Invesco Mortgage Capital (IVR) - 2025 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and notes for the periods ended June 30, 2025, and December 31, 2024 Unaudited Condensed Consolidated Balance Sheets Total assets, liabilities, and stockholders' equity decreased, driven by reduced mortgage-backed securities and repurchase agreements Condensed Consolidated Balance Sheet Highlights (in thousands) | Metric | June 30, 2025 | December 31, 2024 | Change | Change (%) | | :----------------------------------- | :------------ | :---------------- | :----- | :--------- | | Total assets | $5,400,370 | $5,688,034 | $(287,664) | -5.06% | | Mortgage-backed securities, at fair value | $5,185,559 | $5,445,508 | $(259,949) | -4.77% | | Repurchase agreements | $4,635,881 | $4,893,958 | $(258,077) | -5.27% | | Total liabilities | $4,690,994 | $4,957,305 | $(266,311) | -5.37% | | Total stockholders' equity | $709,376 | $730,729 | $(21,353) | -2.92% | Unaudited Condensed Consolidated Statements of Operations The company reported a net loss for both periods, primarily due to significant losses on derivative instruments, despite increased net interest income Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest income | $70,624 | $68,028 | $144,470 | $136,611 | | Interest expense | $52,895 | $59,393 | $107,920 | $120,973 | | Net interest income | $17,729 | $8,635 | $36,550 | $15,638 | | Gain (loss) on investments, net | $(5,268) | $(45,212) | $76,890 | $(111,365) | | Gain (loss) on derivative instruments, net | $(30,916) | $28,262 | $(107,595) | $121,423 | | Total other income (loss) | $(36,184) | $(17,213) | $(30,705) | $9,563 | | Total expenses | $4,872 | $4,888 | $9,531 | $9,545 | | Net income (loss) | $(23,327) | $(13,466) | $(3,686) | $15,656 | | Net income (loss) attributable to common stockholders | $(26,567) | $(18,766) | $(10,278) | $4,964 | | Basic EPS | $(0.40) | $(0.38) | $(0.16) | $0.10 | | Diluted EPS | $(0.40) | $(0.38) | $(0.16) | $0.10 | Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported a comprehensive loss for both periods, worsening year-over-year due to net loss and other comprehensive losses on MBS Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(23,327) | $(13,466) | $(3,686) | $15,656 | | Total other comprehensive income (loss) | $(789) | $113 | $(173) | $(50) | | Comprehensive income (loss) | $(24,116) | $(13,353) | $(3,859) | $15,606 | | Comprehensive income (loss) attributable to common stockholders | $(27,356) | $(18,653) | $(10,451) | $4,914 | Unaudited Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased due to net losses and dividends, partially offset by common stock issuance proceeds - Total stockholders' equity decreased from $730,729 thousand as of December 31, 2024, to $709,376 thousand as of June 30, 2025, a decline of $21,353 thousand[17] - The company issued 4,212,057 common shares in Q1 2025 and 282,750 in Q2 2025, generating $35,956 thousand and $2,279 thousand in proceeds, respectively[17] - Repurchased and retired 90,146 Series C Preferred Stock shares in Q1 2025 and 96,803 shares in Q2 2025[17] Unaudited Condensed Consolidated Statements of Cash Flows Operating cash flow decreased, investing cash flow increased from MBS sales, and financing activities used more cash for debt and dividends Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $59,980 | $90,476 | | Net cash provided by (used in) investing activities | $191,514 | $133,048 | | Net cash provided by (used in) financing activities | $(271,833) | $(238,719) | | Net change in cash, cash equivalents and restricted cash | $(20,339) | $(15,195) | | Cash, cash equivalents and restricted cash, end of period | $190,542 | $183,442 | - Purchases of mortgage-backed securities increased to $1,073,240 thousand in 2025 from $624,425 thousand in 2024[21] - Proceeds from sale of mortgage-backed securities significantly increased to $1,179,303 thousand in 2025 from $568,331 thousand in 2024[21] Notes to Condensed Consolidated Financial Statements These notes provide essential context and detailed breakdowns for the financial statements, covering business, accounting policies, financial instruments, related party transactions, equity, and subsequent events Note 1 – Organization and Business Operations Invesco Mortgage Capital Inc. invests in and manages MBS, primarily Agency RMBS and CMBS, operates as a REIT, and is externally managed - The Company primarily invests in Agency RMBS and Agency CMBS[24][33] - The Company is externally managed and advised by Invesco Advisers, Inc[26] - The Company elected to be taxed as a REIT, requiring distribution of at least 90% of REIT taxable income annually[27] Note 2 – Summary of Significant Accounting Policies Financial statements are prepared under U.S. GAAP, consolidating subsidiaries, with management estimates for fair values and credit losses, and no significant policy changes - Condensed consolidated financial statements are prepared in accordance with U.S. GAAP and consolidate the Company and its controlled subsidiaries[29] - Management's estimates include fair values of financial instruments, interest income on MBS, and allowances for credit losses[31] - There have been no changes to the Company's accounting policies since December 31, 2024[32] Note 3 – Mortgage-Backed Securities The MBS portfolio, primarily Agency RMBS and CMBS, is accounted for at fair value, showing decreased fair value and net unrealized gains in 2025, with