-Agency issued securities.

Gains (Losses) on Investments and Derivative Instruments

As shown in the graph in Executive Overview, the 10-year U.S. Treasury rate ranged from a low of 3.31% in April 2023 to a high of 4.99% in October 2023, yet ended the year where it started at 3.88%. Credit spreads, which were wider for the majority of 2023, also tightened during the fourth quarter of 2023. We purchased $3.6 billion of Agency RMBS throughout the year when credit spreads were wider relative to December 31, 2023. As a

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result, the fair value of our investment portfolio including TBA securities increased a net $68.4 million for the year ended December 31, 2023. These gains were partially offset by net losses on our interest rate hedges of $(10.8) million for the year ended December 31, 2023.

During the year ended December 31, 2022, our interest rate hedges mitigated the impact of higher interest rates on the fair value of our investment portfolio; however, we experienced spread widening across all of our asset classes throughout 2022. As a result, the decline in the fair value of our investments including TBA securities exceeded the gains from our interest rate hedges by $54.2 million.

The following tables provide details on realized and unrealized gains and losses within our investment and interest rate hedging portfolios for the periods indicated:

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31, 2023"],["($s in thousands)","","Realized Gain (Loss) Recognized in Net Income","","Unrealized Gain (Loss) Recognized in Net Income","","Unrealized Gain (Loss) Recognized in OCI","","Total Change in Fair Value"],["Investment portfolio:"],["Agency RMBS","","$","(74,916)","","","$","141,263","","","$","16,343","","","$","82,690"],["Agency CMBS","","\u2014","","","96","","","1,342","","","1,438"],["CMBS IO","","\u2014","","","1,111","","","5,148","","","6,259"],["Other non-Agency and loans","","\u2014","","","31","","","10","","","41"],["Subtotal","","(74,916)","","","142,501","","","22,843","","","90,428"],["TBA securities (1)","","(97,777)","","","75,713","","","\u2014","","","(22,064)"],["Net (loss) gain on investments","","$","(172,693)","","","$","218,214","","","$","22,843","","","$","68,364"],["Interest rate hedging portfolio:"],["U.S. Treasury futures","","$","234,015","","","$","(246,445)","","","$","\u2014","","","$","(12,430)"],["Put options on U.S. Treasury futures","","3,645","","","(2,056)","","","\u2014","","","1,589"],["Net gain (loss) on interest rate hedges","","$","237,660","","","$","(248,501)","","","$","\u2014","","","$","(10,841)"],["Total net gain (loss)","","$","64,967","","","$","(30,287)","","","$","22,843","","","$","57,523"]]
[[/GREPCENT_TABLE]]

35

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","December 31, 2022"],["($s in thousands)","","Realized Gain (Loss) Recognized in Net Income","","Unrealized Gain (Loss) Recognized in Net Income","","Unrealized Gain (Loss) Recognized in OCI","","Total Change in Fair Value"],["Investment portfolio:"],["Agency RMBS","","$","(89,067)","","","$","(208,129)","","","$","(152,734)","","","$","(449,930)"],["Agency CMBS","","\u2014","","","$","(1,169)","","","$","(14,110)","","","(15,279)"],["CMBS IO","","\u2014","","","(3,924)","","","(21,153)","","","(25,077)"],["Other non-Agency and loans","","\u2014","","","200","","","(78)","","","122"],["Subtotal","","(89,067)","","","(213,022)","","","(188,075)","","","(490,164)"],["TBA securities (1)","","(309,527)","","","(26,120)","","","\u2014","","","(335,647)"],["Net loss on investments","","$","(398,594)","","","$","(239,142)","","","$","(188,075)","","","$","(825,811)"],["Interest rate hedging portfolio:"],["U.S. Treasury futures","","$","642,281","","","$","82,066","","","$","\u2014","","","$","724,347"],["Interest rate swaptions","","50,940","","","(3,202)","","","\u2014","","","47,738"],["Put options on U.S. Treasury futures","","(2,487)","","","2,056","","","\u2014","","","(431)"],["Net gain on interest rate hedges","","$","690,734","","","$","80,920","","","$","\u2014","","","$","771,654"],["Total net gain (loss)","","$","292,140","","","$","(158,222)","","","$","(188,075)","","","$","(54,157)"]]
[[/GREPCENT_TABLE]]

1)Realized and unrealized gains (losses) on TBA securities are recorded within “gain (loss) on derivative instruments, net” on the Company’s consolidated statements of comprehensive income.

