Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The discussion and analysis disclosed herein apply to material changes in our consolidated financial statements for 2025 and 2024. For the comparison of 2024 and 2023, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2024 Annual Report on Form 10-K, filed with the SEC on February 20, 2025. The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in Part IV, Item 15 of this Report.
Overview
We are a Maryland corporation primarily focused on investing in, financing and managing MBS and other mortgage-related assets. Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation.
Factors Impacting Our Operating Results
Our operating results can be affected by a number of factors and primarily depend on the level of our net interest income and the market value of our assets. Our net interest income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates and prepayment speeds, as measured by the constant prepayment rate (“CPR”) on our assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. The market value of our assets can be impacted by spreads and the supply of, and demand for, assets in which we invest.
Market Conditions and Impacts
Macroeconomic factors that affect our business include inflation, economic growth, employment conditions, public policy, fiscal and monetary policy, interest rates, interest rate volatility, financial conditions, spread premiums, residential and commercial real estate prices, credit availability, the health of the banking system, consumer spending, personal income and
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corporate earnings. Of these macroeconomic factors, financial conditions, inflation, employment conditions, monetary policy, interest rates and interest rate volatility had the most direct impact on our performance and financial condition during 2025.
Financial conditions ended 2025 slightly improved, falling sharply after elevated uncertainty around U.S. trade policy in April before rebounding over the remainder of the year. Conditions remained accommodative in the fourth quarter as the Federal Open Market Committee (“FOMC”) reduced rates twice, volatility measures remained subdued and equity markets performed well. During the fourth quarter, the S&P 500 Index and the NASDAQ continued their strong performance, posting gains of 2.3% and 2.6%, respectively. For 2025, the S&P 500 gained 16.4% and the NASDAQ was up 20.4%. Credit market valuations improved over the course of 2025 and ended the fourth quarter largely unchanged, despite experiencing a period of notable deterioration driven primarily by uncertainty regarding U.S. trade policy.
Inflation readings trended modestly lower during 2025 but continued to exceed the Federal Reserve’s 2% target. The headline consumer price index (“CPI”) ended the year at 2.7%, down from 2.9% in December 2024. Core CPI (CPI excluding food and energy) declined from 3.2% to 2.6%. The disinflationary trend was also evident in the fourth quarter, as headline CPI decreased from 3.0% to 2.7% and core CPI declined modestly from 3.0% to 2.6%. Investors responded to the improved inflation readings by lowering expectations for future inflation, most directly reflected in Treasury inflation-protected securities breakeven rates. The two-year breakeven ended the year at 2.30% (down from 2.63% at the end of September and 2.54% in December 2024) and the five-year breakeven ended at 2.27% (down from 2.45% in September and 2.39% last December). The labor market weakened in 2025, as the economy added 181,000 jobs compared to 1.5 million jobs in 2024. This weakening trend continued during the fourth quarter, as the economy lost 51,000 jobs.
Despite inflation remaining above the Federal Reserve’s 2% target, the FOMC responded to the weakening job market by lowering its benchmark Federal Funds target rate by 25 basis points on three occasions during 2025, including at both meetings in the fourth quarter. By year-end, Federal Funds futures priced in expectations for an additional 50 basis points of rate cuts by the end of 2026, reflecting investor anticipation of a more accommodative Federal Reserve moving forward. The FOMC ended its program of quantitative tightening during the fourth quarter after reducing its portfolio of U.S. Treasury securities and Agency MBS by over $2.2 trillion since June 2022.
Interest rates declined across the U.S. Treasury yield curve in 2025, reflecting market expectations for a more accommodative monetary policy stance and continued weakness in the labor market. The two-year U.S. Treasury security yield fell 78 basis points to 3.47%, the five-year yield declined 68 basis points to 3.71% and the ten-year yield decreased by 43 basis points to 4.15%. Interest rates were little changed during the fourth quarter, as the yield on two-year U.S. Treasury securities decreased by 13 basis points, while the yields on five- and ten-year U.S. Treasury securities fell by two basis points and remained unchanged, respectively. Despite increasing significantly in April after the U.S. trade policy announcements, interest rate volatility declined notably throughout the remainder of the year. This decline reflected market expectations for an accommodative Federal Reserve, which were confirmed when the FOMC lowered its benchmark rate by 25 basis points at each of the last three meetings of 2025.
Against this macroeconomic backdrop, Agency RMBS delivered robust performance during the fourth quarter, capping an exceptional year for the sector. Relative to U.S. Treasury securities, 2025 marked the strongest calendar-year performance for Agency RMBS since 2010, which is particularly notable given the ongoing runoff in Agency RMBS from the Federal Reserve’s balance sheet and the continued lack of meaningful demand from commercial banks. Three key themes emerged in the second half of the year that supported valuations following the sector’s underperformance amid April’s trade policy-related instability: a sharp decline in interest rate volatility, significant inflows into fixed income funds and mortgage REITs, and the unexpected emergence of Fannie Mae and Freddie Mac as additional sources of demand. With organic net supply totaling just $164 billion for the year, money manager, mortgage REIT and GSE demand drove higher valuations. As a result, the sector outperformed investment grade corporates relative to U.S. Treasury securities for the first time since 2018. Prepayment speeds increased modestly but remained low, constrained by subdued housing activity and mortgage rates that, despite falling nearly 100 basis points over the year, remain elevated. Premiums on higher coupon specified pool collateral were well supported by the decline in mortgage rates, improving notably in the second half of the year.
Agency CMBS risk premiums finished 2025 largely unchanged, retracing the spread widening seen in April amid heightened U.S. trade policy uncertainties. The rebound in valuations began in mid-to-late April and continued through the fourth quarter, supported by improving clarity in trade relations and growing confidence in the path toward monetary policy easing. Additionally, slightly higher issuance levels relative to the prior year were well absorbed due to money manager inflows and continued bank demand for stable cash flow profiles.
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Market Rates
As of
Interest Rates
As of
Swap Spreads (1)
30 Year Mortgage Spreads vs. 5/10 Year U.S. Treasury Securities Blend (2)
10 Year Agency CMBS Spreads vs. U.S. Treasury Securities (3)
(1)Swap spreads represent the difference between the fixed rate coupon of an interest rate swap and the yield on a U.S. Treasury security with a similar maturity.
(2)Mortgage spreads represent the difference between the yield on the Agency TBA and the blended average yield of five year and ten year U.S. Treasury securities.
(3)Agency CMBS spreads represent the difference between the yields on new issue Freddie Mac K Certificates and Fannie Mae Delegated Underwriting and Servicing MBS (“DUS”) and a U.S. Treasury security with a similar maturity.
Outlook
Given the meaningful decline in interest rate volatility, we remain constructive on Agency RMBS, though we view near-term risks as balanced following the sector's strong performance, reinforced by the recent announcements that Fannie Mae and Freddie Mac will purchase $200 billion in Agency RMBS. In addition, Agency CMBS continues to offer attractive risk-adjusted yields and diversification benefits given its stable cash flow profile and lower sensitivity to interest rate fluctuations.
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Longer term, the environment for Agency MBS investments is likely to remain favorable given reduced interest rate volatility and expectations for broadening investor demand and a steeper yield curve.
Investment Activities
The table below shows the composition of our investment portfolio as of December 31, 2025 and 2024.
$ in thousands As of December 31,
Agency RMBS:
Non-Agency CMBS, at fair value — 9,836
Non-Agency RMBS, at fair value — 7,224
As of December 31, 2025 and 2024, our holdings of 30 year fixed-rate Agency RMBS represented approximately 85% and 83% of our total investment portfolio, respectively. Our 30 year fixed-rate Agency RMBS holdings as of December 31, 2025 and 2024 consisted of specified pools with coupon distributions as shown in the table below.
As of December 31,
Our holdings of Agency RMBS are primarily focused on specified pools with attractive prepayment profiles. We seek to capitalize on the impact of prepayments on our investment portfolio by purchasing specified pools with characteristics that optimize borrower incentive to prepay for both our premium and discount priced investments. The table below shows the specified pool characteristics of our 30 year fixed-rate Agency RMBS holdings as of December 31, 2025 and 2024.
As of December 31,
$ in thousands Fair Value Percentage Fair Value Percentage
Specified pool characteristic:
As of December 31, 2025 and 2024, our holdings of Agency CMBS represented approximately 14% and 15% of our total investment portfolio, respectively. These securities offer attractive risk-adjusted yields and diversification benefits. Further, the hedging costs associated with these holdings are economical as Agency CMBS is less sensitive to interest rate risk given prepayment protection and scheduled balloon maturity payments. As of December 31, 2025, approximately 81% of our Agency CMBS holdings were Fannie Mae DUS and 19% were Freddie Mac Multifamily Participation Certificates.
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We sold our remaining investments in non-Agency securities during 2025. As of December 31, 2024, our holdings of non-Agency securities represented less than 1% of our total investment portfolio.
Financing and Other Liabilities
We finance the majority of our investment portfolio through repurchase agreements. Repurchase agreements are generally settled on a short-term basis, usually from one to six months, and bear interest at rates that are expected to move in close relationship to the secured overnight financing rate (“SOFR”).
The following table presents the amount of collateralized borrowings outstanding under repurchase agreements as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter.
$ in thousands Collateralized Borrowings Under Repurchase Agreements
(1)Average quarterly balance for each period is based on month-end balances.
(2)Amount represents the maximum borrowings at month-end during each of the respective periods.
