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Dynamic quotes 
OFFON

DYNEX CAPITAL, INC.

(DX)
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DYNEX CAPITAL : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/03/2021 | 02:16pm EDT
The following discussion should be read in conjunction with our unaudited
consolidated financial statements and the accompanying notes included in Part I,
Item 1. "Financial Statements" in this Quarterly Report on Form 10-Q and our
audited consolidated financial statements and the accompanying notes included in
Part II, Item 8 in our 2020 Form 10-K. References herein to "Dynex," the
"Company," "we," "us," and "our" include Dynex Capital, Inc. and its
consolidated subsidiaries, unless the context otherwise requires. In addition to
current and historical information, the following discussion and analysis
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements relate to our future business,
financial condition or results of operations. For a description of certain
factors that may have a significant impact on our future business, financial
condition or results of operations, see "Forward-Looking Statements" at the end
of this discussion and analysis.

For more information about our business including our operating policies, investment philosophy and strategy, financing and hedging strategies, and other important information, please refer to Part I, Item 1 of our 2020 Form 10-K.

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                               EXECUTIVE OVERVIEW
Dynex Capital, Inc. is an internally managed mortgage real estate investment
trust, or mortgage REIT, which primarily invests in residential and commercial
mortgage-backed securities ("MBS") on a leveraged basis. We finance our
investments principally with borrowings under repurchase agreements. Our
objective is to provide attractive risk-adjusted returns to our shareholders
over the long term that are reflective of a leveraged, high quality fixed income
portfolio with a focus on capital preservation. We seek to provide returns to
our shareholders primarily through the payment of regular dividends and also
potentially through capital appreciation of our investments.
Market Conditions and Recent Activity
Economic activity continued to recover in the first quarter of 2021 and market
conditions materially improved relative to recent quarters. Interest rates and
credit markets responded to the improving economic outlook with the 10-year U.S.
Treasury rate increasing 82 basis points and spreads on MBS tightening as
indicated in the table below. Equity markets also continued their strong
performance as evidenced by the S&P 500 Index increasing 6.2% during the first
quarter of 2021. As discussed further below, the Company had anticipated and
positioned its hedging portfolio for strengthening economic activity and a
steepening yield curve, which more than offset the impact of an increasing
interest rate environment on MBS prices during the quarter.
                                                                                          As of                          As of
Investment Type:                                     Change in Spreads               March 31, 2021                December 31, 2020
Agency RMBS: (1)
2.0% coupon                                                    (19)                           (20)                            (1)
2.5% coupon                                                    (14)                           (16)                            (2)
3.0% coupon                                                    (34)                             2                             36
3.5% coupon                                                    (20)                             8                             28
4.0% coupon                                                    (40)                            11                             51
Agency DUS (Agency CMBS) (2)                                   (14)                            22                             36
Freddie K AAA IO (Agency CMBS IO) (2)                          (45)                            95                            140
AAA CMBS IO (Non-Agency CMBS IO) (2)                           (35)                           130                            165


(1) Option adjusted spreads are based on Company estimates using third-party
models and market data.
(2) Data represents the spread to swap rate on newly issued securities and is
sourced from JP Morgan.
The charts below show the highest and lowest U.S. Treasury and swap rates during
the three months ended March 31, 2021 as well as the rates as of March 31, 2021
and December 31, 2020:
                                       22
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                     [[Image Removed: dx-20210331_g1.jpg]]

                     [[Image Removed: dx-20210331_g2.jpg]]

First Quarter 2021 Performance
Our results for the first quarter of 2021 were driven by the overall positioning
of our assets and our hedging for the potential performance of those assets,
given our expectation of a steepening yield curve. Comprehensive income to
common shareholders of $47.2 million, or $1.76 per common share, was primarily
comprised of realized and unrealized gains from our hedging instruments, which
protected the Company's book value. The steepening yield curve resulted in a
decline in the fair value of the majority of our investment portfolio, but this
decline was partially buffered by spread tightening, particularly in the lower
coupon assets in which we are predominantly invested. We used proceeds from our
two capital raises during the first quarter to purchase investments and adjust
our hedge position, which together contributed approximately $0.51 of the
increase in book value per common share during the first quarter.

Net interest income for the first quarter of 2021 declined $2.2 million compared
to the prior quarter due to a smaller average balance of lower yielding assets
while adjusted net interest income, a non-GAAP measure, was relatively unchanged
                                       23
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from the prior quarter as drop income from TBA dollar roll positions increased
by $2.1 million, mostly offsetting the decline in net interest income. We
increased our investment activity in TBA securities by approximately 50% during
the first quarter of 2021 as implied funding costs remained lower for TBA dollar
roll transactions versus repurchase agreement financing typically used for
specified pools. The increase in our leverage including TBA long positions to
6.9 time shareholders' equity as of March 31, 2021 compared to 6.3 times
shareholders' equity as of December 31, 2020 was primarily due to our increased
investment in TBAs during the first quarter.

Core net operating income to common shareholders, a non-GAAP measure, increased
for the first quarter of 2021 by $1.9 million to $12.4 million, or $0.46 per
common share, compared to the prior quarter due to lower general and
administrative expenses and lower preferred stock dividends as a result of the
redemption of the remaining shares of our 7.625% Series B Preferred Stock. On a
per common share basis, the impact of the $1.9 million increase in core net
operating income to common shareholders was mostly offset by an increase in
weighted average common shares as a result of the two capital raises during the
first quarter.
Current Outlook
We believe market conditions and the outlook for the Company continue to remain
favorable. Second quarter projections of U.S. Gross Domestic Product are
optimistic, but interest rates remain range-bound and off their recent highs.
Borrowing rates remain very low with short-term interest rates near 0%, and
market volatility remains somewhat muted given the historic monetary stimulus
measures of the Federal Reserve. The Federal Reserve has also indicated that
policy will be based on actual outcomes and not projections, which is consistent
with their process historically. We believe this could potentially introduce
more volatility as market participants adjust to the new policy-making regime.
As we have continually noted, markets are more vulnerable to exogenous shocks
and the risk for policy mistakes remains high.

For the next few quarters, we believe rates will remain relatively range-bound
while longer-term we believe interest rates will likely face pressure from the
increased supply of U.S. Treasuries as well as possible increases in real and
expected inflation. The Federal Reserve has indicated that the Federal Funds
target rate will remain near zero until at least 2023, which means our financing
costs should remain at current low levels until then. An environment where
borrowing costs are anchored and the yield curve is reasonably steep with rates
range-bound supports our ability to generate solid total economic returns to our
shareholders. While there are risks that the 10-year Treasury rate moves outside
the range we currently expect or there is a sudden change in Federal Reserve
policy, we believe the probability of either occurring in the near-term is
relatively low.

We have planned for other potential scenarios that may unfold, including the
risk of an exogenous event, which we believe remains high. As a result, we are
maintaining a lower leveraged capital structure, a highly liquid position, and
are investing in Agency MBS where the Federal Reserve is providing material
support. Also, though we do not expect dollar roll specialness to continue at
the same level as what we experienced in the latter half of 2020, we do expect
our second quarter results to benefit from our continued investment in TBA
securities. Our target for leverage including TBA securities remains between 6-9
times shareholders' equity, and we will actively increase or decrease leverage
based on the risk environment and the expected rate of return on available
assets. Longer term, we maintain our belief that the demographics behind the
housing sector continue to support our investment thesis of investing in high
quality, highly liquid U.S.-based housing assets, and we maintain our focus on
capital preservation while generating returns over the long term.


                          Non-GAAP Financial Measures
In addition to the Company's operating results presented in accordance with
GAAP, the information presented within Item 2, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" of this Quarterly
Report on Form 10-Q contains the following non-GAAP financial measures: core net
operating income to common shareholders (including per common share), adjusted
net interest income and the related metric adjusted net interest spread. Because
these measures are used in the Company's internal analysis of financial and
operating performance, management believes that they provide greater
transparency to our investors of management's view of our economic performance.
Management also believes the presentation of these measures, when analyzed in
conjunction with the Company's GAAP operating results, allows investors to more
effectively evaluate and compare the performance of the Company to that of its
                                       24
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peers, although the Company's presentation of its non-GAAP measures may not be
comparable to other similarly-titled measures of other companies.
Reconciliations of core net operating income to common shareholders and adjusted
net interest income to the related GAAP financial measures are provided below
and within "Results of Operations".
Management views core net operating income to common shareholders as an estimate
of the Company's financial performance based on the effective yield of its
investments, net of financing costs and other normal recurring operating
income/expense, net. In addition to the non-GAAP reconciliation set forth below,
which derives core net operating income to common shareholders from GAAP
comprehensive income (loss) to common shareholders, core net operating income to
common shareholders can also be determined by adjusting net interest income to
include interest rate swap periodic interest benefit/cost, drop income on TBA
securities, general and administrative expenses, and preferred dividends. 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 core net operating income and in adjusted
net interest income 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. Management
also includes interest rate swap periodic interest benefit/cost, which is also
included in "gain (loss) on derivatives instruments, net", in adjusted net
interest income because interest rate swaps are used by the Company to
economically hedge the impact of changing interest rates on its borrowing costs
from repurchase agreements, and therefore represent a cost of financing in
addition to GAAP interest expense. However, these non-GAAP measures do not
provide a full perspective on our results of operations, and therefore, their
usefulness is limited. For example, these non-GAAP measures do not include the
changes in fair value of investments or changes in fair value of and costs of
terminating derivative instruments used by management to economically hedge the
impact of changing interest rates on the fair value of the Company's portfolio
and book value per common share. As a result, these non-GAAP measures should be
considered as a supplement to, and not as a substitute for, the Company's GAAP
results as reported on its consolidated statements of comprehensive income.
                                                                                     Three Months Ended
Reconciliations of GAAP to Non-GAAP Financial Measures:                  March 31, 2021           December 31, 2020
($ in thousands except per share data)
Comprehensive income to common shareholders                            $        47,227          $           28,725

Less:

Change in fair value of available for sale investments                          60,459                        (888)
Loss on investments, net                                                           980                         134
Change in fair value of derivative instruments, net (1)                        (99,233)                    (17,428)
Preferred stock redemption charge                                                2,987                           -
Core net operating income to common shareholders                       $        12,420          $           10,543
Average common shares outstanding                                           26,788,693                  23,261,542
Comprehensive income per common share                                  $          1.76          $             1.23
Core net operating income per common share                             $          0.46          $             0.45

GAAP net interest income                                               $        12,259          $           14,416
TBA drop income (2)                                                              8,568                       6,445
Net periodic interest cost of interest rate swaps                                    -                          (7)
Adjusted net interest income                                           $        20,827          $           20,854
Other operating expense, net                                                      (380)                       (205)
General and administrative expenses                                             (5,468)                     (6,853)
Preferred stock dividends                                                       (2,559)                     (3,253)
Core net operating income to common shareholders                       $        12,420          $           10,543


(1) Amount includes unrealized gains and losses from changes in fair value of
derivatives and realized gains and losses on terminated derivatives and excludes
net periodic interest benefit/cost incurred on effective interest rate swaps
outstanding during the period and TBA drop income.
                                       25
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(2) 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. The impact of TBA drop income on
adjusted net interest spread includes the implied average funding cost of TBA
dollar roll transactions during the periods indicated.


                              FINANCIAL CONDITION

Investment Portfolio
The following chart compares the composition of our MBS portfolio including TBA
securities as of the dates indicated:
[[Image Removed: dx-20210331_g3.jpg]]
(1) Includes TBA positions at their implied market value as if settled of $2.8
billion and $1.6 billion, respectively. TBA securities are recorded within
"derivative assets (liabilities)" on our consolidated balance sheet at their net
carrying value, which represents the difference between the implied market value
and the implied cost basis of the TBA security as of the date indicated..

RMBS. As of March 31, 2021, the majority of our investments in RMBS were
Agency-issued pass-through securities collateralized primarily by pools of
fixed-rate single-family mortgage loans. Monthly payments of principal and
interest made by the individual borrowers on the mortgage loans underlying the
pools are "passed through" to the security holders, after deducting GSE or U.S.
Government agency guarantee and servicer fees. Mortgage pass-through
certificates generally distribute cash flows from the underlying collateral on a
pro-rata basis among the security holders. Security holders also receive
guarantor advances of principal and interest for delinquent loans in the
mortgage pools. In addition to specified pools of Agency RMBS, we are also
currently investing in TBA securities. Please refer to   Note    s 1   and  

4

of the Notes to the Consolidated Financial Statements for a description of these
transactions and information regarding their accounting treatment.
As noted in the table below, as of March 31, 2021, we are invested in lower
coupon securities to mitigate the risk of loss of premiums due to early
prepayment. Our lower coupon investments also have lower premiums relative to
higher coupon assets which further protects our earnings when prepayments occur.
Our investment in TBA securities has increased relative to prior periods as
implied financing rates for dollar roll transactions have been lower than the
financing rates for repurchase agreement borrowings we typically use to finance
specified pools. Because TBA securities have higher relative liquidity, these
transactions allow more flexibility should we decide or find it necessary to
reduce leverage.
The following tables compare our fixed-rate Agency RMBS investments including
TBA dollar roll positions as of the dates indicated:
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                                                                                                          March 31, 2021