Operating Expenses

Operating expenses for the year ended December 31, 2023 decreased $1.0 million compared to the year ended December 31, 2022 primarily due to lower consulting and legal expenses.

Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

Please refer to “Results of Operations” within Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 for a discussion of the results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, which is incorporated herein by reference.

Non-GAAP Financial Measures

In evaluating the Company’s financial and operating performance, management considers book value per common share, total economic return (loss) to common shareholders, and other operating results presented in accordance with GAAP as well as certain non-GAAP financial measures, which include the following: EAD to common shareholders (including per common share), adjusted net interest income and the related metric adjusted net interest spread. Management believes these non-GAAP financial measures may be useful to investors because they are viewed by management as a measure of the investment portfolio’s return based on the effective yield of its investments, net of financing costs and, with respect to EAD, net of other normal recurring operating income/expenses. Drop income generated by TBA dollar roll positions, which is included in "gain (loss) on derivatives instruments, net" on the Company's consolidated statements of comprehensive income, is included in these non-GAAP financial measures because management views drop income as the economic equivalent of net interest

income (interest income less implied financing cost) on the underlying Agency security from trade date to settlement date. However, these non-GAAP financial measures are not a substitute for GAAP earnings and may not be comparable to similarly titled measures of other REITs because they may not be calculated in the same manner. Furthermore, though EAD is one of several factors our management considers in determining the appropriate level of distributions to common shareholders, it should not be utilized in isolation, and it is not an accurate indication of the Company’s REIT taxable income or its distribution requirements in accordance with the Tax Code.

Reconciliations of EAD to common shareholders and adjusted net interest income to the related GAAP financial measures are provided below.

[[GREPCENT_TABLE]]
[["","","Year Ended"],["Reconciliations of GAAP to Non-GAAP Financial Measures:","","December 31, 2023","","December 31, 2022"],["($s in thousands except per share data)"],["Comprehensive income (loss) to common shareholders","","$","9,020","","","$","(52,608)"],["Less:"],["Change in fair value of investments (1)","","(90,429)","","","490,164"],["Change in fair value of derivative instruments, net (2)","","28,808","","","(393,401)"],["EAD to common shareholders","","$","(52,601)","","","$","44,155"],["Average common shares outstanding","","54,809,462","","","42,491,433"],["EAD per common share","","$","(0.96)","","","$","1.04"],["Net interest expense","","$","(7,931)","","","$","43,083"],["TBA drop (loss) income (3)","","(4,097)","","","42,606"],["Adjusted net interest (expense) income","","$","(12,028)","","","$","85,689"],["Total operating expenses","","(32,879)","","","(33,840)"],["Preferred stock dividends","","(7,694)","","","(7,694)"],["EAD to common shareholders","","$","(52,601)","","","$","44,155"]]
[[/GREPCENT_TABLE]]

(1)Amount includes realized and unrealized gains and losses due to changes in the fair value of the Company’s MBS.

(2)Amount includes unrealized gains and losses from changes in fair value of derivatives (including TBAs accounted for as derivative instruments) and realized gains and losses on terminated derivatives and excludes TBA drop loss.

(3)TBA drop income is calculated by multiplying the notional amount of the TBA dollar roll positions by the difference in price between two TBA securities with the same terms but different settlement dates.

We primarily use U.S. Treasury futures to hedge the impact of increasing interest rates on our borrowing costs and the fair value of our investments. In the past, we used interest rate swaps to hedge interest rate risk and included the net periodic interest benefit/cost of those instruments in each of the non-GAAP measures mentioned above. Management is using U.S. Treasury futures instead of interest rate swaps because U.S. Treasury futures generally have lower margin requirements and offer more liquidity and flexibility in the current volatile interest rate environment. The Company’s realized gains on its U.S. Treasury futures as well as other interest rate hedges are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated, but are not included in EAD or adjusted net interest income during any reporting period. Furthermore, because the majority of the U.S. Treasury futures and other derivative instruments are designated as hedges for tax purposes, the realized gains are not distributable to our shareholders until amortized into REIT taxable income over the period originally hedged. Additional information regarding the expected impact of deferred tax hedge amortization on our estimated REIT taxable income is discussed in “Executive Overview” and “Liquidity and Capital Resources.”