Hedging Instruments
We enter into interest rate swap agreements that are designed to mitigate the effects of changes in interest rates for a portion of our borrowings. Under these swap agreements, we generally pay fixed interest rates and receive floating interest rates indexed to SOFR. To a lesser extent, we have in the past entered into and may in the future enter into interest rate swap agreements whereby we make floating interest rate payments indexed to SOFR and receive fixed interest rate payments as part of our overall risk management strategy.
We actively manage our interest rate swap portfolio as the size and composition of our investment portfolio changes. During the year ended December 31, 2025, we entered into interest rate swaps with a notional amount of $1.3 billion and terminated or settled interest rate swaps with a notional amount of $790.0 million.
We also use U.S. Treasury futures contracts as an alternative way to help mitigate the potential impact of changes in interest rates on our performance. During the year ended December 31, 2025, we entered into U.S. Treasury futures contracts with a notional amount of $5.6 billion and terminated or settled U.S. Treasury futures contracts with a notional amount of $5.9 billion.
Daily variation margin for interest rate swaps and U.S. Treasury futures contracts is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our consolidated statements of operations.
Additionally, we have used and may in the future use short positions in TBAs to manage risk and economically hedge a
portion of our exposure to changes in Agency RMBS valuations.
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Capital Activities
As of December 31, 2025, we had 19,538,020 shares of our common stock remaining available for sale from time to time in at-the-market or privately negotiated transactions under our equity distribution agreement with placement agents. The table below shows issuances of our common stock under equity distribution agreements during the years ended December 31, 2025 and 2024.
Years ended December 31,
Fees paid to placement agents 1,034 1,475
Cash proceeds, net of fees paid to placement agents 81,625 116,460
For information on dividends declared during the years ended December 31, 2025 and 2024, see Note 10 - “Stockholders' Equity" of our consolidated financial statements in Part IV, Item 15 of this annual report on Form 10-K.
During the years ended December 31, 2025 and 2024, we did not repurchase any shares of our common stock.
In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the year ended December 31, 2025, we repurchased and retired 352,528 shares of Series C Preferred Stock. During the year ended December 31, 2024, we repurchased and retired 138,008 shares of Series B Preferred Stock prior to redemption and 338,780 shares of Series C Preferred Stock. We redeemed all outstanding shares of our Series B Preferred Stock in December 2024. As of December 31, 2025, we had authority to repurchase 354,131 additional shares of our Series C Preferred Stock under the current preferred stock share repurchase program.
Book Value per Common Share
We calculate book value per common share as follows.
As of December 31,
Numerator (adjusted equity):
Less: Liquidation preference of Series B Preferred Stock — — (109,650)
Denominator (number of shares):
Our book value per common share decreased 2.2% as of December 31, 2025 compared to December 31, 2024. The decrease in our book value per common share was primarily due to losses on derivative instruments, dividends declared and expenses, which were partially offset by net interest income and gains on investments.
Refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for interest rate risk and its impact on fair value.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. All of these estimates reflect our best judgment about current, and for some estimates, future economic and market conditions and their effects based on information available as of the date of these financial statements. If conditions change from those expected, it is possible that the judgments and estimates described below could change, which may result in a change in valuation of our investment portfolio or derivative instruments and a change in our interest income recognition among other effects.
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Mortgage-Backed Securities. We have elected the fair value option for all of our MBS held as of December 31, 2025 (December 31, 2024: $5.4 billion or 99.7%). Under the fair value option, we recognize changes in fair value in our consolidated statement of operations. In our view, the fair value option election more appropriately reflects the results of our operations because MBS fair value changes are accounted for in the same manner as fair value changes in economic hedging instruments.
We determine the fair value of our MBS by obtaining valuations from an independent source. If the fair value of a security is not available from a third-party pricing service, we may estimate the fair value of the security using a variety of methods including other pricing services, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors. It is possible that changes in these inputs could change the valuation estimate.
Refer to the preceding discussion under “Market Conditions and Impacts” for information on how conditions in 2025 impacted valuations of our Agency securities, which constituted substantially all of our investment portfolio during 2025. Additionally, refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for the estimated impact of an instantaneous shift in the yield curve on the market value of our interest rate-sensitive instruments.
Interest Income Recognition. Interest income on MBS is accrued based on the outstanding principal or notional balance of the securities and their contractual terms. Premiums or discounts are amortized or accreted into interest income over the life of the investment using the effective interest method.
For Agency MBS that cannot be prepaid in such a way that we would not recover substantially all of our initial investment, interest income recognition is based on contractual cash flows. We do not estimate prepayments in applying the effective interest method.
Interest income on our MBS where we may not recover substantially all of our initial investment is based on estimated future cash flows. We estimate future expected cash flows at the time of purchase and determine the effective interest rate based on these estimated cash flows and our purchase price. Over the life of the investments, we update these estimated future cash flows and compute a revised yield based on the current amortized cost of the investment. In estimating these future cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including but not limited to the rate and timing of principal payments, the pass through or coupon rate and interest rate fluctuations. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our estimate and our interest income. Changes in our original or most recent cash flow projections may result in a prospective change in interest income recognized on these securities, or the amortized cost of these securities.
One of the most significant factors impacting our interest income recognition is changes in long-term interest rates. When interest rates fall, prepayments will generally increase and when interest rates rise, prepayments will generally decrease. However, there are a variety of factors that may impact the rate of prepayments on our securities. Accordingly, under different conditions, we could report materially different amounts.
Prepayment rates on our mortgage-backed securities accelerated in 2025 compared to 2024 as interest rates declined. Refer to Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” for an estimate of the percentage change in our net interest income, including interest paid or received under interest rate swaps, caused by an instantaneous 50 and 100 basis points increase or decrease in interest rates.
Accounting for Derivative Financial Instruments. We use or have used derivatives to manage interest rate risk and as an alternative means of investing in and financing Agency RMBS. We record all derivatives on our consolidated balance sheets at fair value. Refer to Note 2 - “Summary of Significant Accounting Policies” of our consolidated financial statements included in Part IV, Item 15 of this Report for a description of how we determine the fair value of our U.S. Treasury futures contracts, interest rate swaps and TBAs. As of December 31, 2025, all of our U.S. Treasury futures contracts were exchange-traded, and all of our interest rate swaps were centrally cleared by a registered clearing organization. Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in our consolidated statement of operations. Further information is provided in Note 6 - “Derivatives and Hedging Activities” of our consolidated financial statements included in Part IV, Item 15 of this Report.
The factors that impact valuations of our TBAs are similar to those that impact valuations of our Agency RMBS. Valuations of U.S. Treasury futures contracts are impacted by changes in interest rates. Valuations of interest rate swaps are impacted by changes in swap rates, which includes changes in interest rates as well as changes in swap spreads. We recognized net losses on our interest rate swaps and U.S. Treasury futures contracts in 2025 as rates declined.
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Results of Operations
The table below presents information from our consolidated statements of operations for the years ended December 31, 2025, 2024 and 2023.
Years Ended December 31,
Other income (loss)
(Increase) decrease in provision for credit losses — (458) (320)
Equity in earnings (losses) of unconsolidated ventures — (193) (1)
Other investment income (loss), net — 2 (66)
Expenses
Gain (loss) on repurchase and retirement of preferred stock 14 427 1,471
Issuance and redemption costs of redeemed preferred stock — (3,535) —
Net income (loss) attributable to common stockholders 88,173 34,763 (37,541)
Earnings (loss) per share:
Net income (loss) attributable to common stockholders
Weighted average number of shares of common stock:
Interest Income and Average Earning Asset Yields
The table below presents information related to our average earning assets and earning asset yields for the years ended December 31, 2025, 2024 and 2023.
Years ended December 31,
Average earning asset yields (2) 5.43 % 5.50 % 5.44 %
(1)Average balances for each period are based on weighted month-end balances.
(2)Average earning asset yields for the period were calculated by dividing interest income, including amortization of premiums and discounts, by average earning assets based on the amortized cost of the investments. All yields are annualized.
Total average earning assets increased $231.0 million for the year ended December 31, 2025 compared to 2024. Changes in our average earning assets are a factor of our total stockholders' equity and our desired leverage levels.
Average earning asset yields decreased 7 basis points for the year ended December 31, 2025 compared to 2024. Changes in our average earning asset yields are driven by the composition of our investments, amortized cost of our securities and prepayment rates.
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Our interest income includes coupon interest and net (premium amortization) discount accretion as shown in the table below.
Years Ended December 31,
Interest income
Net (premium amortization) discount accretion (1,294) 5,466 6,073
Our interest income increased $8.7 million for the year ended December 31, 2025 compared to 2024 due to higher average earning assets, which was partially offset by lower average earning asset yields.
Prepayment Speeds
Our Agency RMBS portfolio is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income. Generally, in an environment of falling interest rates, prepayment speeds will increase as homeowners are more likely to prepay their existing mortgage and refinance into a lower borrowing rate. In an environment of rising interest rates, prepayment speeds will generally decrease as homeowners are not as incentivized to refinance. For Agency RMBS where we do not estimate prepayments, premium amortization and discount accretion are not impacted by prepayments until actual prepayments occur. For Agency RMBS purchased at a substantial premium relative to par value, expected future prepayment speeds are estimated on at least a quarterly basis.
Faster prepayment rates on securities purchased at a premium relative to par value result in higher premium amortization and a decrease in interest income. Conversely, faster prepayment rates on securities purchased at a discount relative to par value result in higher discount accretion and an increase in interest income.
The following table presents net (premium amortization) discount accretion recognized during 2025, 2024 and 2023.
Years Ended December 31,
U.S. Treasury securities — (1) 291
Net (premium amortization) discount accretion (1,294) 5,466 6,073
The change in net (premium amortization) discount accretion for the year ended December 31, 2025 compared to 2024 was primarily a result of repositioning a portion of our investment portfolio into higher coupon securities that have higher amortized costs relative to par value.