                                                                Amortized Cost/                                                                Weighted Average
                                   Par/Notional-Long             Implied Cost                Fair                     Loan Age                     3 Month
          Coupon                        (Short)                  Basis (1)(3)            Value (2)(3)              (in months)(4)                 CPR (4)(5)             Estimated Duration (6)
30-year fixed-rate:                                         ($ in thousands)
2.0%                             $           664,474          $        679,538          $    664,294                                 10                  11.0  %                             7.71
2.5%                                         810,213                   843,779               833,590                                 13                  17.8  %                             6.33
4.0%                                         244,868                   252,207               265,852                                 36                  39.9  %                             3.22
TBA 2.0%                                   1,035,000                 1,040,214             1,028,661                                n/a                      n/a                             8.10
TBA 2.5%                                     890,000                   910,249               908,739                                n/a                      n/a                             6.34
15-year fixed-rate:
TBA 1.5%                                     375,000                   375,911               375,850                                n/a                      n/a                             5.36
TBA 2.0%                                     500,000                   519,430               512,687                                n/a                      n/a                             4.65
Total                            $         4,519,555          $      4,621,328          $  4,589,673                                 15                  18.6  %                   6.48



                                                                                                        December 31, 2020

                                                                Amortized Cost/                                                                Weighted Average
                                   Par/Notional-Long             Implied Cost                Fair                     Loan Age                     3 Month
          Coupon                        (Short)                  Basis (1)(3)            Value (2)(3)              (in months)(4)                 CPR (4)(5)             Estimated Duration (6)
30-year fixed-rate:                                         ($ in thousands)
TBA 2.0%                         $           765,000          $        789,945          $    792,957                                n/a                      n/a                             4.89
2.0%                                         620,238                   635,096               646,744                                  8                   7.7  %                             5.31
2.5%                                         938,334                   973,116               995,889                                 10                  13.5  %                             3.53
4.0%                                         280,474                   288,831               303,758                                 33                  46.8  %                             2.48
15-year fixed-rate:
TBA 1.5%                                     250,000                   255,068               257,305                                n/a                      n/a                             4.73
TBA 2.0%                                     500,000                   519,047               522,687                                n/a                      n/a                             3.09
Total                            $         3,354,046          $      3,461,103          $  3,519,340                                 13                  17.1  %                   4.10


(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 4 

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. Securities with no prepayment history are excluded
from this calculation.
(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.
CMBS. Substantially all of our CMBS investments as of March 31, 2021 were
fixed-rate Agency-issued securities backed by multifamily housing loans. The
loans underlying CMBS are generally fixed-rate with scheduled principal payments
generally assuming a 30-year amortization period, but typically requiring
balloon payments on average approximately 10 years from origination. These loans
typically have some form of prepayment protection provisions (such as prepayment
lock-out) or prepayment compensation provisions (such as yield maintenance or
prepayment penalty), which provide us compensation if underlying loans prepay
prior to us earning our expected return on our investment. Yield
                                       27
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maintenance and prepayment penalty requirements are intended to create an
economic disincentive for the loans to prepay, which we believe makes the fair
value of CMBS less costly to hedge relative to RMBS.
The following table presents information about our CMBS investments by year of
origination as of the dates indicated:
                                                        March 31, 2021                                                                     December 31, 2020
                                                                      Months to                                                                            Months to
                                                                      Estimated                                                                            Estimated
($ in thousands)         Par Value           Amortized Cost         Maturity (1)           WAC (2)            Par Value           Amortized Cost         Maturity (1)           WAC (2)
Year of Origination:
Prior to 2009           $   8,924          $         8,790                     25              5.13  %       $   9,132          $         8,964                     36              5.69  %
2009 to 2012               11,352                   11,968                     44              5.56  %          11,424                   12,085                     65              5.56  %
2013 to 2014                9,811                    9,968                     42              3.29  %           9,865                   10,033                     44              3.61  %
2015                      154,333                  155,646                     67              2.85  %         155,760                  157,137                     69              2.85  %
2017                       30,882                   31,254                     89              3.18  %          30,907                   31,294                     91              3.18  %
2019                       19,702                   19,982                    149              3.12  %          19,702                   19,988                    151              3.12  %
                        $ 235,004          $       237,608                     73              3.15  %       $ 236,790          $       239,501                     77              3.19  %


(1) Months to estimated maturity is an average weighted by the amortized cost of
the investment.
(2) The weighted average coupon ("WAC") is the gross interest rate of the
security weighted by the outstanding principal balance.

CMBS IO. CMBS IO are interest-only securities issued as part of a CMBS
securitization and represent the right to receive a portion of the monthly
interest payments (but not principal cash flows) on the unpaid principal balance
of the underlying pool of commercial mortgage loans. We invest in both
Agency-issued and non-Agency issued CMBS IO. The loans collateralizing
Agency-issued CMBS IO pools are similar in composition to the pools of loans
that collateralize CMBS as discussed above. Non-Agency issued CMBS IO are backed
by loans secured by a number of different property types including office
buildings, hospitality, and retail, among others. Since CMBS IO securities have
no principal associated with them, the interest payments received are based on
the unpaid principal balance of the underlying pool of mortgage loans, which is
often referred to as the notional amount. Yields on CMBS IO securities are
dependent upon the performance of the underlying loans. Similar to CMBS
described above, the Company receives prepayment compensation as most loans in
these securities have some form of prepayment protection from early repayment;
however, there are no prepayment protections if the loan defaults and is
partially or wholly repaid earlier because of loss mitigation actions taken by
the underlying loan servicer. Because Agency CMBS IO generally contain higher
credit quality loans, they have a lower risk of default than non-Agency CMBS IO.
The majority of our CMBS IO investments are investment grade-rated with the
majority rated 'AAA' by at least one of the nationally recognized statistical
rating organizations.
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The following table presents our CMBS IO investments by year of origination as of the dates indicated:

                                                                                               March 31, 2021
                                                               Agency                                                                 Non-Agency
($ in thousands)                   Amortized Cost          Fair Value           Remaining WAL (1)           Amortized Cost          Fair Value           Remaining WAL (1)
Year of Origination:
2010-2012                        $         9,043          $    8,959                      6               $         2,287          $    2,250                      6
2013                                      19,187              20,947                     10                         9,541               9,668                     12
2014                                      22,558              23,344                     19                        46,583              47,836                     17
2015                                      29,555              30,972                     23                        49,821              51,594                     24
2016                                      21,865              22,908                     28                        15,899              16,251                     16
2017                                      25,543              26,818                     39                         7,370               7,583                     32
2018                                       3,715               3,953                     59                             -                   -                      -
2019                                      86,572              89,661                     57                             -                   -                      -
2020                                       3,116               3,132                     50                             -                   -                      -
                                 $       221,154          $  230,694                     37               $       131,501          $  135,182                     21