LIQUIDITY AND CAPITAL RESOURCES

 Our primary sources of liquidity include borrowings under repurchase arrangements and monthly principal and interest payments we receive on our investments. Additional sources may also include proceeds from the sale of

investments, equity offerings, and net payments received from counterparties for derivative instruments. We use our liquidity to purchase investments, to pay amounts due on our repurchase agreement borrowings, and to pay our operating expenses and dividends on our common and preferred stock. We also use our liquidity to meet margin requirements for our repurchase agreements and derivative transactions, including TBA contracts, under the terms of the related agreements. We may also periodically use liquidity to repurchase shares of the Company’s stock.

Our liquidity fluctuates based on our investment activities, our leverage, capital raising activities, and changes in the fair value of our investments and derivative instruments. Our measurement of liquidity includes unrestricted cash and cash equivalents and unencumbered Agency MBS, which are recognized as assets on our consolidated balance sheet. We also include in our measure of liquidity the fair value of noncash collateral pledged to us by our counterparties, which we typically receive when the fair value of our pledged collateral exceeds our current margin requirement. Though the fair value of this noncash collateral is not recorded on our consolidated balance sheet, we include this amount in our liquidity measure because we have the right repledge the noncash collateral pledged to us by our counterparties. Our liquidity as of December 31, 2023 was $453.6 million, which consisted of unrestricted cash of $119.6 million, unencumbered Agency MBS with a fair value of $157.6 million, and noncash collateral received from our counterparties, which consisted of U.S. Treasuries and Agency RMBS, with a fair value of $176.3 million. The decline in our liquidity, which was $632.3 million as of December 31, 2022, is primarily due to our use of cash to partially finance investment purchases during the year ended December 31, 2023 and to cover dividends declared in excess of cash provided by operating activities.

We continuously monitor our liquidity, especially with potential risk events on the horizon, such as uncertainty regarding Federal Reserve policy decisions, frequent potential for a government shutdown, the impact on global markets stemming from global central bank policies, and the wars between Russia and Ukraine and between Israel and Hamas. We continuously assess the adequacy of our liquidity under various scenarios based on changes in the fair value of our investments and derivative instruments due to market factors such as changes in the absolute level of interest rates and the shape of the yield curve, credit spreads, lender haircuts, and prepayment speeds, which in turn have an impact on derivative margin requirements. In performing these analyses, we will also consider the current state of the fixed income markets and the repurchase agreement markets in order to determine if market forces such as supply-demand imbalances or structural changes to these markets could change the liquidity of MBS or the availability of financing. We also communicate frequently with our counterparties. We have not experienced any material changes in the terms of our repurchase agreements with our counterparties, and they have not indicated to us any concerns regarding access to liquidity.

Our perception of the liquidity of our investments and market conditions significantly influences our targeted leverage. In general, our leverage will increase if we view the risk-reward opportunity of higher leverage on our capital outweighs the risk to our liquidity and book value. Our leverage, which we calculate using total liabilities plus the cost basis of TBA long positions, was 7.8 times shareholders’ equity as of December 31, 2023. We include the cost basis of our TBA securities in evaluating our leverage because it is possible under certain market conditions that it may be uneconomical for us to roll a TBA long position into future months, which may result in us having to take physical delivery of the underlying securities and use cash or other financing sources to fund our total purchase commitment. Leverage based on repurchase agreement amounts outstanding was 6.2 times shareholders’ equity as of December 31, 2023.