non-Agency securities sold - All MBS held as of June 30, 2025, are accounted for under the fair value option[41] MBS Portfolio Fair Value (in thousands) | Asset Type | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Agency RMBS | $4,222,203 | $4,541,525 | | Agency-CMO | $71,835 | $70,776 | | Agency CMBS | $891,521 | $816,147 | | Non-Agency CMBS | — | $9,836 | | Non-Agency RMBS | — | $7,224 | | Total | $5,185,559 | $5,445,508 | Total Gain (Loss) on Investments, Net (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net unrealized gains (losses) on MBS (fair value option) | $(7,095) | $(38,683) | $80,529 | $(101,156) | | Total gain (loss) on investments, net | $(5,268) | $(45,212) | $76,890 | $(111,365) | - The company sold its remaining available-for-sale MBS during the three and six months ended June 30, 2025, recognizing net gains of $518 thousand and $402 thousand, respectively[50] Note 4 – Borrowings The company primarily finances its portfolio through secured repurchase agreements, with total borrowings and weighted average interest rates decreasing - The majority of the investment portfolio is financed through repurchase agreements, which are accounted for as secured borrowings[58] Repurchase Agreements Characteristics (in thousands) | Metric | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :---------------- | | Amount Outstanding | $4,635,881 | $4,893,958 | | Weighted Average Interest Rate | 4.48% | 4.80% | | Weighted Average Remaining Maturity (days) | 24 | 29 | Note 5 – Collateral Positions MBS and cash are pledged as collateral for repurchase agreements and derivatives, maintaining a 105% collateral-to-outstanding repurchase agreement ratio Total Collateral Pledged (in thousands) | Collateral Type | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Mortgage-backed securities | $4,882,659 | $5,129,486 | | Cash | — | $580 | | Restricted cash | $131,146 | $137,478 | | Total Collateral Pledged | $5,013,805 | $5,267,544 | - The ratio of total repurchase agreements collateral pledged to total repurchase agreements outstanding was 105% as of June 30, 2025, and December 31, 2024[65] Note 6 – Derivatives and Hedging Activities The company uses interest rate swaps, futures, and TBAs to manage interest rate risk, with swaps increasing and futures/TBAs decreasing or eliminated - The company uses interest rate swaps and futures contracts to manage interest rate risk and add stability to interest expense[72] Changes in Notional Amount of Derivative Instruments (in thousands) | Instrument | Notional Amount as of Dec 31, 2024 | Additions | Settlement, Termination, or Exercise | Notional Amount as of Jun 30, 2025 | | :-------------------- | :--------------------------------- | :-------- | :----------------------------------- | :--------------------------------- | | Interest Rate Swaps | $3,265,000 | $725,000 | $(485,000) | $3,505,000 | | Futures Contracts | $1,402,000 | $2,927,000 | $(3,499,000) | $830,000 | | TBA Purchase Contracts | $100,000 | $2,556,700 | $(2,656,700) | — | | TBA Sale Contracts | $(100,000) | $(2,556,700) | $2,656,700 | — | | Total | $4,667,000 | $3,652,000 | $(3,984,000) | $4,335,000 | - The company had no TBAs outstanding as of June 30, 2025[79] Note 7 – Offsetting Assets and Liabilities Repurchase agreements and derivatives are subject to master netting, but assets and liabilities are presented gross on the balance sheets - Repurchase agreements and derivative transactions are governed by master netting arrangements, but assets and liabilities are presented gross on the condensed consolidated balance sheets[85] - Centrally cleared interest rate swaps and futures contracts are excluded from offsetting tables due to daily variation margin being characterized as settlement rather than collateral[86] Note 8 – Fair Value of Financial Instruments Fair value measurements are categorized into a three-level hierarchy, with all MBS and derivative liabilities measured at fair value, primarily using Level 2 inputs - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[95] Fair Value Measurements (in thousands) | Instrument | Level 1 (June 30, 2025) | Level 2 (June 30, 2025) | Level 3 (June 30, 2025) | Total at Fair Value (June 30, 2025) | | :-------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------------------- | | Mortgage-backed securities | — | $5,185,559 | — | $5,185,559 | | Derivative liabilities | $4,381 | $6,394 | — | $10,775 | - The estimated fair value of repurchase agreements is a Level 3 fair value measurement[94] Note 9 – Related Party Transactions The company is externally managed by Invesco Advisers, Inc., paying a management fee and reimbursing operating expenses, with reimbursed costs decreasing in 2025 - The Company pays its Manager a fee equal to 1.50% of its stockholders' equity per annum[98] - The Company reimburses its Manager for operating expenses, including directors and officers insurance, accounting, auditing, tax, and legal services[100] Costs Incurred by Manager (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Management fee – related party | $2,831 | $2,945 | $5,827 | $5,806 | | Total incurred costs, originally paid by our Manager | $1,051 | $1,409 | $2,691 | $2,888 | Note 10 – Stockholders' Equity The company repurchased Series C Preferred Stock, redeemed Series B Preferred Stock, sold common stock, and declared dividends for both preferred and common stock - During the three and six months ended