Our interest income is subject to interest rate risk. Refer to Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” for more information relating to interest rate risk and its impact on our operating results.
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Interest Expense and Cost of Funds
The table below presents information related to our borrowings and cost of funds for the years ended December 31, 2025, 2024 and 2023.
Years ended December 31,
(1)Average borrowings for each period are based on weighted month-end balances.
(2)Amount represents the maximum borrowings at month-end during each of the respective periods.
(3)Average cost of funds is calculated by dividing annualized interest expense, including amortization of net deferred gain (loss) on de-designated interest rate swaps, by our average borrowings.
Total average borrowings increased $311.9 million for the year ended December 31, 2025 compared to 2024. Changes in our average borrowings are a factor of our total stockholders' equity and our desired leverage levels.
Our average cost of funds decreased 95 basis points for the year ended December 31, 2025 compared to 2024. Changes in our cost of funds are substantially driven by the Federal Funds target rate, which was set at a range of 4.25% to 4.50% for the majority of 2025 and a range of 5.25% to 5.50% for the majority of 2024.
The table below presents the components of interest expense for the years ended December 31, 2025, 2024 and 2023.
Years ended December 31,
Interest expense
Our interest expense decreased $29.9 million for the year ended December 31, 2025 compared to 2024 due to a lower cost of funds, which was partially offset by an increase in average borrowings.
Net Interest Income
The table below presents the components of net interest income for the years ended December 31, 2025, 2024 and 2023.
Years ended December 31,
Interest expense
Our net interest income, which equals total interest income less total interest expense, and our net interest rate margin, which equals the yield on our average earning assets for the period less the average cost of funds, increased for the year ended December 31, 2025 compared to 2024 due to a lower cost of funds, which was partially offset by a decrease in average earning asset yields. Our cost of funds is generally more sensitive to changes in interest rates than the yield on our investment portfolio, which is largely comprised of 30 year fixed-rate Agency RMBS.
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Gain (Loss) on Investments, net
The table below summarizes the components of gain (loss) on investments, net for the years ended December 31, 2025, 2024 and 2023.
Years Ended December 31,
Net unrealized gains (losses) on U.S. Treasury securities — (372) 372
Net realized gains (losses) on U.S. Treasury securities — (86) 12
During the year ended December 31, 2025, we sold MBS and realized net losses of $2.4 million (2024: net losses of $9.1 million). Net realized losses during the year ended December 31, 2025 primarily reflect sales of Agency RMBS during the first quarter as we rotated the portfolio into higher coupons. Net realized losses during the year ended December 31, 2024 primarily reflect sales of 4.0% to 5.0% coupon Agency RMBS with a portion of the proceeds being used to purchase Agency CMBS.
As of December 31, 2025, all of our MBS were accounted for under the fair value option (December 31, 2024: $5.4 billion or 99.7%). Under the fair value option, changes in fair value are recognized in income on the consolidated statements of operations.
We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $151.8 million in 2025 (2024: net unrealized losses of $124.3 million). Net unrealized gains for the year ended December 31, 2025 were primarily due to the decline in interest rates and MBS spreads during the year, as valuations on fixed-rate securities increased as interest rates fell and spreads tightened. Net unrealized losses for the year ended December 31, 2024 were due to lower valuations on Agency RMBS and Agency CMBS given an increase in interest rates.
We did not hold any U.S. Treasury securities during the year ended December 31, 2025. We recorded net realized and unrealized losses of $458,000 on a U.S. Treasury security during the year ended December 31, 2024.
(Increase) Decrease in Provision for Credit Losses
As of December 31, 2025, we no longer own any securities that are classified as available-for-sale and subject to evaluation for credit losses. We recorded a provision for credit losses of $458,000 on a single non-Agency CMBS for the year ended December 31, 2024.
Equity in Earnings (Losses) of Unconsolidated Ventures
For the year ended December 31, 2024, we recorded equity in losses of unconsolidated ventures of $193,000. We received a final distribution from our sole remaining unconsolidated venture during the first quarter of 2024, and the venture was dissolved in April 2024.
Gain (Loss) on Derivative Instruments, net
We record all derivatives on our consolidated balance sheets at fair value. Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in our consolidated statements of operations. Net interest paid or received under our interest rate swaps is also recognized in gain (loss) on derivative instruments, net in our consolidated statements of operations.
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The tables below summarize the components of our gain (loss) on derivative instruments, net for the following periods.
$ in thousands Year ended December 31, 2025
$ in thousands Year ended December 31, 2024
$ in thousands Year ended December 31, 2023
Currency forward contracts (18) — — (18)
As of December 31, 2025 and 2024, we held the following interest rate swaps whereby we pay fixed interest rates and receive floating interest rates based upon SOFR.
$ in thousands As of December 31, 2025 As of December 31, 2024
We use interest rate swaps to manage our exposure to changing interest rates and add stability to our borrowings costs. During the year ended December 31, 2025, we entered into interest rate swaps with a notional amount of $1.3 billion and terminated or settled interest rate swaps with a notional amount of $790.0 million (2024: $2.6 billion of additions and $3.4 billion of terminations or settlements). We recorded net losses of $49.9 million on interest rate swaps for the year ended December 31, 2025 due to a decline in swap rates on maturities less than 15 years (2024: net gains of $114.8 million).
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As of December 31, 2025 and 2024, we held the following U.S. Treasury futures contracts.
As of
$ in thousands Notional Amount - Short Notional Amount - Short
We use U.S. Treasury futures contracts as an alternative way to help mitigate the potential impact of changes in interest rates on our performance. During the year ended December 31, 2025, we entered into U.S. Treasury futures contracts with a notional amount of $5.6 billion and terminated or settled U.S. Treasury futures contracts with a notional amount of $5.9 billion (2024: $2.8 billion of additions and $1.4 billion of terminations or settlements). We recognized net losses of $57.6 million on U.S. Treasury futures contracts for the year ended December 31, 2025 due to a decline in interest rates (2024: net gains of $61.5 million).
We primarily use TBAs that we do not intend to physically settle on the contractual settlement date in long positions as an alternative means of investing in and financing Agency RMBS. During the second quarter of 2025, we also used short positions in TBAs in response to heightened market volatility to manage risk and economically hedge a portion of our exposure to changes in Agency RMBS valuations. We recorded net gains of $2.6 million on TBAs during the year ended December 31, 2025 (2024: $380,000).
Expenses
For the year ended December 31, 2025, we incurred management fees of $11.3 million (2024: $11.9 million). Our management fees are determined by our average stockholders' equity. Refer to Note 9 – “Related Party Transactions” of our consolidated financial statements in Part IV, Item 15 of this Report for a discussion of our relationship with our Manager and a description of how our fees are calculated.
For the year ended December 31, 2025, our general and administrative expenses not covered under our management agreement amounted to $7.3 million (2024: $7.2 million). General and administrative expenses not covered under our management agreement primarily consist of directors and officers insurance, legal costs, accounting, auditing and tax services, filing fees and miscellaneous general and administrative costs.
Gain (Loss) on Repurchase and Retirement of Preferred Stock
In May 2022, our board of directors approved a share repurchase program for our Series B and Series C Preferred Stock. During the year ended December 31, 2025, we repurchased and retired 352,528 shares of Series C Preferred Stock. During the year ended December 31, 2024, we repurchased and retired 138,008 shares of Series B Preferred Stock prior to redemption and 338,780 shares of Series C Preferred Stock. Gains and losses on repurchases and retirements of preferred stock represent the difference between the consideration transferred and the carrying value of the preferred stock.
Issuance and Redemption Costs of Redeemed Preferred Stock
On December 27, 2024, we redeemed all issued and outstanding shares of our Series B Preferred Stock for $106.2 million. The cash redemption price for each share of Series B Preferred Stock was $25.00. The excess of the consideration transferred over carrying value was accounted for as a deemed dividend and resulted in a reduction of $3.5 million in net income attributable to common stockholders during the year ended December 31, 2024.
Net Income (Loss) attributable to Common Stockholders
For the year ended December 31, 2025, our net income attributable to common stockholders was $88.2 million (2024: $34.8 million) or $1.32 basic and diluted net income per average share available to common stockholders (2024: $0.65). The change in net income attributable to common stockholders compared to 2024 was primarily due to: (i) net gains on investments of $149.3 million compared to net losses on investments of $133.9 million in 2024; (ii) net losses on derivative instruments of $104.9 million compared to net gains of $176.6 million in 2024 and (iii) a $38.6 million increase in net interest income.
For further information on the changes in net gain (loss) on investments, net gain (loss) on derivative instruments, and changes in net interest income, see preceding discussion under “Gain (Loss) on Investments, net”, “Gain (Loss) on Derivative Instruments, net” and “Net Interest Income”.
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Non-GAAP Financial Measures
The table below shows the non-GAAP financial measures we use to analyze our operating results and the most directly comparable U.S. GAAP measures. We believe these non-GAAP measures are useful to investors in assessing our performance as discussed further below.
Non-GAAP Financial Measure Most Directly Comparable U.S. GAAP Measure
Economic debt-to-equity ratio Debt-to-equity ratio
The non-GAAP financial measures used by management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures. In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of our peer companies.
Earnings Available for Distribution
Our business objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation. We use earnings available for distribution as a measure of our investment portfolio’s ability to generate income for distribution to common stockholders and to evaluate our progress toward meeting this objective. We calculate earnings available for distribution as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; TBA dollar roll income; (gain) loss on repurchase and retirement of preferred stock; foreign currency (gains) losses, net and amortization of net deferred (gain) loss on de-designated interest rate swaps. We may add and have added additional reconciling items to our earnings available for distribution calculation as appropriate.