Our repurchase agreement borrowings are principally uncommitted with terms renewable at the discretion of our lenders and generally have original terms to maturity of overnight to six months, though in some instances we may enter into longer-dated maturities depending on market conditions. We seek to maintain unused capacity under our existing repurchase agreement credit lines with multiple counterparties, which helps protect us in the event of a counterparty's failure to renew existing repurchase agreements. As part of our continuous evaluation of counterparty risk, we maintain our highest counterparty exposures with broker dealer subsidiaries of regulated financial institutions or primary dealers.

The amount outstanding for our repurchase agreement borrowings will typically fluctuate in any given period as it is dependent upon a number of factors, but particularly the extent to which we are active in buying and selling securities, including the volume of activity in TBA dollar roll transactions versus buying specified pools. The following table presents information regarding the balances of our repurchase agreement borrowings as of and for the periods indicated:

[[GREPCENT_TABLE]]
[["","Repurchase Agreements"],["($s in thousands)","Balance Outstanding As of Quarter End","","Average Balance Outstanding For the Quarter Ended","","Maximum Balance Outstanding During the Quarter Ended"],["December 31, 2023","$","5,381,104","","","$","5,168,821","","","$","5,381,354"],["September 30, 2023","5,002,230","","","4,773,435","","","5,037,440"],["June 30, 2023","4,201,901","","","3,447,406","","","4,203,788"],["March 31, 2023","2,937,124","","","2,713,481","","","2,959,263"],["December 31, 2022","2,644,405","","","2,727,274","","","3,072,483"],["September 30, 2022","2,991,876","","","2,398,268","","","3,082,138"],["June 30, 2022","2,202,648","","","2,486,217","","","2,949,918"],["March 31, 2022","2,952,802","","","2,806,212","","","2,973,475"],["December 31, 2021","2,849,916","","","2,701,191","","","2,873,523"],["September 30, 2021","2,527,065","","","2,529,023","","","2,590,185"],["June 30, 2021","2,321,043","","","2,155,200","","","2,415,037"],["March 31, 2021","2,032,089","","","2,158,121","","","2,437,163"],["December 31, 2020","2,437,163","","","2,500,639","","","2,594,683"]]
[[/GREPCENT_TABLE]]

For our repurchase agreement borrowings, we are required to post and maintain margin to the lender (i.e., collateral in excess of the repurchase agreement borrowing) in order to support the amount of the financing. This excess collateral is often referred to as a “haircut” and is intended to provide the lender protection against fluctuations in fair value of the collateral and/or the failure by us to repay the borrowing at maturity. Lenders have the right to change haircut requirements at maturity of the repurchase agreement and may change their haircuts based on market conditions and the perceived riskiness of the collateral pledged. If the fair value of the collateral falls below the amount required by the lender, the lender has the right to demand additional margin, or collateral.. These demands are referred to as “margin calls,” and if we fail to meet any margin call, our lenders have the right to terminate the repurchase agreement and sell any collateral pledged. The weighted average haircut for our borrowings as of December 31, 2023 was consistent with prior periods, which has typically averaged less than 5% for borrowings collateralized with Agency RMBS and CMBS and between 12-16% for borrowings collateralized with CMBS IO.

The collateral we post in excess of our repurchase agreement borrowing with any counterparty is also typically referred to by us as “equity at risk,” which represents the potential loss to the Company if the counterparty is unable or unwilling to return collateral securing the repurchase agreement borrowing at its maturity. The counterparties with whom we have the greatest amounts of equity at risk may vary significantly during any given period due to the short-term and generally uncommitted nature of the repurchase agreement borrowings. As of December 31, 2023, the Company had amounts outstanding under 28 different repurchase agreements and did not have more than 10% of equity at risk with any counterparty or group of related counterparties.

We have various financial and operating covenants in certain of our repurchase agreements, which we monitor and evaluate on an ongoing basis for compliance as well as for impacts these customary covenants may have on our operating and financing flexibility. Currently, we do not believe we are subject to any covenants that materially restrict our financing flexibility. We were in full compliance with our debt covenants as of December 31, 2023, and we are not aware of circumstances which could potentially result in our non-compliance in the foreseeable future.

Derivative Instruments

Derivative instruments we enter into may require us to post initial margin at inception and daily variation margin based on subsequent changes in their fair value. Daily variation margin requirements also entitle us to

receive collateral from our counterparties if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement. The collateral posted as margin by us is typically in the form of cash. As of December 31, 2023, we had cash collateral posted to our counterparties of $118.2 million under these agreements.