June 30, 2025, the company repurchased and retired 96,803 and 186,949 shares of Series C Preferred Stock, respectively[102] - All outstanding shares of Series B Preferred Stock were redeemed in December 2024[102] Common Stock Sales under Equity Distribution Agreements (in thousands, except shares) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Shares sold | 282,750 | 1,761,155 | 4,494,807 | 2,126,993 | | Cash proceeds, net of fees | $2,163 | $16,059 | $38,231 | $19,378 | Dividends Declared (in thousands, except per share amounts) | Stock Type | Per Share (2025) | In Aggregate (2025) | Per Share (2024) | In Aggregate (2024) | | :------------------- | :--------------- | :------------------ | :--------------- | :------------------ | | Series C Preferred | $0.46875 | $3,297 (May), $3,341 (Feb) | $0.46875 | $3,450 (May), $3,499 (Feb) | | Common Stock | $0.34 | $22,545 (June), $22,420 (March) | $0.40 | $20,255 (June), $19,530 (March) | Note 11 – Earnings (Loss) per Common Share Basic and diluted EPS show a net loss for common stockholders for both periods, with an increase in weighted average shares outstanding Earnings (Loss) per Share (in thousands, except per share amounts) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) available to common stockholders | $(26,567) | $(18,766) | $(10,278) | $4,964 | | Basic EPS | $(0.40) | $(0.38) | $(0.16) | $0.10 | | Diluted EPS | $(0.40) | $(0.38) | $(0.16) | $0.10 | | Basic weighted average shares | 66,006 | 49,365 | 64,434 | 48,949 | Note 12 – Commitments and Contingencies As of June 30, 2025, the company was not aware of any reported or unreported commitments or contingencies - As of June 30, 2025, the company was not aware of any reported or unreported contingencies[112] Note 13 – Subsequent Events On August 7, 2025, a Series C Preferred Stock dividend of $0.46875 per share was declared, payable on September 29, 2025 - On August 7, 2025, a Series C Preferred Stock dividend of $0.46875 per share was declared, payable on September 29, 2025[113] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition, operations, market outlook, investment strategies, financing, hedging, capital, and non-GAAP reconciliations Executive Summary The company aims for attractive risk-adjusted returns through Agency RMBS and CMBS investments, operating as a REIT and externally managed - The company's objective is to provide attractive risk-adjusted returns to stockholders, primarily through dividends and secondarily through capital appreciation[117] - Investments primarily include Agency RMBS and Agency CMBS, with continuous evaluation of new opportunities[117][120] - The company maintains REIT qualification, requiring distribution of at least 90% of REIT taxable income annually, and is externally managed by Invesco Advisers, Inc[118][119] Market Conditions and Impacts Q2 2025 saw volatile financial conditions, inflation above target, stable employment, and mixed Treasury yield curve movements impacting Agency RMBS and CMBS - Financial conditions were volatile in Q2 2025, tightening sharply in early April before ending modestly accommodative[122] - Headline CPI rose to 2.7% (from 2.4%) and Core CPI to 2.9% (from 2.8%) year-over-year, exceeding the Federal Reserve's 2% target[122] Key Interest Rate Changes (Basis Points) | Metric | June 30, 2025 | March 31, 2025 | One Quarter Change (bps) | | :------------------ | :------------ | :------------- | :----------------------- | | 2 Year Treasury | 3.72% | 3.91% | (19) | | 5 Year Treasury | 3.79% | 3.98% | (19) | | 10 Year Treasury | 4.23% | 4.24% | (1) | | 30 Year Treasury | 4.77% | 4.61% | 16 | - Agency RMBS underperformed Treasuries in early April due to interest rate volatility but benefited from a 90-day pause in tariff implementation[124] Outlook The company holds a cautious near-term but favorable long-term outlook for Agency RMBS, while Agency CMBS outlook remains positive due to limited issuance and strong fundamentals - Cautious near-term outlook for Agency RMBS due to elevated uncertainty regarding trade, fiscal, and monetary policy[128] - Favorable long-term outlook for Agency RMBS, expecting improved demand in higher coupons, stabilization in interest rate volatility, and a steeper yield curve[128] - Positive outlook for Agency CMBS, supported by limited issuance, strong fundamental performance, and stable cash flow profiles[128] Investment Activities The investment portfolio's fair value decreased, with 30-year fixed-rate Agency RMBS as the largest component, and non-Agency securities were sold in 2025 Investment Portfolio Composition (in thousands) | Asset Type | June 30, 2025 | December 31, 2024 | June 30, 2024 | | :------------------------------------ | :------------ | :---------------- | :------------ | | 30 year fixed-rate pass-through Agency RMBS | $4,222,203 | $4,541,525 | $4,359,796 | | Agency CMBS | $891,521 | $816,147 | $384,593 | | Total investment portfolio | $5,185,559 | $5,445,508 | $5,035,247 | - 30-year fixed-rate Agency RMBS represented approximately 81% of the total investment portfolio as of June 30, 2025, down from 83% at December 31, 2024[131] - The company sold its remaining non-Agency securities during 2025[135] Financing and Other Liabilities The company primarily uses short-term repurchase agreements for financing, with collateralized borrowings decreasing to $4.6 billion as of June 30, 2025 - The majority of the investment portfolio is financed through