                                                                                              December 31, 2020
                                                               Agency                                                                 Non-Agency
($ in thousands)                   Amortized Cost          Fair Value           Remaining WAL (1)           Amortized Cost          Fair Value           Remaining WAL (1)
Year of Origination:
2010-2012                        $        12,037          $   11,932                      9               $         3,237          $    3,263                      8
2013                                      22,367              24,165                     13                        10,875              10,912                     15
2014                                      24,841              25,749                     22                        50,777              51,175                     20
2015                                      31,875              33,404                     26                        53,176              54,020                     27
2016                                      23,072              24,203                     31                        16,705              16,906                     16
2017                                      26,493              27,952                     42                         7,733               7,808                     34
2018                                       3,792               3,983                     62                             -                   -                      -
2019                                      88,757              91,303                     60                             -                   -                      -
2020                                       3,203               3,264                     53                             -                   -                      -
                                 $       236,437          $  245,955                     39               $       142,503          $  144,084                     24


(1) Remaining weighted average life ("WAL") represents an estimate of the number
of months of contractual cash flows remaining for the investments by year of
origination.

The weighted average interest coupon rate for our CMBS IO was 0.55% as of
March 31, 2021 and 0.56% as of December 31, 2020. Effective yields on CMBS IO
securities are dependent upon the performance of the underlying loans. Our
return on these investments may be negatively impacted if the loans default,
resulting in foreclosures, or liquidations of the loan collateral.
Non-Agency-issued securities are generally expected to have a higher risk of
default than Agency CMBS IO. We are mostly invested in senior tranches of these
securities where we have evaluated the credit profile of the underlying loan
pool and can monitor credit performance in order to mitigate our exposure to
losses. The majority of our non-Agency CMBS IO investments are investment
grade-rated with the majority rated 'AAA' by at least one of the nationally
recognized statistical rating organizations. All of our non-Agency CMBS IO were
originated prior to 2017, the majority of which we believe have had underlying
property value appreciation.
                                       29
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Since the economic impacts of COVID-19 began in 2020, servicers are reporting an
increase in delinquencies on loans underlying our non-Agency CMBS IO and have
taken loss mitigation actions including loan forbearance or allowing the
borrower to make loan payments using replacement reserve or similar property
related funds. Most of the increases in delinquencies thus far have been in the
retail and hotel sectors and have nominally impacted cash flows and yields on
the securities. Considering the characteristics of our non-Agency CMBS IO and
the actions taken by servicers so far to work with borrowers through various
relief measures, we have not seen evidence of and do not currently expect a
material adverse effect on our future cash flows for non-Agency CMBS IO.
However, the ultimate impact of COVID-19 on the global economy and on the loans
underlying any of our securities remains uncertain and cannot be predicted at
this time.
The property type for the loans securing our non-Agency CMBS IO, which has not
changed materially since December 31, 2020, are shown in the table below as of
March 31, 2021:
                                             March 31, 2021
($ in thousands)                 Fair Value        Percentage of Portfolio
Property Type:
Retail                        $       37,567                        27.8  %
Office                                29,280                        21.7  %
Multifamily                           23,452                        17.3  %
Hotel                                 18,132                        13.4  %
Mixed use                              9,117                         6.7  %
Other (1)                             17,634                        13.1  %
Total non-Agency CMBS IO      $      135,182                       100.0  %

(1) Other property types collateralizing non-Agency CMBS IO do not comprise more than 5% individually.


Repurchase Agreements
We use leverage to enhance the returns on our invested capital by pledging our
investments as collateral for borrowings primarily through the use of
uncommitted repurchase agreements with major financial institutions and
broker-dealers. Repurchase agreements 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 pay interest on our
repurchase agreement borrowings based on short-term rate indices that
historically closely track LIBOR and are fixed for the term of the borrowing.
Please refer to   Note 3   of the Notes to the Consolidated Financial Statements
contained within this Quarterly Report on Form 10-Q as well as "Results of
Operations" and "Liquidity and Capital Resources" contained within this Item 2
for additional information relating to our repurchase agreement borrowings.

Derivative Assets and Liabilities
We use derivative instruments to economically hedge our exposure to adverse
changes in interest rates resulting from our ownership of primarily fixed-rate
investments financed with short-term repurchase agreements. Changes in interest
rates can impact net interest income, the market value of our investments, and
book value per common share. We regularly monitor and frequently adjust our
hedging portfolio in response to many factors including, but not limited to,
changes in our investment portfolio as well as our expectation of future
interest rates, including the absolute level of rates and the slope of the yield
curve versus market expectations. As of March 31, 2021, approximately 72% of our
MBS portfolio including TBA securities were hedged using short positions in U.S.
Treasury futures, put options on U.S. Treasury futures, and interest rate
swaptions compared to approximately 62% as of December 31, 2020. Please refer to
  Note 4   of the Notes to the Consolidated Financial Statements for details on
our interest rate derivative instruments as well as "Quantitative and
Qualitative Disclosures about Market Risk" in Part I, Item 3 of this Quarterly
Report on Form 10-Q.

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                             RESULTS OF OPERATIONS
The discussion below includes both GAAP and non-GAAP financial measures that
management utilizes in its internal analysis of financial and operating
performance. Please read the section "Non-GAAP Financial Measures" contained in
"Executive Overview" of Item 2 of this Quarterly Report on Form 10-Q for
additional important information about these measures.

The following table summarizes the results of operations for the periods
indicated:
                                                                          Three Months Ended
$s in thousands                                   March 31, 2021           December 31, 2020           March 31, 2020
Net interest income                             $        12,259          $           14,416          $        17,721
Gain on sale of investments, net                          4,697                       9,356                   84,783
Loss on investments, net                                   (980)                       (134)                    (372)
Gain (loss) on derivative instruments, net              107,801                      23,866                 (195,567)
General and administrative expenses                      (5,468)                     (6,853)                  (4,621)
Other operating expenses, net                              (380)                       (205)                    (423)
Preferred stock dividends                                (2,559)                     (3,253)                  (3,841)
Preferred stock redemption charges                       (2,987)                          -                   (3,914)
Net income (loss) to common shareholders                112,383                      37,193                 (106,234)
Other comprehensive (loss) income                       (65,156)                     (8,468)                  72,972
Comprehensive income (loss) to common
shareholders                                    $        47,227          $           28,725          $       (33,262)



Net Interest Income For Three Months Ended March 31, 2021 Compared to the Three
Months Ended December 31, 2020
Net interest income decreased $2.2 million for the three months ended March 31,
2021 compared to the three months ended December 31, 2020 due to a smaller
average balance of lower yielding investments. Net interest spread declined 7
basis points for the three months ended March 31, 2021 compared to the prior
quarter, but exceeded management's expectation for the first quarter of 2021 as
prepayment speeds were lower than anticipated and financing rates dropped 5
basis points versus the prior quarter.
The following table presents certain information about our interest-earning
assets and interest-bearing liabilities and their performance for the periods
indicated:
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                                                                                          Three Months Ended
                                                        March 31, 2021                                                         December 31, 2020
                                                                               Effective Yield/                                                         Effective Yield/
                                   Interest             Average Balance            Cost of                  Interest             Average Balance            Cost of
($ in thousands)                Income/Expense              (1)(2)               Funds (3)(4)            Income/Expense              (1)(2)               Funds (3)(4)
Interest-earning assets:
Agency RMBS                   $          7,381          $  1,821,920                     1.62  %       $          9,812          $  2,139,626                     1.83  %
Agency CMBS                              1,832               238,158                     2.91  %                  1,973               255,327                     2.90  %
CMBS IO (5)                              4,516               365,891                     4.33  %                  4,746               391,004                     4.27  %
Non-Agency MBS and other
investments                                163                 7,304                     7.15  %                    174                 7,960                     7.37  %
Total:                        $         13,892          $  2,433,273                     2.17  %       $         16,705          $  2,793,917                     2.29  %

Interest-bearing liabilities:
(6)                                     (1,633)            2,158,121                    (0.30) %                 (2,289)                7,960                    (0.35) %
Net interest income/net
interest spread               $         12,259                                           1.87  %       $         14,416                                           1.94  %


(1) Average balance for assets is calculated as a simple average of the daily
amortized cost and excludes unrealized gains and losses as well as 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 the sum of gross interest income
and scheduled premium amortization/discount accretion (both of which are
annualized for any reporting period less than 12 months) and prepayment
compensation and premium amortization/discount accretion adjustments
(collectively, "prepayment adjustments"), which are not annualized, by the
average balance of asset type outstanding during the reporting period.
(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.
(6) Interest-bearing liabilities consist primarily of repurchase agreement
borrowings.

Rate/Volume Analysis. The following table presents the estimated impact on our
net interest income due to changes in rate (effective yield/cost of funds) and
changes in volume (average balance) of our interest-earning assets and
interest-bearing liabilities for the periods indicated:
                                                                            

Three Months Ended

                                                               March 31, 

2021 Compared to December 31, 2020

                                                     Increase (Decrease) Due to Change In                      Total Change in
                                                                                      Prepayment                  Interest
($ in thousands)                              Rate               Volume             Adjustments (1)            Income/Expense
Interest-earning assets:
Agency RMBS                              $      (984)         $   (1,447)         $              -          $           (2,431)
Agency CMBS                                        -                (160)                       19                        (141)
CMBS IO (2)                                       48                (257)                      (21)                       (230)
Non-Agency MBS and other investments              (5)                 (3)                       (3)                        (11)
Change in interest income                       (941)             (1,867)                       (5)                     (2,813)
Change in interest expense                      (315)               (341)                        -                        (656)

Total net change in net interest income $ (626) $ (1,526)

       $             (5)         $           (2,157)


(1) Prepayment adjustments represent effective interest amortization adjustments
related to changes in actual prepayment speeds and prepayment compensation, net
of amortization adjustments for CMBS and CMBS IO.
(2) Includes Agency and non-Agency issued securities.
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Adjusted Net Interest Income. Please refer to "Non-GAAP Financial Measures" at
the end of the "Executive Overview" section of this Quarterly Report on Form
10-Q for additional information about this financial measure used by management
to evaluate results of operations.
                                                                            Three Months Ended
                                                         March 31, 2021                            December 31, 2020
($ in thousands)                                  Amount                  Rate                Amount               Rate
Net interest income                          $      12,259                   1.87  %       $  14,416                  1.94  %
Add: TBA drop income (1) (2)                         8,568                      -  %           6,445                  0.04  %
Add: net periodic interest benefit (3)                   -                      -  %              (7)                    -  %
Adjusted net interest income                 $      20,827                   1.87  %       $  20,854                  1.98  %



(1) 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.
(2) The impact of TBA drop income on adjusted net interest spread includes the
implied average funding cost of TBA dollar roll transactions during the periods
indicated.
(3) Amount represents net periodic interest cost/benefit of effective interest
rate swaps outstanding during the period and excludes realized and unrealized
gains and losses from changes in fair value of derivatives.
Adjusted net interest income was flat for the three months ended March 31, 2021
compared to the three months ended December 31, 2020 because the increase in our
investment in TBA securities generated an additional $2.1 million in drop income
which mostly offset the decline in net interest income of $2.2 million. The
financing cost imputed in TBA dollar roll transactions continues to be lower
than the average repurchase agreement financing rate, which is commonly referred
to in the industry as TBA dollar rolls "trading special" or "dollar roll
specialness". Dollar roll specialness happens primarily as a result of
supply/demand imbalances or volatility in market prepayment expectations, and in
management's view, the pace of bank and Federal Reserve purchases is currently
resulting in an implied financing costs dropping below 0%. The implied financing
rate for our TBA long positions was (0.20)% compared to our repurchase agreement
financing cost for specified pools of Agency RMBS of 0.19% for the three months
ended March 31, 2021. TBA drop income did not impact adjusted net interest
spread for the first quarter of 2021 because the implied net interest spread on
TBA dollar roll transactions was similar to the net interest spread on our MBS.