Collateral requirements for interest rate derivative instruments are typically governed by the central clearing exchange and the associated futures commission merchant, which may establish margin requirements in excess of the clearing exchange. Collateral requirements for our TBA contracts are governed by the Mortgage-Backed Securities Division ("MBSD") of the Fixed Income Clearing Corporation and, if applicable, by our third-party brokerage agreements, which may establish margin levels in excess of the MBSD. Our TBA contracts, which are subject to master securities forward transaction agreements published by the Securities Industry and Financial Markets Association as well as supplemental terms and conditions with each counterparty, generally provide that valuations for our TBA contracts and any pledged collateral are to be obtained from a generally recognized source agreed to by both parties. However, in certain circumstances, our counterparties have the sole discretion to determine the value of the TBA contract and any pledged collateral. In such instances, our counterparties are required to act in good faith in making determinations of value. In the event of a margin call, we must generally provide additional collateral on the same business day.

Dividends

As a REIT, we are required to distribute to our shareholders amounts equal to at least 90% of our REIT taxable income for each taxable year after certain deductions. When declaring dividends, our Board of Directors considers the Company’s taxable income, the REIT distribution requirements of the Tax Code, financial performance measures, and maintaining compliance with dividend requirements of the Series C Preferred Stock, along with other factors that the Board of Directors may deem relevant from time to time.

Currently, we are primarily using U.S. Treasury futures to hedge the impact of increasing interest rates on our financing costs and fair value of our investments. Realized and unrealized gains (losses) on these derivative instruments are included in GAAP earnings in the same reporting period in which the derivative instrument matures or is terminated by the Company, but are not included in EAD to common shareholders during any reporting period. Furthermore, because we designate the majority of our derivative instruments as interest rate hedges for tax purposes, realized gains and losses recognized in GAAP net income are generally not recognized in REIT taxable income until future periods. Due to the significant increase in interest rates over the past two years, our net deferred tax hedge gain has increased substantially to $861.8 million as of December 31, 2023. The amortization of our net deferred tax hedge gain will be amortized into REIT taxable income over several years. We expect our taxable income for 2023 will include $80.5 million related to amortization of net deferred tax hedge gains, and our taxable income for 2024 is currently projected to include approximately $102.9 million from amortization of deferred tax hedge gains. As of December 31, 2023, we also had $590.8 million in capital loss carryforwards, the majority of which expire by 2028, and NOL carryforwards of $8.1 million, which will expire over the next 2 years. Due to these amounts and other temporary and permanent differences between GAAP net income and REIT taxable income coupled with the degree of uncertainty about the trajectory of interest rates, we cannot reasonably estimate how much the deferred tax hedge gains to be recognized will impact our dividend declarations during 2024 or in any given year.

We generally fund our dividend distributions through our cash flows from operations. If we make dividend distributions in excess of our operating cash flows during the period, whether for purposes of meeting our REIT distribution requirements or other reasons, those distributions are generally funded either through our existing cash balances or through the return of principal from our investments (either through repayment or sale). Please refer to "Operating and Regulatory Structure" within Part I, Item 1, "Business" as well as Part I, Item 1A, “Risk Factors” of our 2022 Form 10-K for additional important information regarding dividends declared on our taxable income.

RECENT ACCOUNTING PRONOUNCEMENTS

There were no accounting pronouncements issued during the year ended December 31, 2023 that are expected to have a material impact on the Company’s financial condition or results of operations. Please refer to Note 1 of the Notes to the Consolidated Financial Statements contained within Part I, Item 1 of this Annual Report on Form 10-K for additional information.

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CRITICAL ACCOUNTING ESTIMATES

The discussion and analysis of our financial condition and results of operations are based in large part upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. We base these estimates and judgments on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual results, however, may differ from the estimated amounts we have recorded.

The following discussion provides information on our critical accounting policies that require management's most difficult, subjective or complex judgments, and which may result in materially different results under different assumptions and conditions. Please also refer to Note 1 of our Notes to the Consolidated Financial Statements included within Part II, Item 8 of this Annual Report on Form 10-K for additional information related to significant accounting policies.

Fair Value Measurements. Our Agency MBS, as well as a majority of our non-Agency MBS, are substantially similar to securities that either are actively traded or have been recently traded in their respective market. Pricing services and brokers have access to observable market information through trading desks and various information services. MBS prices are based on prices we receive from third-party pricing services and broker quotes. To determine each security's valuation, the pricing service uses either a market approach or income approach, both of which rely on observable market data. The market approach uses prices and other relevant information that is generated by market transactions of identical or similar securities, while the income approach uses valuation techniques to convert estimated future cash flows to a discounted present value. Management reviews the assumptions and inputs utilized in the valuation techniques. Examples of these observable inputs and assumptions include market interest rates, credit spreads, cash flows and projected prepayment speeds, among other things.

In addition, management reviews the prices received for each security by comparing those prices to actual purchase and sale transactions, our internally modeled prices that are calculated based on observable market rates and credit spreads, and the prices that our borrowing counterparties use in financing our securities. If the price of a security is obtained from quoted prices for similar instruments or model-derived valuations whose inputs are observable, the security is classified as a level 2 security. The security is classified as a level 3 security if the inputs are unobservable, resulting in an estimate of fair value based primarily on management's judgment. Please refer to Note 6 of the Notes to the Consolidated Financial Statements contained within Part II, Item 8 of this Annual Report on Form 10-K for additional information on fair value measurements.

FORWARD-LOOKING STATEMENTS

Certain written statements in this Annual Report on Form 10-K that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act, as amended, and Section 21E of the Exchange Act. Statements in this report addressing expectations, assumptions, beliefs, projections, future plans and strategies, future events, developments that we expect or anticipate will occur in the future, and future operating results, capital management, and dividend policy are forward-looking statements. Forward-looking statements are based upon management’s beliefs, assumptions, and expectations as of the date of this report regarding future events and operating performance, taking into account all information currently available to us, and are applicable only as of the date of this report. Forward-looking statements generally can be identified by use of words such as “believe,” “expect,” “anticipate,” “estimate,” “plan,” “may,” “will,” “intend,” “should,” “could” or similar expressions. We caution readers not to place undue reliance on our forward-looking statements, which are not historical facts and may be based on projections, assumptions, expectations, and anticipated events that do not materialize. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statement whether as a result of new information, future events, or otherwise.

Forward-looking statements in this Annual Report on Form 10-K may include, but are not limited to statements about:

37

•Our business and investment strategy including our ability to generate acceptable risk-adjusted returns and our target investment allocations, and our views on the future performance of MBS and other investments;

•Our views on the macroeconomic environment, monetary and fiscal policy, and conditions in the investment, credit, interest rate and derivatives markets;

•Our views on inflation, market interest rates and market spreads;

•Our views on the effect of actual or proposed actions of the Federal Reserve or other central banks with respect to monetary policy (including the targeted Fed Funds rate), and the potential impact of these actions on interest rates, borrowing costs, inflation or unemployment;

•The effect of regulatory initiatives of the Federal Reserve, the Federal Housing Finance Agency, other financial regulators, and other central banks;

•Our financing strategy including our target leverage ratios, our use of TBA dollar roll transactions, and anticipated trends in financing costs including TBA dollar roll transaction costs, and our hedging strategy including changes to the derivative instruments to which we are a party, and changes to government regulation of hedging instruments and our use of these instruments;

•Our investment portfolio composition and target investments;

•Our investment portfolio performance, including the fair value, yields, and forecasted prepayment speeds of our investments;

•Our liquidity and ability to access financing, and the anticipated availability and cost of financing;

•Our capital stock activity including the impact of stock issuances and repurchases;

•The amount, timing, and funding of future dividends;

•Our use of our tax NOL carryforward and other tax loss carryforwards;

•Future competition for, and availability of, investments, financing and capital;

•Estimates of future interest expenses, including related to the Company’s repurchase agreements and derivative instruments;

•The status and effect of legislative reforms and regulatory rule-making or review processes, and the status of reform efforts and other business developments in the repurchase agreement financing market;