repurchase agreements, typically with maturities ranging from one to six months[136] Collateralized Borrowings Under Repurchase Agreements (in thousands) | Quarter Ended | Quarter-end balance | | :------------------ | :------------------ | | December 31, 2024 | $4,893,958 | | March 31, 2025 | $5,354,561 | | June 30, 2025 | $4,635,881 | Hedging Instruments The company uses interest rate swaps and futures to mitigate interest rate risk, with swaps increasing and futures experiencing significant additions and terminations - Interest rate swap agreements are used to mitigate the effects of interest rate changes and generally involve paying fixed rates and receiving floating rates indexed to SOFR[140] - During the six months ended June 30, 2025, the company entered into $725.0 million in new interest rate swaps and terminated $485.0 million[141] - Futures contracts are also used to mitigate interest rate impact, with $2.9 billion in additions and $3.5 billion in terminations during the six months ended June 30, 2025[142] Capital Activities The company sold common stock, repurchased Series C Preferred Stock, and redeemed all Series B Preferred Stock in December 2024 Common Stock Sales (in thousands, except shares) | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------ | :----------------------------- | :----------------------------- | | Shares sold | 4,494,807 | 2,126,993 | | Cash proceeds, net of fees | $38,231 | $19,378 | - During the six months ended June 30, 2025, the company repurchased and retired 186,949 shares of Series C Preferred Stock[147] - The company redeemed all outstanding shares of Series B Preferred Stock in December 2024[147] Book Value per Common Share Book value per common share decreased by 9.8% due to derivative losses, dividends, and expenses, partially offset by net interest income and investment gains Book Value per Common Share | Metric | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Total equity (in thousands) | $709,376 | $730,729 | | Common stock outstanding (in thousands) | 66,307 | 61,730 | | Book value per common share | $8.05 | $8.92 | - Book value per common share decreased 9.8% from December 31, 2024, to June 30, 2025[149] - The decrease was primarily due to losses on derivative instruments, dividends declared, and expenses, partially offset by net interest income and gains on investments[149] Critical Accounting Policies and Estimates No significant changes occurred in critical accounting policies and estimates since the most recent Form 10-K - No significant changes to critical accounting policies and estimates since the Annual Report on Form 10-K for the year ended December 31, 2024[150] Recent Accounting Standards No recent accounting standards require reporting - No recent accounting standards to report[151] Results of Operations The company experienced a net loss for both periods, primarily due to significant derivative losses, despite increased net interest income - Net interest income increased significantly for both the three and six months ended June 30, 2025, compared to the same periods in 2024[153] - Significant losses on derivative instruments were recorded for the three and six months ended June 30, 2025, contrasting with gains in the prior year[153] Net Income (Loss) Summary (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(23,327) | $(13,466) | $(3,686) | $15,656 | | Net income (loss) attributable to common stockholders | $(26,567) | $(18,766) | $(10,278) | $4,964 | Interest Income and Average Earning Asset Yields Total average earning assets and interest income increased, but average earning asset yields slightly decreased due to investment composition and prepayment rates Interest Income and Average Earning Asset Yields (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Average earning assets | $5,078,921 | $4,847,125 | $5,249,787 | $4,909,684 | | Average earning asset yields | 5.56% | 5.61% | 5.50% | 5.56% | | Total interest income | $70,624 | $68,028 | $144,470 | $136,611 | - Average earning asset yields decreased by 5 basis points for the three months and 6 basis points for the six months ended June 30, 2025, compared to the same periods in 2024[156] Prepayment Speeds Net premium amortization was recognized in 2025, contrasting with prior year discount accretion, due to repositioning into higher coupon securities - Net premium amortization was $356 thousand for the three months ended June 30, 2025, compared to net discount accretion of $1.8 million for the same period in 2024[160] - The change is primarily a result of repositioning the investment portfolio into higher coupon securities that have higher amortized costs relative to principal value[160] Interest Expense and Cost of Funds Total average borrowings increased, but the average cost of funds and total interest expense decreased significantly due to a lower Federal Funds target rate Borrowings and Cost of Funds (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total average borrowings | $4,577,566 | $4,251,953 | $4,752,927 | $4,335,855 | | Cost of funds | 4.62% | 5.59% | 4.54% | 5.58% | | Total interest expense | $52,895 | $59,393 | $107,920 | $120,973 | - Average cost of funds decreased by 97 basis points for the three months and 104 basis points for the six months ended June 30, 2025, primarily due to a lower Federal Funds target rate[165] Net Interest Income Net interest income and net interest rate margin increased for