Net Interest Income For Three Months Ended March 31, 2021 Compared to the Three
Months Ended March 31, 2020
Net interest income declined by $(5.5) million for the three months ended
March 31, 2021 compared to the three months ended March 31, 2020 because we held
a smaller average balance of lower yielding investments during the first quarter
of 2021. The following table presents information about our interest-earning
assets and interest-bearing liabilities and their performance for the periods
indicated:
                                       33
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                                                                                          Three Months Ended
                                                                                               March 31,
                                                             2021                                                                     2020
                                                                               Effective Yield/                                                         Effective Yield/
                                   Interest             Average Balance            Cost of                  Interest             Average Balance            Cost of
($ in thousands)                Income/Expense              (1)(2)               Funds (3)(4)            Income/Expense              (1)(2)               Funds (3)(4)
Interest-earning assets:
Agency RMBS                   $          7,381          $  1,821,920                     1.62  %       $         19,289          $  2,514,228                     3.07  %
Agency CMBS                              1,832               238,158                     2.91  %                 15,222             1,899,226                     3.16  %
CMBS IO (5)                              4,516               365,891                     4.33  %                  4,655               475,404                     3.73  %
Non-Agency MBS and other
investments                                163                 7,304                     7.15  %                    656                10,274                     7.55  %
Total:                        $         13,892          $  2,433,273                     2.17  %       $         39,822          $  4,899,132                     3.18  %

Interest-bearing liabilities:           (1,633)            2,158,121                    (0.30) %                (22,101)            4,703,511                    (1.86) %
Net interest income/net
interest spread               $         12,259                                           1.87  %       $         17,721                                           1.32  %


(1) Average balance for assets is calculated as a simple average of the daily
amortized cost and excludes unrealized gains and losses as well as 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 the sum of gross interest income
and scheduled premium amortization/discount accretion (both of which are
annualized for any reporting period less than 12 months) and prepayment
compensation and premium amortization/discount accretion adjustments
(collectively, "prepayment adjustments"), which are not annualized, by the
average balance of asset type outstanding during the reporting period.
(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.
(6) Interest-bearing liabilities consist primarily of repurchase agreement
borrowings.

Rate/Volume Analysis. The following table presents the estimated impact on our
net interest income due to changes in rate (effective yield/cost of funds) and
changes in volume (average balance) of our interest-earning assets and
interest-bearing liabilities for the periods indicated:
                                                                            

Three Months Ended

                                                                  March 31, 

2021 Compared to March 31, 2020

                                                       Increase (Decrease) Due to Change In                      Total Change in
                                                                                         Prepayment                 Interest
                                                Rate                Volume            Adjustments (1)            Income/Expense
Interest-earning assets:
Agency RMBS                                $     (6,603)         $   (5,305)         $             -          $          (11,908)
Agency CMBS                                        (177)            (13,265)                      52                     (13,390)
CMBS IO (2)                                         418                (999)                     442                        (139)
Non-Agency MBS and other investments               (447)                (30)                     (16)                       (493)
Change in interest income                  $     (6,809)         $  (19,599)         $           478          $          (25,930)
Change in interest expense                       (8,400)            (12,068)                       -                     (20,468)

Total net change in net interest income $ 1,591 $ (7,531) $

           478          $           (5,462)


(1) Prepayment adjustments represent effective interest amortization adjustments
related to changes in actual prepayment speeds and prepayment compensation, net
of amortization adjustments for CMBS and CMBS IO.
                                       34
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(2) Includes Agency and non-Agency issued securities.


Adjusted Net Interest Income. Please refer to "Non-GAAP Financial Measures" at
the end of the "Executive Overview" section of this Quarterly Report on Form
10-Q for additional information about this financial measure used by management
to evaluate results of operations.
                                                         Three Months Ended
                                                              March 31,
                                                   2021                      2020
($ in thousands)                            Amount        Rate        Amount        Rate
Net interest income                       $ 12,259       1.87  %    $ 17,721        1.32  %
Add: TBA drop income (1) (2)                 8,568          -  %         739       (0.03) %
Add: net periodic interest benefit (3)           -          -  %       2,064        0.18  %
Adjusted net interest income              $ 20,827       1.87  %    $ 20,524        1.47  %



(1) 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.
(2) The impact of TBA drop income on adjusted net interest spread includes the
implied average funding cost of TBA dollar roll transactions during the periods
indicated.
(3) Amount represents net periodic interest cost/benefit of effective interest
rate swaps outstanding during the period and excludes realized and unrealized
gains and losses from changes in fair value of derivatives.

Adjusted net interest income increased $0.3 million for the three months ended
March 31, 2021 compared to the three months ended March 31, 2020 because our
increased investment in TBA securities at lower implied funding costs relative
to the three months ended March 31, 2020 resulted in an increase in TBA drop
income of $7.8 million. This increase in TBA drop income offset the decline of
$(5.5) million in net interest income and $(2.1) million in net periodic
interest benefit from interest rate swaps. As discussed previously, we have
increased our investment in TBA securities relative to prior periods due to
dollar roll specialness and also given the current market environment, TBA
securities allow us more flexibility should we decide or find it necessary to
reduce leverage. The decline in net periodic interest benefit from interest rate
swaps is because we are not currently using interest rate swaps to hedge our
interest rate risk.

Changes in Fair Value of Investments
Changes in the fair value of our investments result in realized and unrealized
gains and losses. The fair value of our investments are impacted by a number of
number of factors including, among others, market volatility, changes in credit
spreads, spot and forward interest rates, actual and anticipated prepayments,
and supply/demand dynamics which are in turn impacted by, among other things,
interest rates, capital flows, economic conditions, and government policies and
actions, such as purchases and sales by the Federal Reserve Bank of New York.
Unrealized Gains (Losses). Changes in the fair value of our MBS designated as
AFS are reported in other comprehensive income ("OCI") as an unrealized gain or
loss until the security is sold or matures. Effective January 1, 2021, we
elected the fair value option for MBS purchased on or after that date with
changes in fair value reported in net income as an unrealized gain or loss until
the security is sold or matures. The following table provides details on the
unrealized gains or
                                       35
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losses on our investments recorded within "other comprehensive (loss) income" and "loss on investments, net" for the periods indicated:

                                                                         Three Months Ended
($ in thousands)                                 March 31, 2021           December 31, 2020           March 31, 2020

Agency RMBS purchased after December 31, 2020 $ (960) $

              -          $             -
Mortgage loans held for investment                         (35)                       (118)                    (370)
Other                                                       15                         (16)                      (2)
Loss on investments, net                                  (980)                       (134)                    (372)

Agency RMBS                                            (60,175)                     (7,579)                 (24,613)
Agency CMBS                                             (7,046)                     (3,900)                 112,785
CMBS IO                                                  2,121                       3,081                  (15,083)
Non-Agency other                                           (56)                        (70)                    (117)
Other comprehensive (loss) income                      (65,156)                     (8,468)                  72,972

Total unrealized (losses) gains                $       (66,136)         $   

(8,602) $ 72,600




Realized Gains (Losses). Sales of our investments happen in the ordinary course
of business as we manage our risk, capital and liquidity profiles, and as we
reallocate capital to various investments. Upon the sale of an AFS security, any
unrealized gain or loss is reclassified out of AOCI into net income as a
realized gain or loss within "gain (loss) on sale of investments, net." Upon the
sale of a security for which we have elected the fair value option, any
unrealized gain or loss recorded in "loss on investments, net" is reversed and
the realized gain or loss is recorded within "gain (loss) on sale of
investments, net". The following table provides information related to our
realized gains (losses) on sales of AFS investments for the periods indicated:
                                                       Three Months Ended

                          March 31, 2021              December 31, 2020               March 31, 2020
                      Amortized      Realized      Amortized       Realized       Amortized       Realized
($ in thousands)      cost sold        Gain        cost sold         Gain         cost sold         Gain
Agency RMBS          $  70,132      $  4,697      $  200,212      $  6,865      $ 1,753,256      $ 64,094
Agency CMBS                  -             -          29,684         2,491          152,995        20,689
                     $  70,132      $  4,697      $  229,896      $  9,356      $ 1,906,251      $ 84,783



Our sales of AFS investments during the three months ended March 31, 2020 were
significantly higher compared to the three months ended March 31, 2021 and the
three months ended December 31, 2020. When interest rates rallied early to
mid-March of 2020 as the markets initially responded to the COVID-19 pandemic,
we chose to realize gains on our Agency RMBS as asset prices began to fall and
we chose to de-lever our balance sheet.

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Gain (Loss) on Derivative Instruments, Net
Changes in the fair value of derivative instruments and net periodic interest
benefits/costs are impacted by changing market interest rates and adjustments
that we may make to our hedging positions in any given period. Because of the
changes made to our derivatives portfolio from one reporting period to the next,
results of any given reporting period are generally not comparable to results of
another.
The following table provides information on our financial instruments accounted
for as derivative instruments for the periods indicated:
                                                                           Three Months Ended
($ in thousands)                                   March 31, 2021           December 31, 2020           March 31, 2020
Interest rate swaps:
Net periodic interest benefit                    $             -          $               (7)         $         2,064
Change in fair value                                           -                           7                 (184,245)
Total loss on interest rate swaps, net                         -                           -                 (182,181)
Change in fair value of other derivatives used
as hedges:
Interest rate swaptions                                   57,763                         842                     (573)
Options on U.S. Treasury futures                          12,617                      (2,371)                 (10,727)
U.S. Treasury futures                                     95,647                      10,094                   (8,447)
Total gain (loss) on derivatives used as hedges
of interest rate risk                                    166,027                       8,565                 (201,928)

TBA dollar roll positions:
Change in fair value (1)                                 (66,794)                      8,856                    5,622
TBA drop income (2)                                        8,568                       6,445                      739
Total TBA dollar roll (loss) gain, net                   (58,226)                     15,301                    6,361

Total gain (loss) on derivative instruments, net $ 107,801 $

23,866 $ (195,567)



(1) Changes in fair value for TBA dollar roll positions include unrealized gains
(losses) from open TBA contracts and realized gains (losses) on paired off or
terminated positions.
(2) TBA drop income represents a portion of the change in fair value and is
calculated by multiplying the notional amount of the net TBA dollar roll
positions by the difference in price between two TBA securities with the same
terms but different settlement dates.

Changes in fair value of our derivative instruments consist of unrealized gains (losses) on instruments held as of the end of the period and realized gains (losses) from instruments terminated or paired off during the period. The following table provides information regarding realized gains (losses) on derivative instruments for the periods indicated:

                                                                       Three Months Ended
($ in thousands)                               March 31, 2021           December 31, 2020           March 31, 2020
Interest rate swaps                          $             -          $                -          $      (183,773)
Interest rate swaptions                               31,173                           -                   (1,934)
U.S. Treasury futures                                 21,397                       6,457                      (10)
Options on U.S. Treasury futures                       1,872                      (4,652)                  (2,422)
TBA long positions                                   (29,471)                      9,882                   19,266
TBA short positions                                        -                           -                   (7,843)

Total realized gains (losses) on derivatives $ 24,971 $

      11,687          $      (176,716)



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General and Administrative Expenses
General and administrative expenses decreased $(1.4) million for the three
months ended March 31, 2021 compared to the three months ended December 31, 2020
due primarily to the absence of the year-end bonus accrual adjustment that
impacted the fourth quarter of 2020. General and administrative expenses
increased $0.8 million for the three months ended March 31, 2021 compared to the
three months ended March 31, 2020 due primarily to higher bonus accruals for the
first quarter of 2021 compared to the first quarter of 2020.

                        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 payments received from counterparties for
derivative instruments. We use our liquidity to purchase investments 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 financing and
capital raising activities, and changes in the fair value of our investments and
derivative instruments. Our most liquid assets include unrestricted cash and
cash equivalents and unencumbered Agency RMBS, CMBS, and CMBS IO which were
$528.6 million as of March 31, 2021 compared to $415.3 million as of
December 31, 2020.
We analyze 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. 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. The
objective of our analyses is to assess the adequacy of our liquidity to
withstand potential adverse events, such as the current COVID-19 pandemic. We
may change our leverage targets based on market conditions and our perceptions
of the liquidity of our investments. Our leverage, which we calculate using
total liabilities plus the cost basis of TBA long positions, was 6.9x
shareholders' equity as of March 31, 2021 compared to 6.3x as of December 31,
2020. The increase in leverage resulted from an 82% increase in the cost basis
of our investment in TBA securities as of March 31, 2021 compared to December
31, 2020. This increase was partially offset by a 15% increase in our equity,
which increased primarily as a result of the two capital raises during the first
quarter of 2021. We include our TBA long positions in evaluating the Company's
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.
Management expects leverage to increase modestly over the next 6 months given
current expectations of market conditions. In general, our leverage will
increase if we are able to purchase investments with higher expected returns
than currently exist today.
Our repurchase agreement borrowings are principally uncommitted with terms
renewable at the discretion of our lenders and have short-term maturities. As
such, we attempt 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 whom we believe are better capitalized
and more durable counterparties.
The following table presents information regarding the balances of our
repurchase agreement borrowings as of and for the periods indicated:
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                                                                        Repurchase Agreements
                                                    Balance               Average Balance            Maximum Balance
                                               Outstanding As of        Outstanding For the         Outstanding During
($ in thousands)                                  Quarter End              Quarter Ended            the Quarter Ended
March 31, 2021                                 $     2,032,089          $       2,158,121          $       2,437,163
December 31, 2020                                    2,437,163                  2,500,639                  2,594,683
September 30, 2020                                   2,594,683                  2,984,946                  3,314,991
June 30, 2020                                        3,314,991                  2,580,296                  4,408,106
March 31, 2020                                       4,408,106                  4,701,010                  4,917,731
December 31, 2019                                    4,752,348                  4,806,826                  4,891,341



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
financing) 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 some 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 (if
the term is renewed) 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 haircut required by the lender, the lender has the
right to demand additional margin, or collateral, to increase the haircut back
to the initial amount. These demands are typically 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. Declines in
the fair value of investments occur for any number of reasons including but not
limited to changes in interest rates, changes in ratings on an investment,
changes in actual or perceived liquidity of the investment, or changes in
overall market risk perceptions. Additionally, Fannie Mae and Freddie Mac
announce principal payments on Agency MBS in advance of their actual remittance
of principal payments, and repurchase agreement lenders generally make margin
calls for an amount equal to the product of their advance rate on the repurchase
agreement and the announced principal payments on the Agency RMBS. A margin call
made by a lender reduces our liquidity until we receive the principal payments
from Fannie Mae and Freddie Mac. The weighted average haircut for our borrowings
collateralized with Agency RMBS, Agency CMBS, and CMBS IO was 4.8%, 4.8%, and
15.6%, respectively, as of March 31, 2021, unchanged from those as of December
31, 2020.
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 March 31, 2021, the Company had repurchase agreement amounts
outstanding with 20 of its 37 available repurchase agreement counterparties and
did not have more than 5% 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 including, among other things, requirements that we maintain minimum
shareholders' equity (usually a set minimum, or a percentage of the highest
amount of shareholders' equity since the date of the agreement), limits on
maximum decline in shareholders' equity (expressed as a percentage decline in
any given period), limits on maximum leverage (as a multiple of shareholders'
equity), and requirements to maintain our status as a REIT and to maintain our
listing on the NYSE. Violations of one or more of these covenants could result
in the lender declaring an event of default which would result in the
termination of the repurchase agreement and immediate acceleration of amounts
due thereunder. In addition, some of the agreements contain cross default
features, whereby default with one lender simultaneously causes default under
agreements with other lenders. Violations could also restrict us from paying
dividends or engaging in other transactions that are necessary for us to
maintain our REIT status.
We monitor and evaluate on an ongoing basis the impact these customary financial
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
March 31, 2021, and we are not aware of any circumstances which could
potentially result in our non-compliance in the foreseeable future.
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Derivative Instruments
We use certain types of financial instruments that are accounted for as
derivative instruments, including interest rate swaps, futures, options, and
long and short positions in TBA securities. Certain of these derivative
instruments may require us to post initial margin at inception and daily
variation margin based on subsequent changes in their fair value. The collateral
posted as margin by us is typically in the form of cash or Agency MBS.
Counterparties may have to post variation margin to us. Generally, as interest
rates decline, we will be required to post collateral with counterparties on our
interest rate derivatives and vice versa as interest rates increase. As of
March 31, 2021, we had received cash collateral of $83.8 million from our
counterparties under these agreements.
Our TBA contracts 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. Under the terms of these agreements, we may be required to pledge
collateral to, or have the right to receive collateral from, our counterparties
when initiated or in the event the fair value of our TBA contracts declines. As
of March 31, 2021, we had cash of $49.2 million posted as collateral under these
agreements. Declines in the fair value of TBA contracts are generally related to
such factors as rising interest rates, increases in expected prepayment speeds,
or widening spreads. Our TBA contracts 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. 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 strategic 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 "Federal Income Tax Considerations" within Part I, Item 1, "Business"
as well as Part I, Item 1A, "Risk Factors" of our 2020 Form 10-K for additional
important information regarding dividends declared on our taxable income.

Contractual Obligations and Other Matters
As of March 31, 2021, we do not have any material contractual obligations other
than the short-term repurchase agreement amounts discussed above, nor do we
believe that any off-balance sheet arrangements exist that are reasonably likely
to have a material effect on our current or future financial condition, results
of operations, or liquidity other than as discussed above. In addition, we do
not have any material commitments for capital expenditures and have not obtained
any commitments for funds to fulfill any capital obligations.

                        RECENT ACCOUNTING PRONOUNCEMENTS
There were no accounting pronouncements issued during the three months ended
March 31, 2021 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 Quarterly Report on Form 10-Q for additional information.

                         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
                                       40
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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.

Critical accounting estimates are defined as those that require management's
most difficult, subjective or complex judgments, and which may result in
materially different results under different assumptions and conditions. Our
critical accounting estimates are discussed in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of our
2020 Form 10-K under "Critical Accounting Estimates." There have been no
significant changes in our critical accounting estimates during the three months
ended March 31, 2021.



                           FORWARD-LOOKING STATEMENTS
Certain written statements in this Quarterly Report on Form 10-Q that are not
historical facts constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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 Quarterly Report on Form 10-Q may include,
but are not limited to statements about:
•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, and derivatives markets;
•Our views on the effect of actual or proposed actions of the Federal Reserve,
the Federal Reserve's Federal Open Market Committee (the "FOMC"), the FHFA, or
other central banks with respect to monetary policy (including the targeted
Federal Funds Rate), and the potential impact of these actions on interest
rates, inflation or unemployment;
•The effect of regulatory initiatives of the Federal Reserve (including the
FOMC), 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;
•The impact of COVID-19 on the economy, as well as certain actions taken by
federal, state and local governments in response to the pandemic, on
delinquencies in loans underlying 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 and restrictions on using our tax NOL carryforward;
•The status of pending litigation;
•The competitive environment in the future, including competition for
investments and the availability of financing;
                                       41
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•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 financial position and credit worthiness of the depository institutions in
which the Company's cash deposits are held;
•The impact of applicable tax and accounting requirements on the Company;
•Our future compliance with covenants in our master repurchase agreements and
debt covenants in our debt agreements;
•Market interest rates and market spreads; and
•Possible future effects of the COVID-19 pandemic.
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, 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 Quarterly Report on Form 10-Q,
especially those incorporated by reference into Part II, Item 1A, "Risk
Factors", and in particular, adverse effects of the ongoing COVID-19 pandemic
and any governmental or societal responses thereto, including the efficacy,
distribution, and adoption rates of vaccines for COVID-19 and variants thereof;
•our ability to find suitable reinvestment opportunities;
•changes in domestic economic conditions;
•changes in interest rates and interest rate 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 use of leverage;
•changes to our investment strategy, operating policies, dividend policy or
asset allocations;
•the quality of performance of third-party servicer providers of our loans and
loans underlying our securities;
•the level of defaults by borrowers on loans we have securitized;
•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 interest rate swaps and other derivative instruments,
including changes to margin requirements on derivative instruments;
                                       42

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•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 System;
•systems failures or cybersecurity incidents; and
•exposure to current and future claims and litigation.

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