By excluding the gains and losses discussed above, we believe the presentation of earnings available for distribution provides a consistent measure of operating performance that investors can use to evaluate our results over multiple reporting periods and, to a certain extent, compare to our peer companies. However, because not all of our peer companies use identical operating performance measures, our presentation of earnings available for distribution may not be comparable to other similarly titled measures used by our peer companies. We exclude the impact of gains and losses when calculating earnings available for distribution because, when analyzed in conjunction with our U.S. GAAP results, earnings available for distribution provides additional detail of our investment portfolio’s earnings capacity. In addition, certain gains and losses represent one-time events.
Furthermore, gains and losses have not been accounted for consistently under U.S. GAAP. Under U.S. GAAP, certain gains and losses may be reflected in net income whereas other gains and losses may be reflected in other comprehensive income. For example, a portion of our mortgage-backed securities were historically classified as available-for-sale securities, and changes in the valuation of these securities were recorded in other comprehensive income on our consolidated balance sheets. We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in our consolidated statements of operations.
To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually. Because we view earnings available for distribution as a consistent measure of our investment portfolio's ability to generate income for distribution to common stockholders, earnings available for distribution is one metric, but not the exclusive metric, that is used to determine the amount, if any, of dividends on our common stock. However, earnings available for distribution should not be considered as an indication of our taxable income, a guaranty of our ability to pay dividends or as a proxy for the amount of dividends we may pay, as earnings available for distribution excludes certain items that impact our cash needs.
Earnings available for distribution is an incomplete measure of our financial performance and there are other factors that impact the achievement of our business objective. We caution that earnings available for distribution should not be considered as an alternative to net income (determined in accordance with U.S. GAAP) or as an indication of our cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of our liquidity or as an indication of amounts available to fund our cash needs.
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The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to earnings available for distribution for the following periods.
Years Ended December 31,
Net income (loss) attributable to common stockholders 88,173 34,763 (37,541)
Adjustments:
Unrealized (gain) loss on derivative instruments, net (1) (6) (3,467) (2,356)
(Gain) loss on repurchase and retirement of preferred stock (14) (427) (1,471)
Foreign currency (gains) losses, net (3) — (2) 66
Basic earnings (loss) per common share 1.32 0.65 (0.85)
Earnings available for distribution per common share (5) 2.35 2.88 5.35
(1)U.S. GAAP gain (loss) on derivative instruments, net on the consolidated statements of operations includes the following components.
Years Ended December 31,
Unrealized gain (loss) on derivative instruments, net 6 3,467 2,356
(2)A TBA dollar roll is a series of derivative transactions where TBAs with the same specified issuer, term and coupon but different settlement dates are simultaneously bought and sold. The TBA settling in the later month typically prices at a discount to the TBA settling in the earlier month. TBA dollar roll income represents the price differential between the TBA price for current month settlement compared to the TBA price for forward month settlement. We include TBA dollar roll income in earnings available for distribution because it is the economic equivalent of interest income on the underlying Agency RMBS, less an implied financing cost, over the forward settlement period. TBA dollar roll income is a component of gain (loss) on derivative instruments, net on our consolidated statements of operations.
(3) Foreign currency gains (losses), net includes foreign currency transaction gains and losses and the reclassification of currency translation adjustments that were previously recorded in accumulated other comprehensive income and is included in other investment income (loss), net on the consolidated statements of operations.
(4) U.S. GAAP interest expense on the consolidated statements of operations includes the following components.
Years Ended December 31,
(5) Earnings available for distribution per common share is equal to earnings available for distribution divided by the basic weighted average number of common shares outstanding.
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The table below shows the components of earnings available for distribution for the following periods.
Years Ended December 31,
Equity in earnings (losses) of unconsolidated ventures — (193) (1)
(Increase) decrease in provision for credit losses — (458) (320)
Issuance and redemption costs of redeemed preferred stock — (3,535) —
(1)See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.
Earnings available for distribution increased for the year ended December 31, 2025 compared to 2024 due to the redemption of our Series B Preferred Stock in December 2024, which was partially offset by lower effective net interest income. See below for details on the change in effective net interest income.
Effective Interest Expense / Effective Cost of Funds / Effective Net Interest Income / Effective Interest Rate Margin
We calculate effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as interest expense. We view our interest rate swaps as an economic hedge against increases in future market interest rates on our borrowings. We add back the net payments or receipts on our interest rate swap agreements to our total U.S. GAAP interest expense because we use interest rate swaps to add stability to interest expense. We exclude the amortization of net deferred gains (losses) on de-designated interest rate swaps from our calculation of effective interest expense because we do not consider the amortization a current component of our borrowing costs.
We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for contractual net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, net and amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as interest expense.
We believe the presentation of effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provides information that is useful to investors in understanding our borrowing costs and operating performance.
The following table reconciles total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods.
Years Ended December 31,
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Our effective interest expense increased for the year ended December 31, 2025 compared to 2024 due to a decrease in contractual net interest income on interest rate swaps and an increase in average borrowings, which were partially offset by a lower average cost of funds. Our effective cost of funds increased for the year ended December 31, 2025 compared to 2024 due to a decrease in contractual net interest income on interest rate swaps, which was partially offset by a lower average cost of funds.
In addition to changes caused by the underlying floating rate index, the amount of contractual net interest income or expense on interest rate swaps that we recognize has changed based on changes in the size and composition of our interest rate swap portfolio. We also use U.S. Treasury futures contracts, which do not earn or incur contractual interest, in lieu of certain interest rate swaps as an alternative way to help mitigate the potential impact of changing interest rates on our performance. See preceding discussion under “Gain (Loss) on Derivative Instruments, net” for details of our interest rate swap portfolio as of December 31, 2025 and 2024.
The following table reconciles net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods.
Years Ended December 31,
Our effective net interest income and effective interest rate margin decreased for the year ended December 31, 2025 compared to 2024 due to a decrease in contractual net interest income on interest rate swaps and average earning asset yields, which were partially offset by a lower average cost of funds.
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Economic Debt-to-Equity Ratio
The table below shows our debt-to-equity ratio and our economic debt-to-equity ratio as of December 31, 2025 and 2024. Our debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt to total stockholders' equity.
We present an economic debt-to-equity ratio, a non-GAAP financial measure of leverage that considers the impact of the off-balance sheet financing of our investments in TBAs that are accounted for as derivative instruments under U.S. GAAP. We include these types of TBAs at implied cost basis in our measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a contract for the forward sale of Agency RMBS has substantially the same effect as selling the underlying Agency RMBS and reducing our on-balance sheet funding commitments. We believe that presenting our economic debt-to-equity ratio, when considered together with our U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates our at-risk leverage and gives investors a comparable statistic to those of other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage.
As of
Debt-to-equity ratio (1) 7.0 6.7
Economic debt-to-equity ratio (2) 7.0 6.7
(1)Debt-to-equity ratio is calculated as the ratio of total repurchase agreements to total stockholders' equity.
(2)Economic debt-to-equity ratio is calculated as the ratio of total repurchase agreements and TBAs at implied cost basis (none as of December 31, 2025; $606,000 as of December 31, 2024) to total stockholders' equity.
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, purchase investments, repay borrowings and fund other general business needs. Our primary sources of funds for liquidity consist of the net cash proceeds from our common equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities.
We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, margin requirements and the payment of cash dividends as required for continued qualification as a REIT. We generally maintain liquidity to pay down borrowings under financing arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements or through the sale of liquid investments. However, there can be no assurance that we will maintain sufficient levels of liquidity to meet margin calls.
We held cash, cash equivalents and restricted cash of $166.4 million as of December 31, 2025 (2024: $210.9 million). Our cash, cash equivalents and restricted cash change due to normal fluctuations in cash balances related to the timing of principal and interest payments, repayments of debt, and asset purchases and sales. Our operating activities provided net cash of approximately $157.1 million for the year ended December 31, 2025 (2024: $183.2 million).
Our investing activities used net cash of $892.9 million for the year ended December 31, 2025 (2024: $497.4 million). Our primary use of cash from investing activities during the year ended December 31, 2025 was $2.7 billion to purchase MBS (2024: $2.2 billion). We received proceeds from sales of MBS of $1.5 billion (2024: $1.3 billion from sales of MBS and $10.8 million from sales of U.S. Treasury securities). We also generated $531.9 million from principal payments of MBS during the year ended December 31, 2025 (2024: $389.5 million) and used cash of $217.2 million to settle derivative contracts during the year ended December 31, 2025 (2024: received cash of $11.4 million).
Our financing activities provided net cash of $691.3 million for the year ended December 31, 2025 (2024: $326.5 million). Our primary source of cash from financing activities during the year ended December 31, 2025 was net proceeds on our repurchase agreements of $725.3 million (2024: $435.7 million) and proceeds from issuance of common stock of $81.6 million (2024: $116.5 million). We also paid dividends of $106.9 million (2024: $105.5 million) and used $8.5 million to repurchase Series C Preferred Stock during the year ended December 31, 2025 (2024: $11.1 million to repurchase Series B Preferred Stock prior to redemption and Series C Preferred Stock). We redeemed all outstanding shares of our Series B Preferred Stock for $106.2 million in December 2024.
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As of December 31, 2025, the average margin requirement (weighted by borrowing amount), or the haircut, under our repurchase agreements was 4.4% for Agency RMBS and 4.9% for Agency CMBS. The haircuts ranged from a low of 3% to a high of 5% for Agency RMBS and a low of 4% to a high of 5% for Agency CMBS. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event may give our counterparties the option to terminate all repurchase transactions outstanding with us and require any amount due from us to the counterparties to be payable immediately.