both periods, primarily driven by a lower cost of funds Net Interest Income (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net interest income | $17,729 | $8,635 | $36,550 | $15,638 | | Net interest rate margin | 0.94% | 0.02% | 0.96% | (0.02)% | - The increase in net interest income and net interest rate margin was due to a lower cost of funds, which is more sensitive to interest rate changes than the yield on the investment portfolio[168] Gain (Loss) on Investments, net The company recorded net unrealized losses on MBS for three months but gains for six months, reflecting market volatility, with net realized gains in Q2 2025 Gain (Loss) on Investments, Net (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net realized gains (losses) on sale of MBS | $1,827 | $(6,529) | $(3,639) | $(9,751) | | Net unrealized gains (losses) on MBS (fair value option) | $(7,095) | $(38,683) | $80,529 | $(101,156) | | Total gain (loss) on investments, net | $(5,268) | $(45,212) | $76,890 | $(111,365) | - Net realized gains in Q2 2025 reflect sales of Agency RMBS during heightened market volatility, while six-month net losses reflect sales of lower coupon Agency RMBS in Q1[170] - Net unrealized gains for the six months ended June 30, 2025, were primarily due to a sharp decline in interest rates during Q1, increasing valuations on fixed-rate securities[172] (Increase) Decrease in Provision for Credit Losses No provision for credit losses was recorded in 2025 due to the sale of available-for-sale securities, contrasting with prior year increases - No provision for credit losses was recorded for the three and six months ended June 30, 2025, as the company sold its remaining available-for-sale MBS[175] - In contrast, the company recorded increases of $263 thousand and $302 thousand in the provision for credit losses for the three and six months ended June 30, 2024, respectively[174] Equity in Earnings (Losses) of Unconsolidated Ventures No equity in earnings or losses from unconsolidated ventures was recorded, as the sole remaining venture was dissolved in April 2024 - No equity in earnings (losses) of unconsolidated ventures was recorded for the three and six months ended June 30, 2025[13] - The sole remaining unconsolidated venture was dissolved in April 2024, after a final distribution in Q1 2024[176] Gain (Loss) on Derivative Instruments, net Significant net losses on derivative instruments were recognized due to tighter swap spreads and declining interest rates, contrasting with prior year gains Gain (Loss) on Derivative Instruments, Net (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gain (loss) on derivative instruments, net | $(30,916) | $28,262 | $(107,595) | $121,423 | | Net losses on interest rate swaps | $(16,170) | $29,260 | $(63,808) | $122,421 | | Net losses on futures contracts | $(13,506) | — | $(46,360) | — | - Net losses on interest rate swaps in 2025 were due to notably tighter swap spreads and a sharp decline in interest rates[181] - Net losses on futures contracts in 2025 were due to changes in interest rate expectations[183] Expenses Management fees slightly decreased for three months but remained stable for six months, with consistent general and administrative expenses Expenses (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Management fee – related party | $2,831 | $2,945 | $5,827 | $5,806 | | General and administrative | $2,041 | $1,943 | $3,704 | $3,739 | | Total expenses | $4,872 | $4,888 | $9,531 | $9,545 | - Management fees are determined by the company's average stockholders' equity[185] Gain (Loss) on Repurchase and Retirement of Preferred Stock The company recognized a gain on Series C Preferred Stock repurchase and retirement for both periods, following prior year repurchases of Series B and C Gain (Loss) on Repurchase and Retirement of Preferred Stock (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Gain (loss) on repurchase and retirement of preferred stock | $57 | $208 | $46 | $401 | - During the three and six months ended June 30, 2025, the company repurchased and retired 96,803 and 186,949 shares of Series C Preferred Stock, respectively[187] Net Income (Loss) Attributable to Common Stockholders Net loss attributable to common stockholders increased for three months and shifted to loss for six months, driven by derivative losses, partially offset by investment performance and net interest income Net Income (Loss) Attributable to Common Stockholders (in thousands, except per share) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) attributable to common stockholders | $(26,567) | $(18,766) | $(10,278) | $4,964 | | Basic EPS | $(0.40) | $(0.38) | $(0.16) | $0.10 | - The change in net loss for the three months was primarily due to net losses on derivative instruments ($30.9 million vs $28.3 million gain in 2024) and a $9.1 million increase in net interest income, partially offset by improved investment performance[189] - For the six months, the shift to net loss was driven by net losses on derivative instruments ($107.6 million vs $121.4 million gain in 2024), offset by net gains on investments ($76.9 million vs $111.4 million loss in 2024) and a $20.9 million increase in net interest income[190] Non-GAAP Financial Measures This section presents non-GAAP financial measures, including Earnings Available for Distribution and various effective interest metrics, used by management to analyze operating results and assess performance - Non-GAAP measures are used to analyze operating results and assess performance, providing additional detail of the investment portfolio's earnings capacity[192][195] - These measures should be analyzed in conjunction with U.S. GAAP financial measures and are not substitutes[193] Earnings Available for Distribution Earnings available for distribution decreased for both periods, primarily due to lower effective net interest income, partially offset by reduced preferred dividends - Earnings available for distribution is calculated as U.S. GAAP net income (loss) attributable to common stockholders adjusted for certain gains and losses on investments and derivatives, TBA dollar roll income, and preferred stock repurchase gains/losses[194] Earnings Available for Distribution (in thousands, except per share data) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) attributable to common stockholders | $(26,567) | $(18,766) | $(10,278) | $4,964 | | Earnings available for distribution | $38,191 | $42,325 | $78,238 | $84,141 | | Earnings available for distribution per common share | $0.58 | $0.86 | $1.21 | $1.72 | - The decrease in earnings available for distribution was due to lower effective net interest income, partially offset by lower preferred dividends[204] Effective Interest Expense / Effective Cost of Funds / Effective Net Interest Income / Effective Interest Rate Margin Effective interest expense and cost of funds increased due to decreased contractual net interest income on interest rate swaps, leading to decreased effective net interest income and margin - Effective interest expense and cost of funds adjust U.S. GAAP total interest expense for contractual net interest income (expense) on interest rate swaps, which are viewed as economic hedges[205] Effective Interest Expense and Cost of Funds (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total interest expense | $52,895 | $59,393 | $107,920 | $120,973 | | Effective interest expense | $24,264 | $16,122 | $51,210 | $32,415 | | Effective cost of funds | 2.12% | 1.52% | 2.15% | 1.50% | Effective Net Interest Income and Margin (in thousands) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net interest income | $17,729 | $8,635 | $36,550 | $15,638 | | Effective net interest income | $46,360 | $51,906 | $93,260 | $104,196 | | Effective interest rate margin | 3.44% | 4.09% | 3.35% | 4.06% | Economic Debt-to-Equity Ratio The economic debt-to-equity ratio, including off-balance sheet TBA financing, remained consistent with GAAP at 6.5x, reflecting no TBAs at implied cost basis - The economic debt-to-equity ratio is a non-GAAP measure that includes the impact of off-balance sheet financing of TBAs accounted for as derivative instruments[214] Debt-to-Equity Ratios | Metric | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Debt-to-equity ratio | 6.5 | 6.7 | | Economic debt-to-equity ratio | 6.5 | 6.7 | - As of June 30, 2025, there were no TBAs at implied cost basis, making the economic debt-to-equity ratio equal to the GAAP debt-to-equity ratio[216] Liquidity and Capital Resources The company maintains sufficient liquidity and capital from equity offerings, operating cash flows, and repurchase agreements to meet obligations and fund investments - Primary sources of funds include net cash proceeds from common equity offerings, net cash from operating activities, and proceeds from repurchase agreements[217] - Cash, cash equivalents, and restricted cash totaled $190.5 million as of June 30, 2025, up from $183.4 million at June 30, 2024[219] - Operating activities provided $60.0 million in net cash for the six months ended June 30, 2025, a decrease from $90.5 million in the prior year[219] Effects of Margin Requirements, Leverage and Spreads The company manages liquidity to meet margin calls, triggered by collateral value declines, with average margin requirements of 4.5% for Agency RMBS and 4.9% for Agency CMBS - Declines in the value of securities pledged as collateral can trigger margin calls, requiring additional cash or collateral[223] - The average margin requirement (haircut) under repurchase agreements was 4.5% for Agency RMBS and 4.9% for Agency CMBS as of June 30, 2025[222] - The company maintains a level of liquidity (cash and unpledged securities) to meet reasonably anticipated margin calls and increased collateral requirements[224][226] Forward-Looking Statements Regarding Liquidity The company anticipates sufficient short-term liquidity from operations and borrowing capacity, with long-term liquidity dependent on debt financing and potential equity/debt issuances - Cash flow from operations and available borrowing capacity are expected to be sufficient for anticipated short-term liquidity requirements[229] - Long-term liquidity and capital resource requirements are subject to obtaining ongoing debt financing and potential public or private offerings of equity or debt securities[230] Exposure to Financial Counterparties The company faces counterparty default risk from repurchase agreements, with one counterparty holding collateral exceeding borrowed amounts by over 5% of stockholders' equity - The company is exposed to potential losses if a counterparty defaults on repurchase agreements, to the extent collateral pledged exceeds the amount loaned[231] - As of June 30, 2025, one counterparty held collateral that exceeded the amounts borrowed under related repurchase agreements