•Market, industry and economic trends, and how these trends and related economic data may impact the behavior of market participants and financial regulators;

•The impact of recent bank failures, potential new regulations and the potential for other bank failures this year:

•The impact of debt ceiling negotiations on interest rates, spreads, the U.S. Treasury market as well as the impact more broadly on fixed income and equity markets:

•Uncertainties regarding the war between Russia and the Ukraine or Israel and Hamas and the related impacts on macroeconomic conditions, including, among other things, interest rates;

•The financial position and credit worthiness of the depository institutions in which the Company’s MBS and cash deposits are held;

•The impact of applicable tax and accounting requirements on us including our tax treatment of derivative instruments such as TBAs, interest rate swaps, options and futures;

•Our future compliance with covenants in our master repurchase agreements, ISDA agreements, and debt covenants in our other contractual agreements;

•Our reliance on a single service provider of our trading, portfolio management, risk reporting and accounting services systems;

•The implementation in a timely and cost-effective manner of our operating platform, which includes trading, portfolio management, risk reporting, and accounting services systems, and the anticipated benefits thereof; and

•Possible future effects of the COVID-19 pandemic or any global health crisis.

Forward-looking statements are inherently subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. Not all of these risks and other factors are known to us. New risks and uncertainties arise over time, and it is not possible to predict those events or how they may affect us. The projections, assumptions, expectations or beliefs upon which the forward-looking statements are based can also change as a result of these risks or other factors. If such a risk or other factor materializes in future periods, our business,

38

financial condition, liquidity and results of operations may vary materially from those expressed or implied in our forward-looking statements.

While it is not possible to identify all factors that may cause actual results to differ from historical results or from any results expressed or implied by forward-looking statements, or that may cause our projections, assumptions, expectations or beliefs to change, some of those factors include the following:

•the risks and uncertainties referenced in this Annual Report on Form 10-K, especially those incorporated by reference into Part II, Item 1A, “Risk Factors,”;

•our ability to find suitable reinvestment opportunities;

•changes in domestic economic conditions;

•geopolitical events, such as terrorism, war or other military conflict, including increased uncertainty regarding the war between Russia and the Ukraine and the related impact on macroeconomic conditions as a result of such conflict;

•changes in interest rates and credit spreads, including the repricing of interest-earning assets and interest-bearing liabilities;

•our investment portfolio performance particularly as it relates to cash flow, prepayment rates and credit performance;

•the impact on markets and asset prices from changes in the Federal Reserve’s policies regarding the purchases of Agency RMBS, Agency CMBS, and U.S. Treasuries;

•actual or anticipated changes in Federal Reserve monetary policy or the monetary policy of other central banks;

•adverse reactions in U.S. financial markets related to actions of foreign central banks or the economic performance of foreign economies including in particular China, Japan, the European Union, and the United Kingdom;

•uncertainty concerning the long-term fiscal health and stability of the United States;

•the cost and availability of financing, including the future availability of financing due to changes to regulation of, and capital requirements imposed upon, financial institutions;

•the cost and availability of new equity capital;

•changes in our leverage and use of leverage;

•changes to our investment strategy, operating policies, dividend policy or asset allocations;

•the quality of performance of third-party service providers, including our sole third-party service provider for our critical operations and trade functions;

•the loss or unavailability of our third-party service provider’s service and technology that supports critical functions of our business related to our trading and borrowing activities due to outages, interruptions, or other failures;

•the level of defaults by borrowers on loans underlying MBS;

•changes in our industry;

•increased competition;

•changes in government regulations affecting our business;

•changes or volatility in the repurchase agreement financing markets and other credit markets;

•changes to the market for derivative instruments, including changes to margin requirements on derivative instruments;

•uncertainty regarding continued government support of the U.S. financial system and U.S. housing and real estate markets, or to reform the U.S. housing finance system including the resolution of the conservatorship of Fannie Mae and Freddie Mac;

•the composition of the Board of Governors of the Federal Reserve;

•the political environment in the U.S.;

•systems failures or cybersecurity incidents; and

•exposure to current and future claims and litigation.

39