Effects of Margin Requirements, Leverage and Spreads
Our securities have values that fluctuate according to market conditions and the market value of our securities will decrease as prevailing interest rates or spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a “margin call”, which means that the lender will require us to pay cash or pledge additional collateral. Under our repurchase facilities, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly.
We experience margin calls and increased collateral requirements in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase or if spreads widen, then the value of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will seek to use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet margin calls or increased collateral requirements. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness.
Our interest rate swaps and U.S. Treasury futures contracts require us to post initial margin and daily variation margin based on subsequent changes in their fair value. Daily variation margin requirements also entitle us to receive collateral from our counterparties if the value of amounts owed to us under the derivative agreement exceeds the minimum margin requirement.
We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls and increased collateral requirements but that also allows us to be substantially invested in securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.
We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to operate in a manner that complies with all of our financial covenants. Our lending and derivative agreements provide that we may be declared in default of our obligations if our leverage ratio exceeds certain thresholds and we fail to maintain stockholders’ equity or market value above certain thresholds over specified time periods.
Forward-Looking Statements Regarding Liquidity
As of December 31, 2025, we held $5.9 billion of Agency securities that are financed by repurchase agreements. We also had approximately $397.3 million of unencumbered investments and unrestricted cash of $56.0 million as of December 31, 2025. As of December 31, 2025, our known contractual obligations primarily consisted of $5.6 billion of repurchase agreement borrowings with a weighted average remaining maturity of 23 days. We generally intend to refinance the majority of our repurchase agreement borrowings at market rates upon maturity. Repurchase agreement borrowings that are not refinanced upon maturity are typically repaid through the use of cash on hand or proceeds from sales of securities.
Based upon our current portfolio and existing borrowing arrangements, we believe that cash flow from operations and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our required distributions to stockholders and fund other general corporate expenses.
Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining ongoing debt financing. In addition, we may increase our capital resources by obtaining long-term credit facilities or through public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, senior or subordinated notes and convertible notes. Such financing will depend on market conditions for capital raises and our
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ability to invest such offering proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.
Exposure to Financial Counterparties
We finance a substantial portion of our investment portfolio through repurchase agreements. Under these agreements, we pledge assets from our investment portfolio as collateral. Additionally, certain counterparties may require us to provide additional collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty.
As of December 31, 2025, one counterparty held collateral that exceeded the amounts borrowed under the related repurchase agreements by more than 5% of our stockholders’ equity.
The following table summarizes our exposure to counterparties by geographic concentration as of December 31, 2025. The information is based on the geographic headquarters of the counterparty or counterparty's parent company. However, our repurchase agreements are denominated in U.S. dollars.
$ in thousands Number of Counterparties Repurchase Agreement Financing Exposure
Dividends
To maintain our qualification as a REIT, U.S. federal income tax law generally requires that we distribute at least 90% of our REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our REIT taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our REIT taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. For additional information regarding the characteristics of our dividends, refer to Note 10 – “Stockholders' Equity” of our consolidated financial statements in Part IV, Item 15 of this Report.
Unrelated Business Taxable Income
We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income.
Other Matters
We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the “Code”) at the end of each calendar quarter in 2025. We also believe that our revenue qualifies for the 75% source of income test and for the 95% source of income test rules for the year ended December 31, 2025. Consequently, we believe we met the REIT income and asset test as of December 31, 2025. We also met all REIT requirements regarding the stock ownership and distribution of dividends of our taxable income as of December 31, 2025. Therefore, as of December 31, 2025, we believe that we qualified as a REIT under the Code.
At all times, we intend to conduct our business so that neither we nor our Operating Partnership nor the subsidiaries of our Operating Partnership are required to register as an investment company under the 1940 Act. If we were required to register as an investment company, then our use of leverage would be substantially reduced. Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of
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U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries. In addition, we believe neither we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the Operating Partnership’s wholly-owned or majority-owned subsidiaries, we and the Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries. IAS Asset I LLC and certain of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of “investment company” under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities “primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). We calculate that as of December 31, 2025, we conducted our business so as not to be regulated as an investment company under the 1940 Act.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The primary components of our market risk are related to interest rate, principal prepayment and market value. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and we seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.
For additional discussion of market risk, see Item Part I. Item 1A - Risk Factors of this Report.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We are subject to interest rate risk in connection with our investments and our repurchase agreements. Our repurchase agreements are typically short-term in nature and are periodically refinanced at current market rates. We typically mitigate this interest rate risk by utilizing derivative contracts, primarily interest rate swap agreements and U.S. Treasury futures contracts.
Interest Rate Effect on Net Interest Income
Our operating results depend in large part upon differences between the yields earned on our investments and our cost of borrowing and interest rate hedging activities. During periods of rising interest rates, the borrowing costs associated with our investments tend to increase while the income earned on our fixed interest rate investments may remain substantially unchanged. This increase in borrowing costs results in the narrowing of the net interest spread between the related assets and borrowings and may even result in losses.
Hedging techniques are partly based on assumed levels of prepayments of our Agency RMBS. If prepayments are slower or faster than assumed, the life of the Agency RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.
Interest Rate Effects on Fair Value
Another component of interest rate risk is the effect that changes in interest rates will have on the market value of the assets that we acquire. We face the risk that the market value of our assets will increase or decrease at different rates than those of our liabilities, including our hedging instruments.
We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration values for the same securities.
The impact of changing interest rates on fair value can change significantly when interest rates change materially. Therefore, the volatility in the fair value of our assets could increase significantly in the event interest rates change materially. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, changes in actual interest rates may have a material adverse effect on us.
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Spread Risk
We refer to the difference between interest rates on our investments and interest rates on risk free instruments as spreads. We employ a variety of spread risk management techniques that seek to mitigate the influences of spread changes on our book value and our liquidity to help us achieve our investment objectives. The yield on our investments changes over time due to the level of risk free interest rates, the creditworthiness of the security, and the price of the perceived risk. The change in the market yield of our interest rate hedges also changes primarily with the level of risk free interest rates. We manage spread risk through careful asset selection, sector allocation, regulating our portfolio value-at-risk, and seeking to maintain adequate liquidity. Changes in spreads impact our book value and our liquidity and could cause us to sell assets and to change our investment strategy to maintain liquidity and preserve book value. Inflation, financial conditions, monetary policy initiatives, interest rates and interest rate volatility may have an impact on spreads.
Prepayment Risk
As we receive prepayments of principal on our investments, premiums or discounts on these investments are amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments.
Uncertainty regarding the rate of inflation, fiscal and monetary policy initiatives, elevated interest rate volatility and other factors make it more difficult to predict prepayment levels for the securities in our portfolio. As a result, it is possible that realized prepayment behavior will be materially different from our expectations.
Extension Risk
We compute the projected weighted average life of our investments based upon assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when a fixed-rate or hybrid adjustable-rate security is acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect us from rising interest rates, because the borrowing costs are fixed for the duration of the fixed-rate portion of the related target asset.
However, if prepayment rates decrease in a rising interest rate environment, then the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the assets would remain fixed. This situation may also cause the market value of our assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.
Market Risk
Market Value Risk
The estimated fair value of our securities fluctuates due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of these securities would be expected to decrease; conversely, in a falling interest rate environment, the estimated fair value of these securities would be expected to increase.
Pandemics and other widespread crises, including any related fiscal or monetary policy responses, may cause extreme volatility and illiquidity in fixed income markets. The amount of financing we receive under our repurchase agreements is directly related to our counterparties’ valuation of our assets that collateralize the outstanding repurchase agreement financing. When these or similar market conditions are present, margin call risk is elevated and our operating results and financial condition may be materially impacted.
The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive instruments and net interest income, including net interest paid or received under interest rate swaps, as of December 31, 2025 and 2024, assuming a static portfolio and constant financing and asset spreads. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager’s expectations. The analysis presented utilized assumptions, models and estimates of our Manager based on our Manager’s judgment and experience.
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Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The interest rate scenarios assume interest rates as of December 31, 2025 and 2024. Furthermore, while the analysis reflects the estimated impact of interest rate increases and decreases on a static portfolio, we actively manage the size and composition of our portfolio, which includes hedging instruments, and that can result in material changes to our interest rate risk profile. When applicable, our scenario analysis assumes a floor of 0% for U.S. Treasury yields and, to be consistent, we also apply a floor of 0% for all related funding costs.
The information set forth in the interest rate sensitivity table above and all related disclosures constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table.
Liquidity Risk
We engage in a variety of liquidity management techniques to mitigate the risk of volatility in the marketplace, which may bring significant security price fluctuations, associated margin calls, changing cash needs, and variability in counterparty financing terms. We perform statistical analysis to measure and quantify our required liquidity needs under multiple scenarios and time horizons. Liquidity in the form of cash, unencumbered assets and future cash flows is consistently monitored and evaluated versus internal targets. One such measure that we use to monitor our liquidity is unrestricted cash and unencumbered investments, which consists of cash and cash equivalents as reported in our consolidated balance sheets and investments that have not been pledged as collateral for repurchase agreement borrowings.
Other Risks
We have previously invested in non-Agency CMBS and non-Agency RMBS and may invest in these types of assets again
in the future. The following sections discuss additional risks associated with credit investments in commercial and residential
real estate markets.
Real Estate Risk
Residential and commercial property values are subject to volatility and may be adversely affected by a number of factors, including, but not limited to: national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as the supply of housing stock or other property sectors); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay their loans, which could also cause us to suffer losses.