by more than 5% of the company's stockholders' equity[231] Exposure to Counterparties by Geographic Concentration (in thousands) | Geographic Concentration | Number of Counterparties | Repurchase Agreement Financing | Exposure | | :------------------------------- | :----------------------- | :----------------------------- | :------- | | North America | 14 | $2,890,203 | $(151,644) | | Asia | 3 | $623,472 | $(33,673) | | Europe (excluding United Kingdom) | 2 | $675,757 | $(33,805) | | United Kingdom | 1 | $446,449 | $(18,465) | | Total | 20 | $4,635,881 | $(237,587) | Dividends To maintain REIT qualification, the company must distribute at least 90% of REIT taxable income, with differences from GAAP net income impacting distribution requirements - To maintain REIT qualification, the company is generally required to distribute at least 90% of its REIT taxable income annually[234] - Key differences between REIT taxable income and U.S. GAAP net income include unrealized gains/losses on investments and derivatives, and temporary differences related to amortization of premiums and discounts[235] Unrelated Business Taxable Income The company has not engaged in transactions resulting in unrelated business taxable income - The company has not engaged in transactions that would result in a portion of its income being treated as unrelated business taxable income[236] Other Matters The company believes it satisfied REIT asset tests and intends to maintain REIT qualification while avoiding 1940 Act investment company registration - The company believes it satisfied REIT asset tests for the period ended June 30, 2025, and expects to satisfy all REIT requirements for the taxable year ending December 31, 2025[237] - The company intends to conduct its business to avoid registration as an investment company under the 1940 Act, relying on exclusions like Section 3(c)(5)(C)[238] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, including interest rate, prepayment, and market value risks, and outlines management strategies using derivatives and active portfolio management Interest Rate Risk The company is highly sensitive to interest rate risk, which is primarily mitigated through derivative contracts like interest rate swaps and futures - Interest rate risk is highly sensitive to governmental, monetary, and tax policies, and other macroeconomic factors[241] - The company mitigates interest rate risk primarily by utilizing derivative contracts, such as interest rate swap agreements and futures contracts[241] Interest Rate Effect on Net Interest Income Operating results are affected by the spread between investment yields and borrowing costs, with rising rates potentially narrowing the spread and impacting hedging effectiveness - Operating results depend on the difference between yields earned on investments and the cost of borrowing and hedging activities[242] - Rising interest rates can increase borrowing costs, narrowing the net interest spread and potentially leading to losses[242] - Inaccurate prepayment assumptions for RMBS can reduce the effectiveness of hedging strategies and cause losses[243] Interest Rate Effects on Fair Value Changes in interest rates directly impact the fair value of assets and liabilities, with risk assessed by duration, and volatility increasing with material rate changes - Changes in interest rates affect the market value of acquired assets, with the risk that asset and liability values change at different rates[244] - Interest rate risk is assessed by estimating the duration of assets and liabilities, which measures market price volatility[245] - Volatility in fair value can increase significantly with material changes in interest rates, impacting operating results[246] Spread Risk Spread risk, the difference between investment and risk-free rates, is managed through asset selection, allocation, value-at-risk, and liquidity, with changes impacting book value and strategy - Spread risk is the difference between interest rates on investments and risk-free instruments[247] - Management techniques include careful asset selection, sector allocation, regulating portfolio value-at-risk, and maintaining adequate liquidity[247] - Changes in spreads impact book value and liquidity, potentially forcing asset sales or changes in investment strategy[247] Prepayment Risk Prepayment risk affects premium amortization and discount accretion, with increased rates accelerating both, and predicting levels is challenging due to inflation and interest rate volatility - An increase in prepayment rates accelerates the amortization of purchase premiums, reducing interest income[248] - An increase in prepayment rates accelerates the accretion of purchase discounts, increasing interest income[248] - Uncertainty regarding inflation, fiscal/monetary policy, and interest rate volatility makes predicting prepayment levels difficult[249] Extension Risk Extension risk occurs if decreasing prepayment rates in a rising interest rate environment extend fixed-rate asset lives beyond hedging terms, negatively impacting operating results and potentially forcing asset sales - If prepayment rates decrease in a rising interest rate environment, the life of fixed-rate assets can extend beyond the term of hedging instruments[251] - This situation can negatively impact operating results as borrowing costs become unfixed while asset income remains fixed[251] - In extreme situations, the