Credit Risk
We retain the risk of potential credit losses on all of our commercial and residential mortgage investments. We seek to manage this risk through our pre-acquisition due diligence process. In addition, we re-evaluate the credit risk inherent in our investments on a regular basis pursuant to fundamental considerations such as GDP, unemployment, interest rates, retail sales, store closings/openings, corporate earnings, housing inventory, affordability and regional home price trends. We also review key loan credit metrics including, but not limited to, payment status, current loan-to-value ratios, current borrower credit scores and debt yields. These characteristics assist in determining the likelihood and severity of loan loss as well as prepayment and extension expectations. We then perform structural analysis under multiple scenarios to establish likely cash flow profiles and credit enhancement levels relative to collateral performance projections. This analysis allows us to quantify our opinions of credit quality and fundamental value, which are key drivers of portfolio management decisions.
Deteriorating fundamentals and tightening lending conditions may cause borrowers to experience difficulties meeting their obligations and refinancing loans upon scheduled maturities. Loans may experience increasing delinquency levels and
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eventual defaults, which could impact the performance of the investments. Rating agencies periodically reassess transactions negatively impacted by these adverse changes, which may result in our investments being downgraded.
Risk Management
To the extent consistent with maintaining our REIT qualification, we seek to manage risk exposure to protect our investment portfolio against the effects of major interest rate changes. We generally seek to manage this risk by:
•monitoring and adjusting, if necessary, the reset index and interest rate related to our target assets and our financings;
•attempting to structure our financing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;
•using hedging instruments, primarily interest rate swap agreements but also financial futures, options, interest rate cap agreements, floors and forward sales to adjust the interest rate sensitivity of our target assets and our borrowings; and
•actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset margins of our target assets and the interest rate indices and adjustment periods of our financings.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data are included under Item 15 of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. We have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of December 31, 2025. Based upon our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the Exchange Act, Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of the principal executive officer and principal financial officer, management assessed the effectiveness of our internal control over financial reporting as of December 31, 2025. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2025.
Our independent registered public accounting firm, PricewaterhouseCoopers LLP, audited the effectiveness of our internal control over financial reporting as of December 31, 2025. Their report dated February 23, 2026, which is included herein, expressed an unqualified opinion on the effectiveness of our internal control over financial reporting.
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Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended December 31, 2025 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
Rule 10b5-1 Trading Plans
During the fiscal quarter ended December 31, 2025, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” as each term is defined in Item 408 of Regulation S-K.
Series C Preferred Stock Dividends
We declared a Series C Preferred Stock dividend of $0.46875 per share on February 18, 2026 that is payable on March 27, 2026 to stockholders of record at the close of business on March 5, 2026.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
We will provide information that is responsive to certain portions of this Item 10 in our definitive proxy statement or in an amendment to this Report not later than 120 days after the end of the fiscal year covered by this Report, in either case under the captions “Information about Director Nominees,” “Information about the Executive Officers of the Company,” “Corporate Governance,” “Information about the Board and its Committees,” or under captions with similar meanings and possibly elsewhere therein. That information is incorporated into this Item 10 by reference.
Each year, the chief executive officer of each company listed on the New York Stock Exchange (“NYSE”) must certify to the NYSE that he or she is not aware of any violation by us of NYSE corporate governance listing standards as of the date of certification, qualifying the certification to the extent necessary. Our chief executive officer submitted this certification to the NYSE in 2025 as required pursuant to Section 303A of the NYSE Listed Company Manual and will submit a similar certification within 30 days of our 2026 annual stockholders’ meeting. In addition, we have filed, as exhibits to this Report, the certifications of our chief executive officer and chief financial officer required under Section 302 and 906 of the Sarbanes-Oxley Act of 2002.
Item 11. Executive Compensation.
We will provide information that is responsive to this Item 11 in our definitive proxy statement or in an amendment to this Report not later than 120 days after the end of the fiscal year covered by this Report, in either case under the captions “Information About the Board and Its Committees - Director Compensation,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” or under captions with similar meanings and possibly elsewhere therein. That information is incorporated into this Item 11 by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
We will provide information that is responsive to this Item 12 in our definitive proxy statement or in an amendment to this Report not later than 120 days after the end of the fiscal year covered by this Report, in either case under the caption “Security Ownership of Principal Stockholders,” “Security Ownership of Management,” “Executive Compensation,” or under captions with similar meanings and possibly elsewhere therein. That information is incorporated into this Item 12 by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
We will provide information that is responsive to this Item 13 in our definitive proxy statement or in an amendment to this Report not later than 120 days after the end of the fiscal year covered by this Report, in either case under the captions “Corporate Governance,” “Certain Relationships and Related Transactions,” “Information About Director Nominees,” “Related Person Transaction Policy,” or under captions with similar meanings and possibly elsewhere therein. That information is incorporated into this Item 13 by reference.
Item 14. Principal Accounting Fees and Services.
We will provide information that is responsive to this Item 14 in our definitive proxy statement or in an amendment to this Report not later than 120 days after the end of the fiscal year covered by this Report, in either case under the captions “Fees Paid to Independent Registered Public Accounting Firm,” “Pre-Approval Process and Policy,” or under captions with similar meanings and possibly elsewhere therein. That information is incorporated into this Item 14 by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements: The financial statements contained herein are set forth on pages 71 - 96 of this Report.
(a)(2) Financial Statement Schedules: Not applicable.
(a)(3) Exhibits: Refer to Exhibit Index starting on page 66 of this Report.
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Exhibit Index
ExhibitNo. Description
4.3* Description of Invesco Mortgage Capital Inc. Securities.
21.1* Subsidiaries of the Registrant.
23.1* Consent of PricewaterhouseCoopers LLP.
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101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
101.DEF XBRL Taxonomy Definition Linkbase Document
§ Management contract or compensatory plan or arrangement.
* Filed herewith
** Furnished herewith
Item 16. Form 10-K Summary.
Not applicable.
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INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) 69
Consolidated Balance Sheets as of December 31, 2025 and December 31, 2024 71
Notes to Consolidated Financial Statements 76
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Invesco Mortgage Capital Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Invesco Mortgage Capital Inc. and its subsidiaries (the “Company”) as of December 31, 2025 and 2024, and the related consolidated statements of operations, of comprehensive income (loss), of stockholders' equity and of cash flows for each of the three years in the period ended December 31, 2025, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2025 and 2024, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2025 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2025, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Valuation of Mortgage-Backed Securities, at fair value
As described in Notes 2 and 8 to the consolidated financial statements, the Company’s mortgage-backed securities, at fair value were $6.3 billion as of December 31, 2025. Management determines the fair value of mortgage-backed securities using an independent primary pricing service. If the primary pricing service cannot provide a price, management seeks a value from other pricing services. The pricing service uses two types of valuation approaches to determine the valuation of the Company’s various mortgage-backed securities: a market approach, which uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities; and an income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount.
The principal considerations for our determination that performing procedures relating to the valuation of mortgage-backed securities, at fair value is a critical audit matter are the high degree of auditor effort in performing procedures and evaluating audit evidence related to the fair value of the mortgage-backed securities.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the valuation of mortgage-backed securities, at fair value. These procedures also included, among others, (i) developing an independent range of prices for the securities by obtaining independent pricing from third party vendors; (ii) comparing management’s estimate of fair value to the independent range of prices to evaluate the reasonableness of management’s estimate; and (iii) testing the completeness and accuracy of the data provided by management.
/s/ PricewaterhouseCoopers LLP
Atlanta, Georgia
February 23, 2026
We have served as the Company’s auditor since 2016.
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of
$ in thousands except share amounts December 31, 2025 December 31, 2024
ASSETS
Due from counterparties — 580
Derivative assets, at fair value 4,412 5,033
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Derivative liabilities, at fair value — 627
Accounts payable and accrued expenses 1,580 1,619
Commitments and contingencies (See Note 13)
Stockholders' equity:
Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized:
Accumulated other comprehensive income — 173
Retained earnings (distributions in excess of earnings) (3,578,907) (3,572,149)
The accompanying notes are an integral part of these consolidated financial statements.
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
$ in thousands, except share data
Other income (loss)
(Increase) decrease in provision for credit losses — (458) (320)
Equity in earnings (losses) of unconsolidated ventures — (193) (1)
Other investment income (loss), net — 2 (66)
Expenses
Gain (loss) on repurchase and retirement of preferred stock 14 427 1,471
Issuance and redemption costs of redeemed preferred stock — (3,535) —
Net income (loss) attributable to common stockholders 88,173 34,763 (37,541)
Earnings (loss) per share:
Net income (loss) attributable to common stockholders
Weighted average number of shares of common stock:
The accompanying notes are an integral part of these consolidated financial statements.
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
$ in thousands
Other comprehensive income (loss):
Unrealized gain (loss) on mortgage-backed securities, net 229 (1,051) (91)
Total other comprehensive income (loss) (173) (525) (10,063)
Gain (loss) on repurchase and retirement of preferred stock 14 427 1,471
Issuance and redemption costs of redeemed preferred stock — (3,535) —
The accompanying notes are an integral part of these consolidated financial statements.
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Shares Amount Shares Amount Shares Amount
Net income (loss) — — — — — — — — (15,859) (15,859)
Other comprehensive income (loss) — — — — — — — (10,063) — (10,063)
Stock awards — — — — 50,239 — — — — —
Common stock dividends — — — — — — — — (73,260) (73,260)
Preferred stock dividends — — — — — — — — (23,153) (23,153)
Amortization of equity-based compensation — — — — — — 569 — — 569
Other comprehensive income (loss) — — — — — — — (525) — (525)
Stock awards — — — — 64,099 1 — — — 1
Common stock dividends — — — — — — — — (88,769) (88,769)
Preferred stock dividends — — — — — — — — (22,011) (22,011)
Amortization of equity-based compensation — — — — — — 586 — — 586
Other comprehensive income (loss) — — — — — — — (173) — (173)
Stock awards — — — — 77,660 1 — — — 1
Common stock dividends — — — — — — — — (94,931) (94,931)
Preferred stock dividends — — — — — — — — (13,120) (13,120)
Amortization of equity-based compensation — — — — — — 687 — — 687
The accompanying notes are an integral part of these consolidated financial statements.