company may be forced to sell assets to maintain liquidity, incurring losses[251] Market Value Risk The fair value of securities fluctuates with interest rates and market factors, with crises causing volatility and margin call risk, and a sensitivity analysis showing yield curve shift impacts - The estimated fair value of securities fluctuates primarily due to changes in interest rates and other factors[252] - Pandemics and widespread crises can cause extreme volatility and illiquidity in fixed income markets, elevating margin call risk[253] Interest Rate Sensitivity Analysis (June 30, 2025) | Change in Interest Rates | Percentage Change in Projected Net Interest Income | Percentage Change in Projected Portfolio Value | | :----------------------- | :----------------------------------------------- | :--------------------------------------------- | | +1.00% | (3.72)% | (0.60)% | | +0.50% | (1.55)% | (0.16)% | | -0.50% | 1.02% | (0.19)% | | -1.00% | 1.87% | (0.88)% | Other Risks This section introduces additional risks related to credit investments in commercial and residential real estate markets, including real estate and credit risk Real Estate Risk Residential and commercial property values are volatile, affected by economic and local factors, with decreases reducing collateral value and repayment capacity, potentially leading to losses - Property values are subject to volatility due to national, regional, and local economic conditions, local real estate conditions, and demographic factors[259] - Decreases in property values reduce collateral value and potential proceeds for loan repayment, which could cause losses[259] Credit Risk The company retains credit loss risk on mortgage investments, managed through due diligence and re-evaluation, with deteriorating fundamentals potentially leading to delinquencies and defaults - The company retains the risk of potential credit losses on all commercial and residential mortgage investments[260] - Credit risk is managed through pre-acquisition due diligence and regular re-evaluation of fundamental factors like GDP, unemployment, and interest rates[260] - Deteriorating fundamentals and tightening lending conditions can lead to increasing delinquency levels and eventual defaults, impacting MBS performance[261] Risk Management The company manages interest rate risk by monitoring reset indices, structuring diverse financing, exploring non-marked-to-market financing, and using hedging instruments - Risk management strategies include monitoring and adjusting reset indices and interest rates for assets and financings[264] - The company attempts to structure financing agreements with a range of different maturities, terms, amortizations, and interest rate adjustment periods[264] - Hedging instruments, primarily interest rate swap agreements and financial futures, are used to adjust the interest rate sensitivity of target assets and borrowings[264] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2025, with no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2025, providing reasonable assurance for timely and accurate reporting[263][265] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2025[267] PART II OTHER INFORMATION Item 1. Legal Proceedings As of June 30, 2025, the company was not involved in any legal proceedings - As of June 30, 2025, the company was not involved in any legal proceedings[270] Item 1A. Risk Factors No material changes occurred to risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024 - No material changes to risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024[271] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased and retired 96,803 shares of Series C Preferred Stock during Q2 2025 under its existing share repurchase program Series C Preferred Stock Repurchases (Three Months Ended June 30, 2025) | Month | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------------- | :------------------------------- | :--------------------------- | | April 1, 2025 to April 30, 2025 | 47,232 | $22.98 | | May 1, 2025 to May 31, 2025 | 29,557 | $24.51 | | June 1, 2025 to June 30, 2025 | 20,014 | $23.63 | | Total | 96,803 | $23.59 | - As of June 30, 2025, 519,710 additional shares of Series C Preferred Stock remained authorized for repurchase under the program[273] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - No defaults upon senior securities were reported[274] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[275] Item 5. Other Information This section includes information on Rule 10b5-1 trading plans and subsequent Series C Preferred Stock dividend declarations Rule 10b5-1 Trading Plans No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2025 - No directors or officers adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the fiscal quarter ended June 30, 2025[276] Series C Preferred Stock Dividends A Series C Preferred Stock dividend of $0.46875 per share was declared on August 7, 2025, payable on September 29, 2025 - A Series C Preferred Stock dividend of $0.46875 per share was declared on August 7, 2025, payable on September 29, 2025[277] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including articles, bylaws, certifications, and XBRL data files - The exhibit index includes Articles of Amendment and Restatement, Articles Supplementary for Preferred Stock, Amended and Restated Bylaws, Certifications (31.1, 31.2, 32.1, 32.2), and XBRL Interactive Data Files[284]