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
$ in thousands Years Ended December 31,
Cash Flows from Operating Activities
Amortization of premiums and (discounts), net (5,658) (13,310) (14,380)
Increase (decrease) in provision for credit losses — 458 320
Loss on foreign currency translation — — 123
Changes in operating assets and liabilities:
(Increase) decrease in operating assets (2,265) (613) (1,977)
Increase (decrease) in operating liabilities (4,785) 16,924 (5,055)
Cash Flows from Investing Activities
Purchase of U.S. Treasury securities — — (59,514)
Distributions from investments in unconsolidated ventures, net — 307 41
Proceeds from sale of U.S. Treasury securities — 10,755 48,977
Cash Flows from Financing Activities
Redemption of preferred stock — (106,213) —
Supplement Disclosure of Cash Flow Information
Non-cash Investing and Financing Activities Information
Unsettled receivables recorded within investment related receivable — — 2,429
The accompanying notes are an integral part of these consolidated financial statements.
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Organization and Business Operations
Invesco Mortgage Capital Inc. (the “Company” or “we”) is a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities (“MBS”) and other mortgage-related assets.
As of December 31, 2025, we were invested in:
•residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S. government agency such as the Government National Mortgage Association (“Ginnie Mae”), or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively “Agency RMBS”); and
•commercial mortgage-backed securities (“CMBS”) that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively “Agency CMBS”).
During the periods presented in these consolidated financial statements, we also invested in CMBS and RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS” and “non-Agency RMBS”, respectively), U.S. Treasury securities and real estate-related financing arrangements in the form of unconsolidated ventures.
We conduct our business through IAS Operating Partnership L.P. (the “Operating Partnership”) and have one operating segment. We are externally managed and advised by Invesco Advisers, Inc. (our “Manager”), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. (“Invesco”), an independent global investment management firm.
We elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain our REIT qualification, we are required to distribute at least 90% of our REIT taxable income to our stockholders annually, and we will generally not be subject to U.S. federal or state corporate income tax to the extent that we distribute all of our annual taxable income to our stockholders on a timely basis. It is our intention to distribute 100% of our taxable income within the time limits prescribed by the Internal Revenue Code. We operate our business in a manner that permits our exclusion from the “Investment Company” definition under the Investment Company Act of 1940, as amended (the “1940 Act”).
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and consolidate the financial statements of the Company and its controlled subsidiaries. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income on mortgage-backed securities and allowances for credit losses. Actual results may differ from those estimates.
Fair Value Measurements
As described in Note 8 - “Fair Value of Financial Instruments,” we evaluate the source used to fair value our assets and liabilities and make a determination on its categorization within the fair value hierarchy. If the price of an instrument is readily available, meaning that it is a quoted price in an active market for identical assets, the instrument is classified as a level 1 measurement. If the price of an instrument is obtained from quoted prices in inactive markets for similar instruments, or whose values are model-derived but the inputs are observable either directly or indirectly, the instrument is classified as a level 2 measurement. If the inputs appear to be not observable and reflect judgment about assumptions used to value the instrument, the instrument would be classified as a level 3 measurement. Transfers between levels, if any, are determined at the end of the reporting period.
We report our MBS and derivative assets and liabilities at fair value as determined by an independent pricing service. We generally obtain one price per instrument from our primary pricing service. If the primary pricing service cannot provide a price, we will seek a value from other pricing services.
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The pricing service uses two types of valuation approaches to determine the valuation of our various mortgage-backed securities: a market approach, which uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities; and an income approach, which uses valuation techniques to convert future amounts to a single, discounted present value amount. In instances where sufficient market activity may not exist, the pricing service may utilize proprietary valuation models that may consider market transactions in comparable securities and the various relationships between securities in determining fair value and/or market characteristics to estimate relevant cash flows, which are then discounted to calculate the fair values. Observable inputs may include a combination of benchmark yields, executed trades, broker/dealer quotes, issuer spreads, bids, offers and benchmark securities. In addition, the valuation models utilized by pricing services may consider additional pool level information such as prepayment speeds, default frequencies and default severities, if applicable. We and the pricing service continuously monitor market indicators and economic events to determine whether they may have an impact on our valuations. Our MBS are classified as Level 2 measurements in the fair value hierarchy.
Our U.S. Treasury futures contracts are valued based on exchange pricing for identical instruments and classified as Level 1 measurements in the fair value hierarchy. Interest rate swaps are valued using the daily settlement price, or fair value, determined by the clearing exchange based on a pricing model that references observable market data, including current benchmark rates and the forward yield curve. The valuation methodology for to-be-announced securities forward contracts (“TBAs”) is similar to that of our Agency RMBS. Our interest rate swaps and TBAs are classified as Level 2 measurements in the fair value hierarchy.
Overrides of prices from pricing services are rare in the current market environment for the assets we hold. Examples of instances that would cause an override include if we recently traded the same security or there is an indication of market activity that would cause the pricing service price to no longer be indicative of fair value. In the rare instance where a price is adjusted, we have a control process to monitor the reason for such adjustment.
To gain comfort that pricing service prices are representative of current market information, we compare the transaction prices of security purchases and sales to the valuation levels provided by the pricing services. Price differences exceeding pre-defined tolerance levels are identified and investigated and may be challenged. Trends are monitored over time and if there are indications that the valuations are not comparable to market activity, the pricing services are asked to provide detailed information regarding their methodology and inputs. Transparency tools are also available from the pricing services which help us understand data points and/or market inputs used for pricing securities.
We also review daily price movements for interest rate swaps, U.S. Treasury futures contracts and TBAs. Price movements exceeding pre-defined tolerance levels are investigated using an alternate price from another pricing service as well as available market information. Based on our findings, the primary pricing service may be challenged, or in rare cases, overridden with an alternate pricing source.
In addition, we perform due diligence procedures on all pricing services on at least an annual basis. A questionnaire is sent to pricing services which requests information such as changes in methodologies, business recovery preparedness, internal controls and confirmation that evaluations are generated based on market data.
Mortgage-Backed Securities
We record our purchases of MBS on the trade date and report these securities at fair value as described above in the Fair Value Measurements section of this Note 2 to our consolidated financial statements. We have elected the fair value option for all of our MBS held as of December 31, 2025 (December 31, 2024: $5.4 billion or 99.7% of our MBS). Under the fair value option, we recognize changes in fair value in our consolidated statements of operations. In our view, the election more appropriately reflects the results of our operations because MBS fair value changes are accounted for in the same manner as fair value changes in our economic hedging instruments. We elected the fair value option for all MBS purchased on or after September 1, 2016.
Our MBS that were held as of December 31, 2024 for which we had not elected the fair value option were classified as available-for-sale, with unrealized gains or losses recorded in accumulated other comprehensive income, a separate component of stockholders' equity, until sale or disposition of the investment. Upon sale or disposition, the cumulative gain or loss previously reported in stockholders' equity was recognized in income.
Realized gains and losses from sales of MBS are determined based upon the specific identification method. Our interest income recognition policies for MBS is described below in the Interest Income Recognition section of this Note 2 to our consolidated financial statements.
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Allowances for Credit Losses on Available-for-Sale Securities
Prior to the sale of our MBS that were classified as available-for-sale, we were required to evaluate those securities for credit losses. Allowances for credit losses were estimated based on a comparison of the investment's amortized cost basis to its discounted expected cash flows. Credit losses were recorded within (increase) decrease in provisions for credit losses in our consolidated statements of operations.
U.S. Treasury Securities
U.S. Treasury securities are classified as trading securities and reported at fair value on our consolidated balance sheets. Purchases of U.S. Treasury securities are recorded on the trade date. Changes in the fair value of U.S. Treasury securities are recognized within gain (loss) on investments, net in our consolidated statements of operations.
Interest Income Recognition
Mortgage-Backed Securities
Interest income on MBS is accrued based on the outstanding principal or notional balance of the securities and their contractual terms. Premiums or discounts are amortized or accreted into interest income over the life of the investment using the effective interest method.
For Agency MBS that cannot be prepaid in such a way that we would not recover substantially all of our initial investment, interest income recognition is based on contractual cash flows. We do not estimate prepayments in applying the effective interest method.
Interest income on our MBS where we may not recover substantially all of our initial investment is based on estimated future cash flows. We estimate future expected cash flows at the time of purchase and determine the effective interest rate based on these estimated cash flows and our purchase price. Over the life of the investments, we update these estimated future cash flows and compute a revised yield based on the current amortized cost of the investment In estimating these future cash flows, there are a number of assumptions that are subject to uncertainties and contingencies, including but not limited to the rate and timing of principal payments, the pass through or coupon rate and interest rate fluctuations. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact our estimate and our interest income. Changes in our original or most recent cash flow projections may result in a prospective change in interest income recognized on these securities, or the amortized cost of these securities. For non-Agency RMBS not of high credit quality, when actual cash flows varied from expected cash flows, the difference was recorded as an adjustment to the amortized cost of the security and the security's yield was revised prospectively.
U.S. Treasury Securities
Coupon interest income on U.S. Treasury securities is accrued based on the outstanding principal balance of the securities and their contractual terms.
Cash and Cash Equivalents
We consider all highly liquid investments that have original or remaining maturity dates of three months or less when purchased to be cash equivalents. As of December 31, 2025, we had cash and cash equivalents in excess of the FDIC deposit insurance limit of $250,000 per institution. We mitigate our risk of loss by actively monitoring our counterparties.
Restricted Cash
Restricted cash represents initial margin posted on our interest rate swaps and futures contracts. Cash posted as initial margin is not available for general corporate purposes.
Due from Counterparties / Collateral Held Payable
Due from counterparties represents cash variation margin posted with our counterparties as collateral on our TBAs and repurchase agreements. Collateral held payable represents cash variation margin posted with us by counterparties as collateral on our TBAs and repurchase agreements. If we receive collateral other than cash from our counterparties under repurchase agreements, such assets are not included in our consolidated balance sheets. If we either sell such assets or pledge the assets as collateral under a repurchase agreement, the cash received and the corresponding liability are reflected on the consolidated balance sheets.
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Investment Related Receivable / Investment Related Payable
Investment related receivable consists of receivables for mortgage-backed securities that we have sold but have not settled with the buyer and accrued interest and principal paydowns on mortgage-backed securities. Investment related payable consists of liabilities for mortgage-backed securities that we have purchased but have not settled with the seller.
Repurchase Agreements
We have financed our purchases of mortgage-backed securities primarily through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest that is recorded as accrued interest payable in our consolidated balance sheets, as specified in the respective agreements.
We record the mortgage-backed securities and the related repurchase agreement financing on a gross basis in our consolidated balance sheets, and the corresponding interest income and interest expense on a gross basis in our consolidated statements of operations.
Dividends Payable
Dividends payable represent dividends declared at the balance sheet date that are payable to common stockholders and/or preferred stockholders.
Earnings (Loss) per Share
We calculate basic earnings (loss) per share by dividing net income (loss) attributable to common stockholders for the period by the weighted-average number of shares of our common stock outstanding for that period. Diluted earnings per share takes into account the effect of dilutive instruments, such as unvested restricted stock awards, and uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding.
Share-Based Compensation
Under the terms of our amended and restated 2009 Equity Incentive Plan (the “Incentive Plan”), our independent directors are eligible to receive stock awards as part of their compensation for serving as directors, In addition, we may compensate the officers and employees of our Manager and its affiliates under the Incentive Plan under the terms of our management agreement.
Share-based compensation arrangements may include share options, restricted and non-restricted share awards, performance-based awards and share appreciation rights. Compensation related to stock awards is recognized in the consolidated financial statements based on the fair value of the equity or liability instruments issued on the date of grant.
Underwriting Commissions and Offering Costs
Underwriting commissions and direct costs incurred in connection with our common and preferred stock offerings are recorded as a reduction of additional paid in capital and preferred stock, respectively.
Comprehensive Income
Our comprehensive income consists of net income, as presented in the consolidated statements of operations, adjusted as appropriate for items such as unrealized gains and losses on available-for-sale MBS; reclassification of unrealized gains and losses upon sale of available-for-sale MBS to gain (loss) on investments, net; reclassification of unrealized losses on available-for-sale securities to (increase) decrease in provision for credit losses; reclassification of amortization of net deferred gains and losses on de-designated interest rate swaps to repurchase agreements interest expense and currency translation adjustments on an investment in an unconsolidated venture. Unrealized gains and losses on available-for-sale MBS were reclassified into net income upon their sale.
Accounting for Derivative Financial Instruments
We record all derivatives on our consolidated balance sheets at fair value. At the inception of a derivative contract, we determine whether the instrument will be part of a qualifying hedge accounting relationship or whether we will account for the contract as a trading instrument. We have elected not to apply hedge accounting to all new derivative contracts entered into after January 1, 2014. Changes in the fair value of our derivatives are recorded in gain (loss) on derivative instruments, net in our consolidated statements of operations. Net interest paid or received under our interest rate swaps is also recognized in gain
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(loss) on derivative instruments, net in our consolidated statements of operations. Cash receipts or payments that are attributed to contractual interest earned or incurred on interest rate swaps are classified as cash flows from operating activities in our consolidated statements of cash flows. All other cash flows from derivatives are generally recorded as investing cash flows in our consolidated statements of cash flows.
Before 2014, we applied hedge accounting to our interest rate swap agreements. Effective December 31, 2013, we voluntarily discontinued hedge accounting for our interest rate swap agreements by de-designating the interest rate swaps as cash flow hedges. Amounts recorded in accumulated other comprehensive income (loss) (“AOCI”) before we discontinued cash flow hedge accounting for our interest rate swaps were reclassified to interest expense on repurchase agreements on the consolidated statements of operations as interest was accrued and paid on the related repurchase agreements over the remaining original life of the interest rate swap agreements.
We evaluate the terms and conditions of our U.S. Treasury futures contracts, currency forward contracts and TBAs to determine if an instrument has the characteristics of an investment or should be considered a derivative under U.S. GAAP. Accordingly, U.S. Treasury futures contracts, currency forward contracts and TBAs having the characteristics of derivatives are accounted for at fair value with such changes recognized in gain (loss) on derivative instruments, net in the consolidated statements of operations.
The fair value of interest rate swaps, U.S. Treasury futures contracts, currency forward contracts and TBAs is included in derivative assets or derivative liabilities on the consolidated balance sheets. Daily variation margin received or paid on interest rate swaps and U.S. Treasury futures contracts is accounted for as settlement of the derivative itself rather than as collateral and is recorded as a reduction in the corresponding derivative asset or derivative liability.
Income Taxes
We elected to be taxed as a REIT. Accordingly, we will generally not be subject to U.S. federal and applicable state and local corporate income tax to the extent that we make qualifying distributions to our stockholders, and provided we satisfy on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If we fail to qualify as a REIT and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the four taxable years following the year in which we lost our REIT qualification. Accordingly, our failure to qualify as a REIT could have a material adverse impact on our results of operations and amounts available for distribution to stockholders.
Our dividends paid deduction for qualifying dividends to our stockholders is computed using our REIT taxable income as opposed to net income reported on the consolidated financial statements. REIT taxable income will generally differ from net income because the determination of REIT taxable income is based on tax regulations and not financial accounting principles. We did not incur an income tax liability for the years ended December 31, 2024 and 2023 and do not expect to incur an income tax liability for the year ended December 31, 2025. Accordingly, our effective tax rate was 0% and we did not pay any income tax.
We have net operating loss carryforwards that do not expire and capital loss carryforwards that expire five years after the fiscal tax years in which they were created. We do not recognize our net operating loss carryforwards or capital loss carryforwards as deferred tax assets on our consolidated balance sheets because we do not expect to incur income taxes.
We have elected to treat one of our subsidiaries as a taxable REIT subsidiary (“TRS”). In general, a TRS may hold assets and engage in activities that we cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes. Our TRS did not generate taxable income for the years ended December 31, 2025, 2024 and 2023.
We do not have any accruals for uncertain tax positions. Our tax returns for tax years 2022 and forward are open to examination by the IRS. We would recognize interest and penalties, if any, as income tax expense, which would be included in general and administrative expenses.
Recently Issued Accounting Pronouncements
In November 2024, the Financial Accounting Standards Board issued an accounting standard requiring public business entities to disclose disaggregated information about certain income statement line items. Public business entities are required to disclose purchases of inventory, employee compensation, depreciation, intangible asset amortization and depletion for each income statement line item that contains those expenses. Specified expenses, gains or losses that are already disclosed under existing U.S. GAAP are required to be included in the disaggregated income statement expense line item disclosures, and any remaining amounts need to be described qualitatively. Separate disclosures of total selling expenses and an entity’s definition of those expenses are also required. The guidance does not change what an entity presents on the face of its income statement.
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We are required to implement the new standard prospectively in our consolidated financial statements for the year ended December 31, 2027 and for interim periods thereafter. We may implement the new standard retrospectively, and early adoption is permitted. We are currently evaluating the impact of the new standard.
We reviewed all other recently issued accounting standards updates and determined that they were not expected to have a significant impact on our consolidated financial statements when adopted or did not have a significant impact on our consolidated financial statements upon adoption.
Note 3 – Mortgage-Backed Securities
The following tables summarize our MBS portfolio by asset type as of December 31, 2025 and 2024.
Agency RMBS:
(1)Period-end weighted average yield is based on amortized cost as of December 31, 2025 and incorporates future prepayment and loss assumptions when appropriate. Total represents period-end weighted average yield of all mortgage-backed securities.
(2)All Agency collateralized mortgage obligations (“Agency CMO”) are interest-only securities (“Agency IO”).
Agency RMBS:
(1)Period-end weighted average yield is based on amortized cost as of December 31, 2024 and incorporates future prepayment and loss assumptions when appropriate. Total represents period-end weighted average yield of all mortgage-backed securities.
(2)All Agency CMO are Agency IO.
(3)Non-Agency RMBS is 66.4% fixed rate, 33.0% variable rate and 0.6% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying hybrid adjustable-rate mortgage loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index.
(4)Of the total discount in non-Agency RMBS, $2.1 million is non-accretable calculated using the principal/notional balance and based on estimated future cash flows of the securities.
(5)Non-Agency RMBS includes interest-only securities (“non-Agency IO”) which represent 96.7% of principal/notional balance, 34.2% of amortized cost and 31.0% of fair value.
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We have elected the fair value option for all of our MBS held as of December 31, 2025. The following table presents the fair value of our available-for-sale securities and securities accounted for under the fair value option by asset type as of December 31, 2024.
As of
Agency RMBS: