Western Asset Mortgage Capital Corp - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2022


☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-35543

Western Asset Mortgage Capital Corporation

(Exact name of Registrant as specified in its charter)


Delaware						27-0298092
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification Number)

Western Asset Mortgage Capital Corporation

47 W 200 South, Suite 200

Salt Lake City, Utah 84101

(Address of Registrant’s principal executive offices)

(801) 952-3390

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 under the Securities Exchange Act of 1934). Yes ☐ No ý

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value

WMC

New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

As of November 9, 2022 there were 6,038,010 shares, par value $0.01, of the registrant’s common stock outstanding.

TABLE OF CONTENTS


		Page

	Part I — FINANCIAL INFORMATION

ITEM 1.	Financial Statements	2

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	89

ITEM 4.	Controls and Procedures	95

	Part II — OTHER INFORMATION	96

ITEM 1.	Legal Proceedings	96

ITEM 1A.	Risk Factors	96

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96

ITEM 3.	Defaults Upon Senior Securities	96

ITEM 4.	Mine Safety Disclosures	96

ITEM 5.	Other Information	96

ITEM 6.	Exhibits	97

Signatures		98

Part I

ITEM I. Financial Statements

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands—except share and per share data)

(Unaudited)


	September 30, 2022		December 31, 2021
Assets:
Cash and cash equivalents	$	55,352	$	40,193
Restricted cash	251		260
Agency mortgage-backed securities, at fair value ($233 and $1,172 pledged as collateral, at fair value, respectively)	720		1,172
Non-Agency mortgage-backed securities, at fair value ($109,607 and $123,947 pledged as collateral, at fair value, respectively)	118,508		133,127
Other securities, at fair value ($38,310 and $51,648 pledged as collateral, at fair value, respectively)	38,310		51,648
Residential whole loans, at fair value ($1,099,625 and $1,023,502 pledged as collateral, at fair value, respectively)	1,099,625		1,023,502
Residential bridge loans, at fair value ($5,120 and $5,207 pledged as collateral, at fair value, respectively)	5,120		5,428
Securitized commercial loans, at fair value	1,171,914		1,355,808
Commercial loans, at fair value ($81,326 and $101,459 pledged as collateral, at fair value, respectively)	90,103		130,572

Investment related receivable	8,720		22,133
Interest receivable	11,324		11,823
Due from counterparties	3,215		4,565
Derivative assets, at fair value	262		105
Other assets	2,881		45,364
Total Assets (1)	$	2,606,305	$	2,825,700

Liabilities and Equity:
Liabilities:
Repurchase agreements, net	$	218,941	$	617,189
Convertible senior unsecured notes, net	109,162		119,168
Securitized debt, net ($1,808,397 and $1,344,370 at fair value and $155,135 and $180,116 held by affiliates, respectively)	2,159,862		1,863,488
Interest payable (includes $694 and $699 on securitized debt held by affiliates, respectively)	10,460		10,272


Derivative liability, at fair value	—		602
Accounts payable and accrued expenses	3,887		4,842
Payable to affiliate	3,353		1,925
Dividend payable	2,415		3,623
Other liabilities	262		262
Total Liabilities(2)	2,508,342		2,621,371

Commitments and contingencies (Note 15)

Stockholders’ Equity:
Common stock: $0.01 par value, 50,000,000 shares authorized, 6,038,010 and 6,038,010 outstanding, respectively(3)	60		60
Preferred stock, $0.01 par value, 100,000,000 shares authorized and no shares outstanding	—		—
Treasury stock, at cost, 57,981 and 57,981 shares held, respectively	(1,665)		(1,665)
Additional paid-in capital(3)	919,106		918,695
Retained earnings (accumulated deficit)	(819,553)		(723,981)
Total Stockholders’ Equity	97,948		193,109
Non-controlling interest	15		11,220
Total Equity	97,963		204,329
Total Liabilities and Equity	$	2,606,305	$	2,825,700

See notes to unaudited consolidated financial statements.

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Balance Sheets (Continued)

(in thousands — except share and per share data)

(Unaudited)


	September 30, 2022		December 31, 2021
(1) Assets of consolidated VIEs included in the total assets above:
Cash and cash equivalents	$	236	$	266
Restricted cash	251		260
Residential whole loans, at fair value ($1,099,625 and $1,023,502 pledged as collateral, at fair value, respectively)	1,099,625		1,023,502
Residential bridge loans, at fair value ($5,120 and $5,207 pledged as collateral, at fair value, respectively)	5,120		5,207
Securitized commercial loans, at fair value	1,171,914		1,355,808
Commercial loans, at fair value ($14,361 and $14,362 pledged as collateral, at fair value, respectively)	14,361		14,362
Investment related receivable	8,674		22,087
Interest receivable	10,191		10,572

Total assets of consolidated VIEs	$	2,310,372	$	2,432,064

(2) Liabilities of consolidated VIEs included in the total liabilities above:
Securitized debt, net ($1,808,397 and $1,344,370 at fair value and $155,135 and $180,116 held by affiliates, respectively)	$	2,159,862	$	1,863,488
Interest payable (includes $694 and $699 on securitized debt held by affiliates, respectively)	8,209		6,480
Accounts payable and accrued expenses	69		78
Other liabilities	251		260
Total liabilities of consolidated VIEs	$	2,168,391	$	1,870,306

(3) Amounts have been adjusted to reflect the one-for-ten reverse stock split effected July 11, 2022. See Note 2 and Note 12 for additional details.

See notes to unaudited consolidated financial statements.

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Operations

(in thousands—except share and per share data)

(Unaudited)


	For the three months ended September 30, 2022		For the three months ended September 30, 2021		For the nine months ended September 30, 2022		For the nine months ended September 30, 2021
Net Interest Income
Interest income	$	41,406	$	40,141	$	116,625	$	127,353
Interest expense (includes $3,493, $3,564, $10,412 and $10,919 on securitized debt held by affiliates, respectively)	35,707		32,978		100,408		104,352
Net Interest Income	5,699		7,163		16,217		23,001

Other Income (Loss)
Realized loss, net	(35)		(1,526)		(33,551)		(7,367)

Unrealized loss, net	(43,582)		(6,003)		(66,300)		(39,271)
Gain on derivative instruments, net	4,882		515		16,599		716
Other, net	(61)		277		(252)		449
Other Income (Loss)	(38,796)		(6,737)		(83,504)		(45,473)

Expenses
Management fee to affiliate	850		1,502		2,952		4,469

Other operating expenses	343		352		901		1,172
Transaction costs	2,635		954		5,590		954
General and administrative expenses:
Compensation expense	515		626		1,143		1,985
Professional fees	1,626		947		4,434		2,864
Other general and administrative expenses	676		747		2,049		2,793
Total general and administrative expenses	2,817		2,320		7,626		7,642
Total Expenses	6,645		5,128		17,069		14,237

Loss before income taxes	(39,742)		(4,702)		(84,356)		(36,709)
Income tax provision (benefit)	266		(218)		276		(19)
Net loss	(40,008)		(4,484)		(84,632)		(36,690)
Net income (loss) attributable to non-controlling interest	2		(271)		3,618		(267)
Net loss attributable to common stockholders and participating securities	$	(40,010)	$	(4,213)	$	(88,250)	$	(36,423)

Net loss per Common Share — Basic(1)	$	(6.63)	$	(0.70)	$	(14.63)	$	(6.00)
Net loss per Common Share — Diluted(1)	$	(6.63)	$	(0.70)	$	(14.63)	$	(6.00)

(1) Amounts have been adjusted to reflect the one-for-ten reverse stock split effected July 11, 2022. See Note 2 and Note 12 for additional details.

See notes to unaudited consolidated financial statements.

Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Changes in Equity

(in thousands—except shares and share data)

(Unaudited)


	Three Months Ended September 30, 2022
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest		Total Equity
	Shares(1)	Par
Balance at June 30, 2022	6,038,010	$	60	$	918,974	$	(777,095)	$	(1,665)	$	140,274	$	64	$	140,338


Equity distribution	—	—		—		—		—		—		(49)		(49)




Vesting of restricted stock	—	—		100		—		—		100		—		100

Net income (loss)	—	—		—		(40,010)		—		(40,010)		2		(40,008)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(2)		(2)
Dividends declared on common stock	—	—		32		(2,448)		—		(2,416)		—		(2,416)
Balance at September 30, 2022	6,038,010	$	60	$	919,106	$	(819,553)	$	(1,665)	$	97,948	$	15	$	97,963


	Three Months Ended September 30, 2021
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest		Total Equity
	Shares(1)	Par
Balance at June 30, 2021	6,081,270	$	60	$	916,331	$	(699,920)	$	(578)	$	215,893	$	2	$	215,895


Equity contributions	—	—		—		—		—		—		12,138		12,138
Equity component of convertible senior unsecured notes	—	—		2,060		—		—		2,060		—		2,060
Exchange of phantom stock to common stock	4,721	—		—		—		—		—		—		—
Offering costs	—	—		(68)		—		—		(68)		—		(68)

Vesting of restricted stock	—	—		165		—		—		165		—		165

Net loss	—	—		—		(4,213)		—		(4,213)		(271)		(4,484)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(2)		(2)
Dividends declared on common stock	—	—		24		(3,675)		—		(3,651)		—		(3,651)
Balance at September 30, 2021	6,085,991	60		918,512		(707,808)		(578)		210,186		11,867		222,053


	Nine Months Ended September 30, 2022
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest
	Shares(1)	Par												Total Equity
Balance at December 31, 2021	6,038,010	$	60	$	918,695	$	(723,981)	$	(1,665)	$	193,109	$	11,220	$	204,329


Equity distribution	—	—		—		—		—		—		(14,817)		(14,817)




Vesting of restricted stock	—	—		335		—		—		335		—		335

Net income (loss)	—	—		—		(88,250)		—		(88,250)		3,618		(84,632)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(6)		(6)
Dividends declared on common stock	—	—		76		(7,322)		—		(7,246)		—		(7,246)
Balance at September 30, 2022	6,038,010	$	60	$	919,106	$	(819,553)	$	(1,665)	$	97,948	$	15	$	97,963


	Nine Months Ended September 30, 2021
	Common Stock Outstanding			Additional Paid-In Capital(1)		Retained Earnings (Accumulated Deficit)		Treasury Stock		Total Stockholders' Equity		Non-Controlling Interest
	Shares(1)	Par												Total Equity
Balance at December 31, 2020	6,081,270	$	60	$	916,007	$	(660,377)	$	(578)	$	255,112	$	2	$	255,114
Equity contributions	—	—		—		—		—		—		12,138		12,138

Equity component of convertible senior unsecured notes	—	—		2,060		—		—		2,060		—		2,060
Exchange of phantom stock	4,721	—		—		—		—		—		—		—

Offering costs	—	—		(68)		—		—		(68)		—		(68)

Vesting of restricted stock	—	—		454		—		—		454		—		454

Net loss	—	—		—		(36,423)		—		(36,423)		(267)		(36,690)
Dividends declared on non-controlling interest	—	—		—		—		—		—		(6)		(6)
Dividends declared on common stock	—	—		59		(11,008)		—		(10,949)		—		(10,949)
Balance at September 30, 2021	6,085,991	$	60	$	918,512	$	(707,808)	$	(578)	$	210,186	$	11,867	$	222,053

(1) Amounts have been adjusted to reflect the one-for-ten reverse stock split effected July 11, 2022. See Note 2 and Note 12 for additional details.

See notes to unaudited consolidated financial statements.

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Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows (in thousands)

(Unaudited)


	For the nine months ended September 30, 2022		For the nine months ended September 30, 2021
Cash flows from operating activities:
Net loss	$	(84,632)	$	(36,690)
Adjustments to reconcile net loss to net cash provided by operating activities:
Premium amortization and (discount accretion), net	2,492		145
Interest income earned added to principal of investments	(79)		(310)
Amortization of deferred financing costs	1,938		3,935
Amortization of discount on convertible senior unsecured notes	648		712
Restricted stock amortization	335		453


Premium on purchase of residential whole loans	(6,619)		(10,281)


Unrealized loss, net	66,300		39,271
Realized loss on extinguishment of convertible senior notes	134		1,337
Realized gain on sale of real estate owned ("REO")	(12,198)		(54)
Unrealized (gain) loss on derivative instruments, net	(3,793)		97

Realized loss on investments, net	45,615		6,084
Loss on derivatives, net	1,762		—
Loss on foreign currency transactions, net	1		—
Changes in operating assets and liabilities:
Interest receivable	499		2,496
Investment related receivable	—		(704)
Other assets	—		(973)
Interest payable	188		(4,243)
Accounts payable and accrued expenses	(953)		60
Payable to affiliate	1,428		(38)
Other liabilities	7		1
Net cash provided by operating activities	13,073		1,298

Cash flows from investing activities:
Purchase of securities	(39,952)		—
Proceeds from sale of securities	42,287		—
Proceeds from sale of REO	54,681		738
Principal repayments and basis recovered on securities	6,704		14,685
Purchase of residential whole loans	(405,298)		(233,041)
Proceeds from sale of residential whole loans	11,735		—
Principal repayments on residential whole loans	206,660		313,661

Principal repayments on commercial loans	20,593		103,272

Principal repayments on securitized commercial loans	—		354,202

Principal repayments on residential bridge loans	366		7,052


Premium for credit default swaps, net	(347)		—
Net settlements of TBAs	2,051		—

Proceeds from sale of interest rate swaptions, net	312		—


Due from counterparties	460		50



Premium for interest rate swaptions, net	(473)		—
Net cash (used in) provided by investing activities	(100,221)		560,619

Cash flows from financing activities:

Payment of offering costs	(2)		(86)


Proceeds from issuance of convertible senior unsecured notes	—		86,250
Payments on extinguishment of convertible senior unsecured notes	(11,690)		(128,645)

Proceeds from repurchase agreement borrowings	3,164,451		2,527,530
Repayments of repurchase agreement borrowings	(3,562,699)		(2,403,068)

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Western Asset Mortgage Capital Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Continued) (in thousands)

(Unaudited)


	For the nine months ended September 30, 2022		For the nine months ended September 30, 2021
Proceeds from securitized debt	742,432		—
Repayments of securitized debt	(207,799)		(597,221)


Payments made for deferred financing costs	—		(2,536)
Due from counterparties, net	890		(565)
Due to counterparties, net	—		(321)
Decrease in other liabilities	(9)		(75,873)
Equity distributions to non-controlling interest	(14,817)		—
Dividends paid on common stock	(8,454)		(10,947)
Dividends paid to non-controlling interest	(4)		(4)
Net cash provided by (used in) financing activities	102,299		(605,486)

Effect of exchange rate changes on cash and cash equivalents	(1)		—

Net increase (decrease) in cash, cash equivalents and restricted cash	15,150		(43,569)
Cash, cash equivalents and restricted cash, beginning of period	40,453		107,745
Cash, cash equivalents and restricted cash, end of period	$	55,603	$	64,176

Supplemental disclosure of operating cash flow information:
Interest paid	$	79,700	$	87,658
Income taxes paid	$	50	$	192
Supplemental disclosure of non-cash financing/investing activities:
Underwriting and offering costs payable	$	—	$	6










Dividends and distributions declared, not paid	$	2,415	$	3,651
Dividends to non-controlling interest, not paid	$	2	$	2
Principal payments of residential whole loans, not settled	$	8,674	$	22,621
Principal payments of residential bridge loans, not settled	$	46	$	1,715

Other assets - transfer of bridge loans to REO	$	—	$	752
Other assets - Transfer of Commercial Loans to REO	$	—	$	30,345
Other assets - Contribution of REO from non-controlling interest	$	—	$	12,138



Reconciliation of cash, cash equivalents and restricted cash reported in the Consolidated Balance Sheets:
Cash and cash equivalents	$	55,352	$	63,916
Restricted cash	251		260
Total cash, cash equivalents and restricted cash shown in the Consolidated Statements of Cash Flows	$	55,603	$	64,176

See notes to unaudited consolidated financial statements.

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Western Asset Mortgage Capital Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(in thousands- except share and per share data)

The following defines certain of the commonly used terms in these Notes to Consolidated Financial Statements: “Agency” or “Agencies” refer to a federally chartered corporation, such as the Federal National Mortgage Association (“Fannie Mae” or “FNMA”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”), or an agency of the U.S. Government, such as the Government National Mortgage Association (“Ginnie Mae” or “GNMA”); references to “MBS” refer to mortgage backed securities, including residential mortgage-backed securities or “RMBS,” commercial mortgage-backed securities or “CMBS,” and “Interest-Only Strips” (as defined herein); “Agency MBS” refer to RMBS, CMBS and Interest-Only Strips issued or guaranteed by the Agencies while “Non-Agency MBS” refer to RMBS, CMBS and Interest-Only Strips that are not issued or guaranteed by the Agencies; references to “ARMs” refers to adjustable rate mortgages; references to “Interest-Only Strips” refer to interest-only (“IO”) and inverse interest-only (“IIO”) securities issued as part of or collateralized with MBS; references to “TBA” refer to To-Be-Announced Securities; and references to “Residential Whole Loans,” “Residential Bridge Loans” and “Commercial Loans” (collectively “Whole Loans”) refer to individual mortgage loans secured by single family, multifamily and commercial properties.

Note 1 — Organization

Western Asset Mortgage Capital Corporation, a Delaware corporation, and its subsidiaries (the “Company”), commenced operations in May 2012. The Company invests in, finances and manages a portfolio of real estate related securities, Whole Loans and other financial assets. The Company’s current portfolio is comprised of Non-Qualified ("Non-QM") Residential Whole Loans, Non-Agency RMBS, Commercial Loans, Non-Agency CMBS and to a lesser extent Agency RMBS, GSE Risk Transfer Securities, Residential Bridge Loans, and asset-backed securities (“ABS”) secured by a portfolio of private student loans. The Company’s investment strategy is based on Western Asset Management Company, LLC’s (the “Manager”) perspective of which mix of portfolio assets it believes provides the Company with the best risk-reward opportunities at any given time. The Company's current investment strategy will focus on residential real estate related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. The Manager will vary the allocation among these asset classes subject to maintaining the Company’s qualification as a REIT and maintaining its exemption from the Investment Company Act of 1940, as amended (the “1940 Act”). These restrictions limit the Company’s ability to invest in non-qualified MBS, non-real estate assets and/or assets which are not secured by real estate. Accordingly, the Company’s portfolio will continue to be principally invested in qualifying MBS, Whole Loans, and other real estate related assets.

The Company is externally managed by the Manager, an investment advisor registered with the Securities and Exchange Commission (“SEC”). The Manager is a wholly-owned subsidiary of Franklin Resources, Inc. (“Franklin”). The Company operates and has elected to be taxed as a real estate investment trust or “REIT” commencing with its taxable year ended December 31, 2012.

On August, 4, 2022, the Company announced that its Board of Directors had authorized a review of strategic alternatives for the Company aimed at enhancing shareholder value, which may include a sale or merger of the Company. JMP Securities, A Citizens Company, was retained as exclusive financial advisor to the Company. No assurance can be given that the review being undertaken will result in a sale, merger, or other transaction sale or other business combination involving the Company, and the Company has not set a timetable for completion of the review process. As previously announced, the Company does not intend to make any further statements regarding this process unless and until a definitive agreement for a transaction has been reached, or until the process of exploring strategic alternatives has ended.

Note 2 — Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements and related notes have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. For all periods presented, all per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-

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ten reverse stock split, which was effected on July 11, 2022. The results of operations for the period ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year or any future period. These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 8, 2022.

The consolidated financial statements include the accounts of the Company, its wholly-owned and majority-owned subsidiaries, and variable interest entities (“VIEs”) in which it is considered the primary beneficiary. All intercompany amounts between the Company and its subsidiaries and consolidated VIEs have been eliminated in consolidation.

Reverse Stock Split

Our amended and restated certificate of incorporation as of June 30, 2022, authorizes the Company to issue a total of 600,000,000 shares of capital stock, consisting of 500,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share.

Following approval by the Company’s stockholders of a reverse stock split between a range of 1-for-5 and 1-for-10 of currently outstanding shares of the Company’s common stock, on June 30, 2022, the Company's board of directors selected a one-for-ten reverse stock split ratio. The one-for-ten reverse stock split was effected on July 11, 2022, which reduced the total number of authorized shares of common stock from 500,000,000 to 50,000,000 and the total number of issued and outstanding shares from 60,380,105 to 6,038,010. The par value per share of our common stock remained unchanged at $0.01. All per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

Our stockholders' equity, in the aggregate, remains unchanged. Per share net income or loss increased because there are fewer shares of common stock outstanding. The common stock held in treasury was reduced in proportion to the reverse stock split ratio. There were no other accounting consequences, including changes to the amount of stock-based compensation expense to be recognized in any period, that arose as a result of the reverse stock split. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of the Company's common stock the business day prior to the effective date. The reverse stock split applied to all of the Company's outstanding shares of common stock and did not affect any stockholder’s ownership percentage of shares of the Company's common stock, except for immaterial changes resulting from the payment of cash for fractional shares.

Variable Interest Entities

VIEs are defined as entities, that by design, either lack sufficient equity for the entity to finance its activities without additional subordinated financial support, or are unable to direct the entity’s activities, or are not exposed to the entity’s losses or entitled to its residual returns. The Company evaluates all of its interests in VIEs for consolidation. When the interests are determined to be variable interests, the Company assesses whether it is deemed the primary beneficiary. The primary beneficiary of a VIE is determined to be the party that has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

To assess whether the Company has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, it considers all facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes: first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.

To assess whether the Company has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, it considers all of its economic interests. This assessment requires the Company to apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include; the design of the VIE, including its capitalization structure, subordination of interests, payment priority, relative share of interests held across various classes within the VIE’s capital structure, and the reasons why the interests are held by the Company.

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In instances where the Company and its related parties have variable interests in a VIE, the Company considers whether there is a single party in the related party group that meets both the power and losses or benefits criteria on its own as though no related party relationship existed. If one party within the related party group meets both these criteria, such reporting entity is the primary beneficiary of the VIE and no further analysis is needed. If no party within the related party group on its own meets both the power and losses or benefits criteria, but the related party group as a whole meets these two criteria, the determination of primary beneficiary within the related party group requires significant judgment. The analysis is based upon qualitative as well as quantitative factors, such as the relationship of the VIE to each of the members of the related-party group, as well as the significance of the VIE's activities to those members, with the objective of determining which party is most closely associated with the VIE.

Ongoing assessments of whether an enterprise is the primary beneficiary of a VIE are required.

Use of Estimates

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Significant Accounting Policies

There have been no significant changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2021.

Recently adopted accounting pronouncements

Description

Adoption Date

Effect on Financial Statements

In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40).” The amendments in this Update affect entities that issue convertible instruments and/or contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed.

January 1, 2022

The adoption of this standard did not have a material impact on the Company's consolidated financial statements due to the limited nature of such transactions.

Recently issued accounting pronouncements

Description

Effective Date

Effect on Financial Statements

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” The amendments in this update provided optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this Update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848)." The amendments in this Update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

March 12, 2020 through December 31, 2022

The Company will elect to adopt the amendments in ASU 2020-04 and ASU 2021-1 no later than December 31, 2022. With respect to contracts within the scope of Topics 310, Receivables, and 470, Debt, the company intends to account for these as continuations of existing contracts by prospectively adjusting the effective interest rates as modified.

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Note 3 — Fair Value of Financial Instruments

The following tables present the Company’s financial instruments carried at fair value as of September 30, 2022 and December 31, 2021, based upon the valuation hierarchy (dollars in thousands):


	September 30, 2022
	Fair Value
	Level I		Level II		Level III		Total
Assets




Agency RMBS Interest-only strips	$	—	$	—	$	52	$	52
Agency RMBS Interest-only strips accounted for as derivatives, included in MBS	—		—		668		668
Subtotal Agency MBS	—		—		720		720

Non-Agency CMBS	—		88,822		—		88,822
Non-Agency RMBS	—		28,513		—		28,513
Non-Agency RMBS Interest-only strips	—		—		1,173		1,173

Subtotal Non-Agency MBS	—		117,335		1,173		118,508

Other securities	—		38,310		—		38,310
Total mortgage-backed securities and other securities	—		155,645		1,893		157,538

Residential whole loans	—		—		1,099,625		1,099,625
Residential bridge loans	—		—		5,120		5,120
Securitized commercial loans	—		—		1,171,914		1,171,914
Commercial loans	—		—		90,103		90,103
Derivative assets	—		262		—		262
Total Assets	$	—	$	155,907	$	2,368,655	$	2,524,562

Liabilities

Securitized debt	$	—	$	1,798,511	$	9,886	$	1,808,397

Total Liabilities	$	—	$	1,798,511	$	9,886	$	1,808,397

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	December 31, 2021
	Fair Value
	Level I		Level II		Level III		Total
Assets





Agency RMBS Interest-only strips	$	—	$	—	$	114	$	114
Agency RMBS Interest-only strips accounted for as derivatives, included in MBS	—		—		1,058		1,058
Subtotal Agency MBS	—		—		1,172		1,172

Non-Agency CMBS	—		99,630		5,728		105,358
Non-Agency RMBS	—		25,652		—		25,652
Non-Agency RMBS Interest-only strips	—		—		2,117		2,117

Subtotal Non-Agency MBS	—		125,282		7,845		133,127

Other securities	—		51,648		—		51,648
Total mortgage-backed securities and other securities	—		176,930		9,017		185,947

Residential whole loans	—		—		1,023,502		1,023,502
Residential bridge loans	—		—		5,428		5,428
Securitized commercial loan	—		—		1,355,808		1,355,808
Commercial loans	—		—		130,572		130,572
Derivative assets	—		105		—		105
Total Assets	$	—	$	177,035	$	2,524,327	$	2,701,362

Liabilities
Derivative liabilities	$	—	$	602	$	—	$	602
Securitized debt	—		1,329,451		14,919		1,344,370
Total Liabilities	$	—	$	1,330,053	$	14,919	$	1,344,972

The fair value of financial instruments is determined by the Manager in accordance with ASC 820, "Fair Value Measurements and Disclosures." When possible, the Company determines fair value using independent data sources. ASC 820 establishes a hierarchy that prioritizes the inputs to valuation techniques giving the highest priority to readily available unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements) when market prices are not readily available or reliable.

In instances when the Company is required to consolidate a VIE that is determined to be a qualifying collateralized financing entity ("CFE") under GAAP, and if the Company has elected the fair value option for the securitized debt, the Company will measure both the financial assets and financial liabilities of the VIE using the fair value of either the VIE’s financial assets or financial liabilities, whichever is more observable.

Residential whole loans and residential bridge loans

In determining the fair value of the Company's residential whole loans and residential bridge loans, the Company considers data such as; loan origination information, borrower credit information, loan servicing data (as available), forward interest rates, general economic conditions, home price index forecasts, and monthly valuations of the underlying properties. The assumptions considered most significant to the determination of the fair value of the Company's mortgage loans include market discount rates, projected of default rates, projected prepayment rates, and loss severity. Projections of default and prepayment rates are impacted by other variables such as re-performance rates and timeline to liquidation. The Company uses loan level data and macro-economic inputs to generate loss adjusted cash flows and other information in determining the fair

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value of its mortgage loans, and with the inherent uncertainty of such valuation, the fair values established for whole loans and bridge loans held by the Company may differ from the fair values that would have been established if a readily available market existed for these mortgage loans, as such, the Company classifies its residential whole loans and residential bridge loans as Level III.

Mortgage-backed securities and other securities

Fair values for the Company’s mortgage-backed securities are based upon prices obtained from independent third party pricing services. The valuation methodology of the third party pricing services incorporates market information and commonly used market pricing methods, which include actual trades and quoted prices for similar or identical instruments, and are designed to produce a pricing process that is responsive to market conditions. Depending on the type of asset and the underlying collateral, the primary inputs to the model include; yields for TBAs, Agency RMBS, the U.S. Treasury market and floating rate indices such as LIBOR and SOFR, the Constant Maturity Treasury rate, and the prime rate as a benchmark yield. In addition, the model may incorporate the current weighted average maturity and additional pool level information such as prepayment speeds, default frequencies and default severities, if applicable. When the third party pricing service cannot adequately price a particular security, the Company utilizes a broker’s quote which is reviewed for reasonableness by the Manager’s pricing group.

In determining the proper fair value hierarchy or level, the Company considers the amount of available observable market data for each security. For Agency IOs, Non-Agency RMBS, CMBS and other securities, to determine whether a security should be a Level II, the securities are grouped by security type and the Manager reviews the internal trade history, for the quarter, for each security type. If there is sufficient trade data above a predetermined threshold of a security type, the manager determines it has sufficient observable market data and the security will be categorized as a Level II; otherwise, the

security is classified as a Level III.

Commercial loans

Values for the Company's commercial loans are based upon prices obtained from an independent third party pricing service that specializes in loan valuation, utilizing a valuation model that is calibrated to recent loan trade executions. Their valuation methodology incorporates commonly used market pricing methods, tuned to consider the most significant inputs and weighted assumptions to determine the fair value of the Company's commercial loans. The assumptions made by the independent third party pricing vendor include market discount rates, projected default rates, projected prepayment rates, and loss severity, along with more definable underwriting assumptions, such as; credit documentation, initial loan to value of collateral, geographic diversity, and realized prepayment speeds. The Manager reviews the analysis provided by the pricing service, with a primary focus on the rationale for weighted valuation probabilities relating to unobservable inputs, such as the market discount rate and weighted average life. Due to inherent uncertainty of such valuations, the fair values established for commercial loans held by the Company may differ from the fair values that would have been established if a larger, more actively traded market existed for these individual loans. For all securities and loans, if neither a pricing service, nor broker quote valuations are available, the Company determines the fair value using internal models of the Manager, which are reviewed and approved by the Pricing Committee of the Manager. Accordingly, the Company's commercial loans are all classified as Level III.

Securitized commercial loans

Values for the Company’s securitized commercial loans are based on the collateralized financing entity ("CFE") valuation methodology. Since there is an extremely limited market for the securitized commercial loans, the Company determined the securitized debt is more actively traded and therefore was more observable. Due to the inherent uncertainty of the securitized commercial loans' valuation, the Company classifies its securitized commercial loans as Level III.

Securitized debt

Values for the Company's securitized debt that the Company elected the fair value option are based upon prices obtained from independent third party pricing services. The valuation methodology of the third-party pricing services incorporates market information and commonly used market pricing methods, which include actual trades and quoted prices for similar or identical instruments. In determining the proper fair value hierarchy or level, the Company considers the amount of available observable market data for each security. Since the securitized debt represents traded debt securities, the Manager's

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pricing team reviews the trade activity during the quarter for each security to determine the appropriate level within the fair value hierarchy. If there is sufficient trade data above a predetermined volume threshold, the Manager determines it has sufficient observable market data and the debt security will be categorized as a Level II. If there is not sufficient observable market data the debt security will be categorized as a Level III.

Derivatives

Values for the Company's derivatives are based upon prices from third party pricing services, whose pricing is subject to review by the Manager’s pricing committee. In valuing its over-the-counter interest rate derivatives, such as swaps and swaptions, its currency derivatives, such as swaps, forwards, and credit derivatives such as total return swaps, the Company considers the creditworthiness of both the Company and its counterparties, along with collateral provisions contained in each derivative agreement, from the perspective of both the Company and its counterparties. No credit valuation adjustment was made in determining the fair value of interest rate derivatives and/or futures contracts for the periods ended September 30, 2022 and December 31, 2021. See Note 8 for more information.

Third party pricing data review

The Company performs quarterly reviews of the independent third party pricing data. These reviews may include a review of the valuation methodology used by third party valuation specialists and review of the daily change in the prices provided by the independent pricing vendor which exceed established tolerances or comparisons to executed transaction prices, utilizing the Manager’s pricing group. The Manager’s pricing group, which functions independently from its portfolio management personnel, reviews the price differences or changes in price by comparing the vendor price to alternate sources including other independent pricing services or broker quotations. If the price change or difference cannot be corroborated, the Manager’s pricing group consults with the portfolio management team for market color in reviewing such pricing data as warranted. To the extent that the Manager has information, typically in the form of broker quotations that would indicate that a price received from the independent pricing service is outside of a tolerance range, the Manager generally challenges the independent pricing service price.

The following tables present a summary of the available quantitative information about the significant unobservable inputs used in the fair value measurement of financial instruments for which the Company has utilized Level III inputs to determine fair value as of September 30, 2022 and December 31, 2021 (dollars in thousands):


	Fair Value at				Range
	September 30, 2022		Valuation Technique	Unobservable Input	Minimum		Maximum		Weighted Average






Residential whole loans	$	1,099,625	Discounted Cash Flow	Market Discount Rate	6.4	%	7.6	%	7.1	%
				Weighted Average Life	1.8		10.6		5.7
Residential bridge loans	$	5,120	Discounted Cash Flow	Market Discount Rate	12.9	%	35.7	%	20.7	%
				Weighted Average Life	0.4		4.1		2.1



Commercial loans	$	90,103	Discounted Cash Flow	Market Discount Rate	2.3	%	9.1	%	8.0	%
				Weighted Average Life	0.2		7.1		2.0

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	Fair Value at				Range
	December 31, 2021		Valuation Technique	Unobservable Input	Minimum		Maximum			Weighted Average






Residential whole loans	$	1,023,502	Discounted Cash Flow	Market Discount Rate	2.6	%	7.5	%		3.5	%
				Weighted Average Life	1.4		8.9			3.1
Residential bridge loans	$	5,428	Discounted Cash Flow	Market Discount Rate	9.8	%	23.1	%	(1)	17.2	%
				Weighted Average Life	0.3		3.6			2.4

Commercial loans	$	130,572	Discounted Cash Flow	Market Discount Rate	4.5	%	21.7	%		9.3	%
				Weighted Average Life	0.5		2.8			1.2

The following tables present additional information about the Company’s financial instruments which are measured at fair value on a recurring basis for which the Company has utilized Level III inputs to determine fair value:


	Three months ended September 30, 2022
$ in thousands	Agency MBS		Non-Agency MBS		Residential Whole Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loans		Securitized debt
Beginning balance	$	785	$	1,181	$	1,195,853	$	5,095	$	128,421	$	1,243,371	$	14,919
Transfers into Level III from Level II	—		—		—		—		—		—		—
Transfers from Level III into Level II	—		—		—		—		—		—		—

Sales and settlements	—		—		(11,735)		—		—		—		—



Loan modifications / capitalized interest	—		—		4		—		—		—		—
Principal repayments	—		—		(37,036)		—		(20,588)		—		—
Total net gains / losses included in net income
Realized gains/(losses), net on assets	—		—		(33)		—		—		—		—


Unrealized gains/(losses), net on assets(1)	(63)		88		(46,545)		25		(17,730)		(78,046)		—
Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		(3,863)
Premium and discount amortization, net	(2)		(96)		(883)		—		—		6,589		(1,170)
Ending balance	$	720	$	1,173	$	1,099,625	$	5,120	$	90,103	$	1,171,914	$	9,886

Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(63)	$	88	$	(35,855)	$	25	$	(17,730)	$	(78,046)	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	3,863

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	Three months ended September 30, 2021
$ in thousands	Agency MBS		Non-Agency MBS		Residential Whole Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt
Beginning balance	$	1,501	$	11,803	$	801,503	$	7,471	$	267,203	$	1,595,077	$	14,937
Transfers into Level III from Level II	—		5,683		—		—		—		—		—
Transfers from Level III into Level II	—		—		—		—		—		—		—
Purchases	—		—		232,993		—		—		—		—

Transfers to REO	—		—		—		(68)		(30,000)		—		—


Loan modifications / capitalized interest	—		—		34		—		—		—		—
Principal repayments	—		—		(80,607)		(1,575)		(102,969)		(214,545)		—
Total net gains / losses included in net income
Realized gains/(losses), net on assets	—		—		—		(3)		—		—		—


Unrealized gains/(losses), net on assets(1)	(93)		(399)		(3,074)		154		(5,495)		(9,617)		—
Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		1,103
Premium and discount amortization, net	(66)		(18)		(1,432)		(19)		27		6,090		(1,120)
Ending balance	$	1,342	$	17,069	$	949,417	$	5,960	$	128,766	$	1,377,005	$	14,920

Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(93)	$	(399)	$	(1,055)	$	36	$	(5,479)	$	(12,336)	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	(1,121)


	Nine months ended September 30, 2022
$ in thousands	Agency MBS		Non-Agency MBS		Residential Whole-Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt
Beginning balance	$	1,172	$	7,845	$	1,023,502	$	5,428	$	130,572	$	1,355,808	$	14,919
Transfers into Level III from Level II	—		—		—		—		—		—		—
Transfers from Level III into Level II	—		(5,437)		—		—		—		—		—
Purchases	—		—		402,650		—		—		—		—
Sales and settlements	—		—		(11,362)		—		—		—		—



Loan modifications / capitalized interest	—		—		79		—		—		—		—
Principal repayments	—		—		(184,683)		(250)		(20,593)		—		—
Total net gains / losses included in net income
Realized gains/(losses), net on assets	—		—		(32)		—		—		—		—


Unrealized gains/(losses), net on assets(1)	(329)		(998)		(125,943)		(58)		(19,876)		(203,828)		—
Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		(2,064)
Premium and discount amortization, net	(123)		(237)		(4,586)		—		—		19,934		(2,969)
Ending balance	$	720	$	1,173	$	1,099,625	$	5,120	$	90,103	$	1,171,914	$	9,886

Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(329)	$	(644)	$	(107,944)	$	17	$	(19,884)	$	(203,828)	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	2,064

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	Nine months ended September 30, 2021
$ in thousands	Agency MBS		Non-Agency MBS		Other Securities		Residential Whole-Loans		Residential Bridge Loans		Commercial Loans		Securitized commercial loan		Securitized debt
Beginning balance	$	1,708	$	34,369	$	8,593	$	1,008,782	$	12,813	$	310,523	$	1,605,335	$	15,418
Transfers into Level III from Level II	—		5,683		—		—		—		—		—		—
Transfers from Level III into Level II	—		(23,370)		(10,306)		—		—		—		—		—
Purchases	—		—		—		241,417		—		—		—		—

Transfers to REO	—		—		—		—		(752)		(30,000)		—		—


Loan modifications / capitalized interest	—		—		—		311		—		—		—		—
Principal repayments	—		(256)		—		(307,543)		(6,542)		(103,272)		(354,202)		—
Total net gains / losses included in net income
Realized gains/(losses), net on assets	—		—		—		—		(155)		—		—		—


Unrealized gains/(losses), net on assets(1)	(109)		868		1,657		13,160		617		(48,630)		107,423		—
Unrealized (gains)/losses, net on liabilities(2)	—		—		—		—		—		—		—		2,810
Premium and discount amortization, net	(257)		(225)		56		(6,710)		(21)		145		18,449		(3,308)
Ending balance	$	1,342	$	17,069	$	—	$	949,417	$	5,960	$	128,766	$	1,377,005	$	14,920

Unrealized gains/(losses), net on assets held at the end of the period(1)	$	(109)	$	(1,434)	$	—	$	13,702	$	(60)	$	(48,630)	$	92,424	$	—
Unrealized gains/(losses), net on liabilities held at the end of the period(2)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	(2,357)

(1)Gains and losses are included in "Unrealized loss, net" in the Consolidated Statements of Operations.

(2)Gains and losses on securitized debt are included in "Unrealized loss, net" in the Consolidated Statements of Operations.

Transfers into the Level 3 category of the fair value hierarchy occur due to the above segmented classes of investments exhibiting indications of reduced levels of market transparency, including changes in observable transactions or executable quotes involving these investments or similar classes of investments. Changes in these indications could impact price transparency, and thereby cause a change in level designations. The Company did not have transfers between either Level I and Level II or Level I and Level III for the three and nine months ended September 30, 2022 and September 30, 2021.

Other Fair Value Disclosures

The Company's repurchase agreement borrowings, convertible senior unsecured notes, and securitized debt from the Arroyo 2019-2 and Arroyo 2020-1 trusts are not carried at fair value in the consolidated financial statements.

Borrowings under repurchase agreements

The fair values of the Company's repurchase agreements approximates the carrying value due to the floating interest rates that are based on an index plus a spread, which is typically consistent with those demanded in the market and the short-term maturities of generally one year or less. The Company's repurchase agreements are classified as Level II.

Convertible senior unsecured notes

The fair values of the convertible senior unsecured notes are based on quoted market prices. Accordingly, the Company's convertible senior unsecured notes were classified as Level I.

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The following table presents the carrying value and estimated fair value of the Company’s convertible senior unsecured notes and securitized debt that are not carried at fair value as of September 30, 2022 and December 31, 2021 in the consolidated financial statements (dollars in thousands):


	September 30, 2022				December 31, 2021
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value




Liabilities
Convertible senior unsecured notes	$	109,162	$	101,548	$	119,168	$	122,133
Securitized debt(1)	355,960		332,574		524,649		528,046
Total	$	465,122	$	434,122	$	643,817	$	650,179

(1) Carrying value excludes $4.5 million and $5.5 million of deferred financing costs as of September 30, 2022 and December 31, 2021, respectively.

"Due from counterparties" in the Company’s Consolidated Balance Sheets are reflected at cost which approximates fair value.

Note 4 – Mortgage-Backed Securities and other securities

The following tables present certain information about the Company’s investment portfolio at September 30, 2022 and December 31, 2021 (dollars in thousands):


	September 30, 2022
	Principal Balance		Unamortized Premium (Discount), net		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value		Net Weighted Average Coupon





Agency RMBS Interest-Only Strips (1) (2)	N/A		N/A		$	56	$	—	$	(4)	$	52	—	%
Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)	N/A		N/A		N/A		N/A		N/A		668		0.7	%

Total Agency MBS	—		—		56		—		(4)		720		0.6	%

Non-Agency RMBS	45,569		(14,848)		30,721		1,568		(3,776)		28,513		4.2	%
Non-Agency RMBS Interest- Only Strips (1)	N/A		N/A		5,307		—		(4,134)		1,173		0.3	%

Subtotal Non-Agency RMBS	45,569		(14,848)		36,028		1,568		(7,910)		29,686		1.1	%
Non-Agency CMBS	110,115		(2,993)		107,122		729		(19,029)		88,822		7.4	%
Total Non-Agency MBS	155,684		(17,841)		143,150		2,297		(26,939)		118,508		3.4	%

Other securities (3)	46,493		(8,510)		42,942		1,216		(5,848)		38,310		7.1	%
Total	$	202,177	$	(26,351)	$	186,148	$	3,513	$	(32,791)	$	157,538	3.8	%

Table of Contents


	December 31, 2021
	Principal Balance		Unamortized Premium (Discount), net		Amortized Cost		Unrealized Gain		Unrealized Loss		Estimated Fair Value		Net Weighted Average Coupon(4)






Agency RMBS Interest-Only Strips (1)	N/A		N/A		$	59	$	55	$	—	$	114	1.3	%
Agency RMBS Interest-Only Strips, accounted for as derivatives (1) (2)	N/A		N/A		N/A		N/A		N/A		1,058		1.3	%

Total Agency MBS	—		—		59		55		—		1,172		1.3	%

Non-Agency RMBS	36,147		(13,936)		22,211		3,476		(35)		25,652		4.3	%
Non-Agency RMBS Interest- Only Strips (1)	N/A		N/A		5,608		—		(3,491)		2,117		0.3	%

Subtotal Non-Agency RMBS	36,147		(13,936)		27,819		3,476		(3,526)		27,769		1.0	%
Non-Agency CMBS	179,619		(13,088)		166,531		1,543		(62,716)		105,358		5.4	%
Total Non-Agency MBS	215,766		(27,024)		194,350		5,019		(66,242)		133,127		3.0	%

Other securities (3)	51,159		(8,229)		47,652		4,209		(213)		51,648		5.6	%
Total	$	266,925	$	(35,253)	$	242,061	$	9,283	$	(66,455)	$	185,947	3.2	%

(1) IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on interest-only class of securities. At September 30, 2022, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs, and IIO and Agency RMBS IOs and IIOs, accounted for as derivatives was $2.5 million, $146.7 million, and $13.8 million, respectively. At December 31, 2021, the notional balance for Agency RMBS IOs and IIOs, Non-Agency RMBS IOs and IIOs, and Agency RMBS IOs and IIOs, accounted for as derivatives was $2.9 million, $181.0 million, and $16.8 million, respectively.

(2) Interest on these securities is reported as a component of "Gain on derivative instruments, net" in the Consolidated Statements of Operations.

(3) Other securities include residual interests in ABS which have no principal balance and an amortized cost of approximately $5.0 million and $4.7 million, as of September 30, 2022 and December 31, 2021, respectively.

(4) The calculation of the weighted average coupon rate includes the weighted average coupon rates of IOs and IIOs accounted for as derivatives using their notional amounts.

As of September 30, 2022 and December 31, 2021, the weighted average expected remaining term of the MBS and other securities investment portfolio was 7.2 years and 5.9 years, respectively.

Table of Contents

The following tables present the fair value and contractual maturities of the Company’s investment securities at September 30, 2022 and December 31, 2021 (dollars in thousands):


	September 30, 2022
	< or equal to 10 years		> 10 years and < or equal to 20 years		> 20 years and < or equal to 30 years		> 30 years		Total




Agency RMBS Interest-Only Strips	$	—	$	—	$	52	$	—	$	52
Agency RMBS Interest-Only Strips accounted for as derivatives	—		668		—		—		668
Subtotal Agency	—		668		52		—		720

Non-Agency CMBS	66,003		12,254		10,565		—		88,822
Non-Agency RMBS	—		—		9,273		19,240		28,513
Non-Agency RMBS Interest- Only Strips	—		—		199		974		1,173

Subtotal Non-Agency	66,003		12,254		20,037		20,214		118,508

Other securities	6,526		3,869		19,684		8,231		38,310
Total	$	72,529	$	16,791	$	39,773	$	28,445	$	157,538


	December 31, 2021
	< or equal to 10 years		> 10 years and < or equal to 20 years		> 20 years and < or equal to 30 years		> 30 years		Total




Agency RMBS Interest-Only Strips	$	—	$	—	$	114	$	—	$	114
Agency RMBS Interest-Only Strips accounted for as derivatives	—		1,058		—		—		1,058
Subtotal Agency	—		1,058		114		—		1,172

Non-Agency CMBS	66,384		17,644		21,171		159		105,358
Non-Agency RMBS	—		—		10,282		15,370		25,652
Non-Agency RMBS Interest- Only Strips	—		—		106		2,011		2,117

Subtotal Non-Agency	66,384		17,644		31,559		17,540		133,127

Other securities	9,255		4,266		25,653		12,474		51,648
Total	$	75,639	$	22,968	$	57,326	$	30,014	$	185,947

Table of Contents

The following tables present the gross unrealized losses and estimated fair value of the Company’s MBS and other securities by length of time that such securities have been in a continuous unrealized loss position at September 30, 2022 and December 31, 2021 (dollars in thousands):


	September 30, 2022
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities

Agency RMBS Interest-Only Strips	$	52	$	(4)	1	$	—	$	—	—	$	52	$	(4)	1

Subtotal Agency	52		(4)		1	—		—		—	52		(4)		1

Non-Agency CMBS	$	—	$	—	—	$	79,850	$	(19,029)	11	$	79,850	$	(19,029)	11
Non-Agency RMBS	15,141		(3,721)		7	169		(55)		1	15,310		(3,776)		8
Non-Agency RMBS Interest-Only Strips	—		—		—	1,172		(4,134)		4	1,172		(4,134)		4
Subtotal Non-Agency	15,141		(3,721)		7	81,191		(23,218)		16	96,332		(26,939)		23

Other securities	24,720		(5,327)		4	3,869		(521)		2	28,589		(5,848)		6
Total	$	39,913	$	(9,052)	12	$	85,060	$	(23,739)	18	$	124,973	$	(32,791)	30


	December 31, 2021
	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities	Fair Value		Unrealized Losses		Number of Securities





Non-Agency CMBS	$	—	$	—	—	$	96,080	$	(62,716)	16	$	96,080	$	(62,716)	16
Non-Agency RMBS	—		—		—	201		(35)		1	201		(35)		1
Non-Agency RMBS Interest-Only Strips	—		—		—	2,117		(3,491)		4	2,117		(3,491)		4
Subtotal Non-Agency	—		—		—	98,398		(66,242)		21	98,398		(66,242)		21

Other securities	—		—		—	9,022		(213)		4	9,022		(213)		4
Total	$	—	$	—	—	$	107,420	$	(66,455)	25	$	107,420	$	(66,455)	25

The following tables present components of interest income on the Company’s MBS and other securities for the three and nine months ended September 30, 2022 and September 30, 2021, respectively (dollars in thousands):


	Three months ended September 30, 2022						Three months ended September 30, 2021
	Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Accretion		Interest Income		Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Accretion		Interest Income

Agency RMBS	$	—	$	2	$	2	$	11	$	(7)	$	4
Non-Agency CMBS	1,949		387		2,336		2,621		1,669		4,290
Non-Agency RMBS	446		26		472		609		(240)		369
Other securities	860		185		1,045		1,043		(270)		773
Total	$	3,255	$	600	$	3,855	$	4,284	$	1,152	$	5,436

Table of Contents


	Nine months ended September 30, 2022						Nine months ended September 30, 2021
	Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Accretion		Interest Income		Coupon Interest		Net (Premium Amortization/Amortization Basis) Discount Accretion		Interest Income

Agency RMBS	$	13	$	(4)	$	9	$	38	$	(26)	$	12
Non-Agency CMBS	7,050		386		7,436		7,171		6,230		13,401
Non-Agency RMBS	1,804		(141)		1,663		1,762		(704)		1,058
Other securities	2,515		223		2,738		3,717		(1,214)		2,503
Total	$	11,382	$	464	$	11,846	$	12,688	$	4,286	$	16,974

There were no sales of mortgage-backed securities during the three months ended September 30, 2022.

The following tables present the sales and realized gain (loss) of the Company’s MBS and other securities for the three and nine months ended September 30, 2022 and September 30, 2021, respectively (dollars in thousands):

Three months ended September 30, 2022

Three months ended September 30, 2021

Proceeds

Gross Gains

Gross Losses

Net Gain (Loss)

Proceeds

Gross Gains

Gross Losses

Net Gain (Loss)

Non-Agency CMBS

—

Non-Agency RMBS

—

Other securities

—

Total

—


	Nine months ended September 30, 2022								Nine months ended September 30, 2021
	Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds		Gross Gains		Gross Losses		Net Gain (Loss)


Non-Agency CMBS(1)	$	10,152	$	—	$	(43,934)	$	(43,934)	$	—	$	—	$	(5,929)	$	(5,929)
Non-Agency RMBS	27,729		255		(1,425)		(1,170)		—		—		—		—
Other securities	4,406		—		(478)		(478)		—		—		—		—
Total	$	42,287	$	255	$	(45,837)	$	(45,582)	$	—	$	—	$	(5,929)	$	(5,929)

(1) The realized loss for the nine months ended September 30, 2021 was attributable to a legacy Non-Agency CMBS bond that factored down to zero from a cash shortfall in the securitization.

Unconsolidated CMBS VIEs

The Company’s economic interests held in unconsolidated CMBS VIEs are limited in nature to those of a passive holder of CMBS issued by securitization trusts. The Company was not involved in the design or creation of the securitization trusts. The Company evaluates its CMBS holdings, for potential consolidation of the securitized trust, in which it owns the most subordinate tranche or a portion of the controlling class. As of September 30, 2022 and December 31, 2021, the Company held two and five variable interests in unconsolidated CMBS VIEs, respectively, in which it either owned the most subordinate class or a portion of the controlling class. The Company determined it was not the primary beneficiary and accordingly, the CMBS VIEs were not consolidated in the Company’s consolidated financial statements. As of September 30, 2022 and December 31, 2021, the Company’s maximum exposure to loss from these variable interests did not exceed the carrying value of these investments of $17.1 million and $26.5 million, respectively. These investments are classified in "Non-Agency mortgage-backed securities, at fair value" in the Company’s Consolidated Balance Sheets. Further, as of September 30, 2022 and December 31, 2021, the Company did not guarantee any obligations of unconsolidated entities or enter into any commitment or intent to provide funding to any such entities.

Table of Contents

Note 5 — Residential Whole Loans and Bridge Loans

Residential whole-loan trusts

Revolving Mortgage Investment Trust 2015-1QR2

Revolving Mortgage Investment Trust 2015-1QR2 ("RMI 2015 Trust") was formed to acquire Non-QM residential whole loans. RMI 2015 Trust issued a trust certificate that is wholly-owned by the Company and represents the entire beneficial interest in pools of Non-QM residential whole loans held by the trust. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company classifies the underlying Non-QM residential whole loans owned by the trust in "Residential whole loans, at fair value" in the Consolidated Balance Sheets and has eliminated the intercompany trust certificate in consolidation.

As of September 30, 2022 and December 31, 2021, the RMI 2015 Trust owned eight and 770 Non-QM residential whole loans with a fair value of $5.8 million and $451.7 million, respectively. The loans are financed under the Company's residential whole loan facility, and the Company holds the financing liability outside the RMI 2015 Trust. Refer to Note 7 - Financings for details.

Arroyo Mortgage Trust 2019-2

In May 2019, the Company formed Arroyo Mortgage Trust 2019-2 ("Arroyo Trust 2019"), a wholly-owned subsidiary of the Company, to complete its first residential mortgage-backed securitization comprised of $945.5 million of Non-QM residential whole loans. The Arroyo Trust 2019 issued $919.0 million of mortgage-backed notes and retained all the subordinate and residual debt securities ("Owner Certificates"), which includes the required 5% eligible risk retention. Refer to Note 7 - "Financings" for details. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company classifies the underlying Non-QM residential whole loans in "Residential whole loans, at fair value" in the Consolidated Balance Sheets and eliminated the intercompany Owner Certificates in consolidation.

As of September 30, 2022 and December 31, 2021, the Arroyo Trust 2019 owned 793 and 1,042 Non-QM residential whole loans with a fair value of $241.2 million and $374.3 million, respectively.

Arroyo Mortgage Trust 2020-1

In June 2020, the Company formed Arroyo Mortgage Trust 2020-1 ("Arroyo Trust 2020"), a wholly-owned subsidiary of the Company, to complete its second residential mortgage-backed securitization comprised of $355.8 million of Non-QM residential whole loans. The Arroyo Trust 2020 issued $341.7 million of mortgage-backed notes and retained all the subordinate and residual debt securities, which includes the required 5% eligible risk retention. Refer to Note 7 - "Financings" for details. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company classifies the underlying Non-QM residential whole loans in "Residential whole loans, at fair value" in the Consolidated Balance Sheets and eliminated the intercompany Owner Certificates.

As of September 30, 2022, and December 31, 2021, the Arroyo Trust 2020 owned 440 and 543 Non-QM residential whole loans with a fair value of $135.5 million and $195.7 million, respectively.

Arroyo Mortgage Trust 2022-1

In February 2022, the Company formed Arroyo Mortgage Trust 2022-1 ("Arroyo Trust 2022-1"), a wholly-owned subsidiary of the Company, to complete its third residential mortgage-backed securitization comprised of $432.0 million of Non-QM residential whole loans. The Arroyo Trust 2022-1 issued $398.9 million of mortgage-backed notes and retained all the subordinate and residual debt securities, which includes the required 5% eligible risk retention. Refer to Note 7 - "Financings" for details. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company classifies the underlying Non-QM residential whole loans in "Residential whole loans, at fair value" in the Consolidated Balance Sheets and eliminated the intercompany Owners Certificates.

Table of Contents

As of September 30, 2022, the Arroyo Trust 2022-1 owned 711 Non-QM residential whole loans with a fair value of $350.1 million. The Company has elected the fair value option for the securitized debt. The fair values for the Company’s Non-QM loans held in the Arroyo Trust 2022-1 are measured using the fair value of the securitized debt based on the CFE valuation methodology. The Company determined that the securitized debt is more actively traded and, therefore, more observable.

Arroyo Mortgage Trust 2022-2

In July 2022, the Company formed Arroyo Mortgage Trust 2022-2 ("Arroyo Trust 2022-2"), a wholly-owned subsidiary of the Company, to complete its fourth residential mortgage-backed securitization comprised of $402.2 million of Non-QM residential whole loans. The Arroyo Trust 2022-2 issued $351.9 million of mortgage-backed notes and retained all the subordinate and residual debt securities, which includes the required 5% eligible risk retention. Refer to Note 7 - "Financings" for details. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company classifies the underlying Non-QM residential whole loans in "Residential whole loans, at fair value" in the Consolidated Balance Sheets and eliminated the intercompany Owners Certificates.

As of September 30, 2022, the Arroyo Trust 2022-2 owned 1,038 Non-QM residential whole loans with a fair value of $365.6 million. The Company has elected the fair value option for the securitized debt. The fair values for the Company’s Non-QM loans held in the Arroyo Trust 2022-2 are measured using the fair value of the securitized debt based on the CFE valuation methodology. The Company determined that the securitized debt is more actively traded and, therefore, more observable.

Residential bridge loan trust

In February 2017, the Company formed Revolving Mortgage Investment Trust 2017-BRQ1 ("RMI 2017 Trust") to acquire Residential Bridge Loans. RMI 2017 Trust issued a trust certificate that is wholly-owned by the Company and represents the entire beneficial interest in pools of residential bridge loans and certain residential whole loans held by the trust. Residential bridge loans are mortgage loans secured by residences, typically short-term. The Company consolidates the trust since it met the definition of a VIE and the Company determined that it was the primary beneficiary. The Company has eliminated the intercompany trust certificate in consolidation.

The Company is no longer allocating capital to residential bridge loans. As of September 30, 2022, and December 31, 2021, there were seven and eight remaining residential bridge loans in the RMI 2017 Trust with a fair value of $5.1 million and $5.2 million, respectively. As of September 30, 2022, and December 31, 2021, the trust also owned five and six investor fixed rate residential mortgages with a fair value of $1.4 million and $1.7 million, respectively, which are included in "Residential whole loans" in the Consolidated Balance Sheets.

Consolidated residential whole loan and residential bridge loan trusts

The following table presents a summary of the assets and liabilities of the consolidated residential whole loan trusts and residential bridge loan trust included in the Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (dollars in thousands):

Table of Contents


	September 30, 2022		December 31, 2021
Cash and cash equivalents	$	236	$	266
Residential whole loans, at fair value ($1,099,625 and $1,023,502 pledged as collateral, at fair value, respectively)	1,099,625		1,023,502
Residential bridge loans, at fair value ($5,120 and $5,207 pledged as collateral, at fair value, respectively)	5,120		5,207

Investment related receivable	8,674		22,087
Interest receivable	5,066		5,282

Total assets	$	1,118,721	$	1,056,344
Securitized debt, net	$	998,129	$	519,118
Interest payable	3,214		1,316
Accounts payable and accrued expenses	60		69

Total liabilities	$	1,001,403	$	520,503

The residential whole loans held by the consolidated Arroyo Trust 2019, Arroyo Trust 2020, Arroyo Trust 2022-1, and Arroyo Trust 2022-2 are held solely to satisfy the liabilities of each respective trust, and has no recourse to the general credit of the Company. The Company is not contractually required and has not provided any additional financial support to the trusts for the periods ended September 30, 2022 and December 31, 2021.

The following table presents the components of the fair value of residential whole loans and residential bridge loans as of September 30, 2022 and December 31, 2021 (dollars in thousands):


	Residential whole loans, at Fair Value				Residential bridge loans, at Fair Value
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Principal balance	$	1,190,326	$	989,143	$	5,585	$	5,834
Unamortized premium	31,789		31,070		—		—
Unamortized discount	(1,634)		(1,337)		—		—
Amortized cost	1,220,481		1,018,876		5,585		5,834
Gross unrealized gains	700		14,190		9		78
Gross unrealized losses	(121,556)		(9,564)		(474)		(484)
Fair value	$	1,099,625	$	1,023,502	$	5,120	$	5,428

Residential whole loans

The residential whole loans have low LTV's and are comprised of 2,990 Non-QM adjustable rate mortgages and five investor fixed rate residential mortgages. The following tables present certain information about the Company’s residential whole loan investment portfolio at September 30, 2022 and December 31, 2021 (dollars in thousands):

Table of Contents


September 30, 2022
				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)	Contractual Maturity (years)	Coupon Rate
2.01% – 3.00%	40	$	22,510	66.3	%	758	9.2	28.5	2.9	%
3.01% – 4.00%	431	224,994		65.7	%	758	7.3	28.5	3.7	%
4.01% – 5.00%	1,372	467,195		64.0	%	749	5.8	26.2	4.6	%
5.01% – 6.00%	902	366,708		65.8	%	742	5.1	27.1	5.4	%
6.01% – 7.00%	235	103,067		70.3	%	742	3.9	28.8	6.4	%
7.01% - 8.00%	15	5,852		75.1	%	731	3.2	29.4	7.4	%

Total	2,995	$	1,190,326	65.5	%	748	5.8	27.2	4.8	%

(1)The original FICO score is not available for 236 loans with a principal balance of approximately $77.7 million at September 30, 2022. The Company has excluded these loans from the weighted average computations.


December 31, 2021
				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)(2)	Contractual Maturity (years)	Coupon Rate
2.01% – 3.00%	27	$	15,640	65.1	%	757	5.3	28.8	2.8	%
3.01% – 4.00%	496	244,022		63.7	%	756	3.3	28.0	3.7	%
4.01% – 5.00%	1,051	413,451		65.1	%	747	2.9	28.2	4.7	%
5.01% – 6.00%	757	305,344		64.9	%	738	3.0	26.8	5.4	%
6.01% – 7.00%	28	10,181		67.9	%	721	3.1	25.8	6.3	%
7.01% - 8.00%	2	505		73.2	%	753	4.5	26.8	7.1	%
Total	2,361	$	989,143	64.8	%	746	3.1	27.7	4.6	%

(1)The original FICO score is not available for 230 loans with a principal balance of approximately $74.3 million at December 31, 2021. The Company has excluded these loans from the weighted average computations.

The following table presents geographic concentrations by U.S. state in which the collateral securing the Company’s residential whole loans are located as of September 30, 2022 and December 31, 2021 (dollars in thousands):


September 30, 2022					December 31, 2021
State	State Concentration		Principal Balance		State	State Concentration		Principal Balance
California	66.6	%	$	793,123	California	73.9	%	$	730,771
New York	9.4	%	112,329		New York	11.6	%	114,625
Texas	4.8	%	56,856		Florida	2.7	%	26,293
Florida	4.1	%	48,959		Georgia	2.5	%	25,106
Georgia	3.6	%	42,347		Texas	1.9	%	19,062
Other	11.5	%	136,712		Other	7.4	%	73,286
Total	100.0	%	$	1,190,326	Total	100.0	%	$	989,143

Residential bridge loans

The Company is no longer allocating capital to residential bridge loans. The following tables present certain information about the remaining residential bridge loans which are non-performing in the Company's investment portfolio at September 30, 2022 and December 31, 2021 (dollars in thousands):

Table of Contents


September 30, 2022
c				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)(1)	Coupon Rate


7.01% – 9.00%	3	$	2,946	70.4	%	0.0	8.8	%
9.01% – 11.00%	2	2,144		78.1	%	0.0	10.4	%
11.01% – 13.00%	2	495		69.7	%	0.0	11.4	%






Total	7	$	5,585	73.3	%	0.0	9.7	%


December 31, 2021
				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)(1)	Coupon Rate

7.01% – 9.00%	3	$	2,946	70.4	%	0.0	8.8	%
9.01% – 11.00%	4	2,393		76.7	%	0.0	10.4	%
11.01% – 13.00%	2	495		69.7	%	0.0	11.4	%





Total	9	$	5,834	72.9	%	0.0	9.7	%

(1) Non-performing loans that are past their maturity date are excluded from the calculation of the weighted average contractual maturity. The weighted average contractual maturity for these loans is zero.

The following table presents geographic concentrations by U.S. state in which the collateral securing the Company’s residential bridge loans are located as of September 30, 2022 and December 31, 2021 (dollars in thousands):


September 30, 2022					December 31, 2021
State	Concentration		Principal Balance		State	Concentration		Principal Balance
New York	47.1	%	$	2,631	New York	45.1	%	$	2,631
California	31.4	%	1,754		California	30.1	%	1,754
Florida	20.1	%	1,125		Florida	19.3	%	1,125
New Jersey	1.4	%	75		New Jersey	3.7	%	219
Total	100.0	%	$	5,585	Pennsylvania	1.8	%	105

					Total	100.0	%	$	5,834

Non-performing loans

The following table presents the aging of the residential whole loans and bridge loans as of September 30, 2022 (dollars in thousands):


	Residential whole loans(1)					Bridge loans
	No of Loans	Principal		Fair Value		No of Loans	Principal		Fair Value
Current(1)	2,985	$	1,184,619	$	1,094,291	—	$	—	$	—
1-30 days	3	2,448		2,324		1	849		858
31-60 days	—	—		—		—	—		—
61-90 days	—	—		—		—	—		—
90+ days	7	3,259		3,010		6	4,736		4,262
Total	2,995	$	1,190,326	$	1,099,625	7	$	5,585	$	5,120

(1) As of September 30, 2022, there were no loans in forbearance.

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Residential whole loans

As of September 30, 2022, there were seven residential whole loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $3.3 million and a fair value of $3.0 million. These nonperforming loans represent approximately 0.3% of the total outstanding principal balance. These loans are collateral dependent with a weighted average original LTV of 64.5%.

As of December 31, 2021, there were 20 residential whole loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $12.2 million and a fair value of approximately $12.0 million. These nonperforming loans represent approximately 1.2% of the total outstanding principal balance. These loans are collateral dependent with a weighted average original LTV of 60.0%.

These loans are carried at fair value, and accordingly no allowance for credit losses or credit loss expense was recorded, since the adjustment for credit losses, if any, would be reflected in the fair value of these loans as a component of "Unrealized loss, net" in the Consolidated Statements of Operations. The Company stopped accruing interest income for these loans when they became contractually 90 days delinquent.

Residential bridge loans

As of September 30, 2022, the Company had seven remaining residential bridge loans in the portfolio. Of these, six were in non-accrual status with an unpaid principal balance of approximately $4.7 million and a fair value of $4.3 million. These nonperforming loans had an outstanding principal balance of $4.7 million. These loans are collateral dependent.

As of December 31, 2021, the Company had nine remaining residential bridge loans in the portfolio. Of these, six were in non-accrual status with an unpaid principal balance of $4.8 million and a fair value of $4.4 million. These nonperforming loans had an outstanding principal balance of $5.8 million. These loans are collateral dependent.

The remaining residential bridge loans were carried at fair value. No allowance for credit losses was recorded because the valuation adjustments as of September 30, 2022 and December 31, 2021, if any, would be reflected in the fair value of these loans. The Company stopped accruing interest income for these loans when they became contractually 90 days delinquent.

Residential real estate owned

As of September 30, 2022 and December 31, 2021, the Company had four residential REO properties with an aggregate carrying value of $1.1 million, related to foreclosed bridge loans. The residential REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The residential REO properties are classified in "Other assets" in the Consolidated Balance Sheets.

Note 6 — Commercial Loans

Commercial loans

In January 2019, WMC CRE LLC ("CRE LLC"), a wholly-owned subsidiary of the Company was formed for the purpose of acquiring commercial loans. The commercial loans owned by CRE LLC are financed under the Commercial Whole Loan Facility. Refer to Note 7 - Financings for details.

The following table presents information about the commercial loans owned by CRE LLC as of September 30, 2022 (dollars in thousands):

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Loan

Acquisition Date

Loan Type

Principal Balance

Fair Value

Original LTV

Interest Rate

Maturity Date

Extension Option

Collateral

CRE 3

August 2019

Interest-Only Mezzanine loan

90,000

8,777

58%

1-Month LIBOR plus 9.25%

6/29/2021

None(1)

Entertainment and Retail

CRE 4

September 2019

Interest-Only First Mortgage

22,204

63%

1-Month LIBOR plus 3.02%

8/6/2025(2)

None

Retail

CRE 5

December 2019

Interest-Only First Mortgage

24,535

24,405

62%

1-Month LIBOR plus 3.75%

11/6/2023(3)

None

Hotel

CRE 6

December 2019

Interest-Only First Mortgage

13,207

13,136

62%

1-Month LIBOR plus 3.75%

11/6/2023(3)

None

Hotel

CRE 7

December 2019

Interest-Only First Mortgage

7,259

7,220

62%

1-Month LIBOR plus 3.75%

11/6/2023(3)

None

Hotel

157,205

75,742

(1) CRE 3 is in default and not eligible for extension.

(2) CRE 4 was granted a three-year extension through August 6, 2025, in conjunction with a principal paydown of $16.2 million.

(3) CRE 5, 6, and 7 were each granted one-year extensions through November 6, 2023.

CRE 3 Loan

As of September 30, 2022, the CRE 3 junior mezzanine loan with an outstanding principal balance of $90.0 million, secured by an indirect pledge of equity in the mortgage borrower and owner of a retail facility, was non-performing and past its maturity date of June 29, 2021. Interest payments on this loan were received from a reserve that was exhausted in May 2021. On October 25, 2022, the senior mezzanine lender notified the Company that it had consummated a strict foreclosure under the Uniform Commercial Code of its equity interest in the mortgage borrower and owner of the property, which had the effect of foreclosing out the Company’s subordinate pledge of equity in the retail facility owner that served as collateral for the junior mezzanine loan. As a result, the Company’s junior mezzanine loan remains outstanding but without the benefit of the primary collateral supporting the loan. The Company continues to benefit from certain corporate and personal guarantees with respect to its loan and has certain rights to excess proceeds generated by two other large retail and entertainment properties owned by the borrower in Canada and the American Midwest. As a result of the foreclosure, the Company has marked down the value of its investment in the CRE 3 junior mezzanine loan from $26.9 million at June 30, 2022 to $8.8 million at September 30, 2022. The Company is currently exploring all available measures to maximize its recovery with respect to this loan, but if none of these measures are successful, the Company could experience a total loss of its investment, which would result in an $8.8 million reduction in the Company’s book value. There can be no assurance that the Company will be able to obtain any recovery with respect to such loan.

Commercial loan payoffs

On September 16, 2022, CRE 8, which had an outstanding principal balance of $4.4 million collateralized by assisted living facilities, was paid off in full.

Commercial loan trust

In March 2018, the Company formed the Revolving Small Balance Commercial Trust 2018-1 ("RSBC Trust") to acquire commercial real estate mortgage loans. The Company consolidates the trust because it determined that the wholly-owned RSBC Trust was a VIE and that the Company was the primary beneficiary. As of September 30, 2022, there was one loan remaining in the trust and it is financed under one of the Company's short-term repurchase agreements. The Company holds the financing liability outside the RSBC Trust. Refer to Note 7 - "Financings" for details.

The following table presents information on the commercial real estate mortgage loan held by RSBC Trust as of September 30, 2022 (dollars in thousands):

Table of Contents

Loan

Acquisition Date

Loan Type

Principal Balance

Fair Value

LTV

Interest Rate(1)

Maturity Date(1)

Extension Option

Collateral

SBC 3

January 2019

Interest-Only First Mortgage

14,362

14,361

49%

1-Month LIBOR plus 4.35%

1/6/2023

None

Nursing Facilities

14,362

14,361

(1) During July 2022, the SBC 3 loan was granted a six month extension through January 6, 2023, with a 25 bps increase in rate and a 25 bps extension fee.

Securitized commercial loans

Securitized commercial loans are comprised of commercial loans from consolidated third party sponsored CMBS VIE's. At September 30, 2022, the Company had a variable interest in one third party sponsored CMBS VIE, CSMC Trust 2014-USA, that it determined it was the primary beneficiary and was required to consolidate. The commercial loans that serve as collateral for the securitized debt issued by this VIE can only be used to settle the securitized debt. Refer to Note 7 - "Financings" for details on the associated securitized debt. The Company assesses modifications to VIEs on an ongoing basis to determine if a significant reconsideration event has occurred that would change the Company’s initial consolidation assessment.

RETL 2019-RVP

RETL 2018 was refinanced with a new securitization RETL 2019-RVP ("RETL 2019 Trust") in March 2019. The Company acquired a $65.3 million interest in the trust certificates issued by the RETL 2019 Trust, including $45.3 million which represents the 5% eligible risk retention certificate. The Company determined that RETL 2019 Trust was a VIE and that the Company was also the primary beneficiary because the Manager was involved in certain aspects of the design of the trust and the Company together with other related party entities own more than 50% of the controlling class. As the primary beneficiary, the Company consolidated RETL 2019 Trust and its investment in the trust certificates (HRR class and a portion of the C class) of RETL 2019 Trust was eliminated in consolidation. The RETL 2019 Trust held a commercial loan collateralized by first mortgages, deeds of trusts and interests in commercial real estate.

On September 15, 2021, the commercial loan was paid in full by the borrower and the RETL HRR bond with an outstanding principal amount of $45.3 million held in WMC RETL LLC, a wholly-owned subsidiary of the Company, was paid off. Accordingly, the RETL 2019 Trust is no longer consolidated.

CSMC Trust 2014-USA

The Company together with other related party entities own more than 50% of the controlling class of CSMC Trust 2014-USA ("CSMC USA"). As of September 30, 2022, the Company held an 8.8% interest in the trust certificates issued by CSMC USA (F Class) with an outstanding principal balance of $14.9 million. The Company performs ongoing reassessment of its CMBS VIE holdings for potential consolidation of the securitized trust in which it owns a portion of the controlling class. Since the ownership of the controlling financial interest is held within a related party group, the Company must determine whether it is the primary beneficiary under the related party tie-breaker rule. As a result of the Company's evaluation, it was determined that the Company is the primary beneficiary of CSMC USA, and effective on August 1, 2020, consolidated CSMC USA. The Company’s investment in the trust certificate of CSMC USA (F Class) was eliminated in the consolidation. The CSMC USA holds a commercial loan secured by a first mortgage lien on the borrowers’ fee and leasehold interests in a portion of a super-regional mall. The outstanding principal balance on this commercial loan is $1.4 billion as of September 30, 2022. The loan has a stated maturity date of September 11, 2025 and bears a fixed interest rate of 4.38%. The Company elected the fair value option for the commercial loan as well as the associated securitized debt.

In December 2020, the commercial loan held by CSMC USA was amended to an interest only payment through maturity. As part of the modification, a Cash Management Forbearance Agreement was entered into by the special servicer and the borrower, which required both increased reporting requirements and monthly net cash remittance.

Consolidated securitized commercial loan trusts and commercial loan trust

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The two commercial consolidated trusts, CSMC USA and RSBC Trust, collectively held two commercial loans as of September 30, 2022. The following table presents a summary of the assets and liabilities of the two consolidated trusts included in the Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 (dollars in thousands):


	September 30, 2022		December 31, 2021

Restricted cash	$	251	$	260
Securitized commercial loans, at fair value	1,171,914		1,355,808
Commercial Loans, at fair value	14,361		14,362
Interest receivable	5,125		5,290
Total assets	$	1,191,651	$	1,375,720
Securitized debt, at fair value	$	1,161,733	$	1,344,370
Interest payable	4,995		5,164
Accounts payable and accrued expenses	9		9
Other liabilities	251		260
Total liabilities	$	1,166,988	$	1,349,803

The Company’s risk with respect to its investment in the securitized commercial loan trusts is limited to its direct ownership in the trusts. The commercial loans held by the consolidated securitized commercial loan trusts are held solely to satisfy the liabilities of the trusts, and creditors of the trusts have no recourse to the general credit of the Company. The securitized commercial loans of the trusts can only be used to satisfy the obligations of those trusts. The Company is not contractually required to provide, and has not provided any additional financial support to the securitized commercial loan trusts for the three and nine months ended September 30, 2022 and September 30, 2021.

The following table presents the components of the fair value of the securitized commercial loans and commercial loans as of September 30, 2022 and December 31, 2021 (dollars in thousands):


	CSMC USA Trust Securitized Commercial Loan, at Fair Value	RSBC Trust Commercial Loans, at Fair Value				Commercial Loans, at Fair Value
		September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Principal balance		$	1,385,591	$	1,385,591	$	14,362	$	14,362	$	157,205	$	177,797

Unamortized discount		(90,836)		(110,770)		—		—		—		—
Amortized cost		1,294,755		1,274,821		14,362		14,362		157,205		177,797
Gross unrealized gains		—		80,987		—		—		—		—
Gross unrealized losses		(122,841)		—		(1)		—		(81,463)		(61,587)
Fair value		$	1,171,914	$	1,355,808	$	14,361	$	14,362	$	75,742	$	116,210

Non-performing commercial loans

The following table presents the aging of the Commercial Loans as of September 30, 2022 (dollars in thousands):

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	Commercial Loans
	No of Loans	Principal		Fair Value
Current	5	$	81,567	$	81,326
1-30 days	—	—		—
31-60 days	—	—		—
61-90 days	—	—		—
90+ days	1	90,000		8,777
Total	6	$	171,567	$	90,103

CRE 3 Loan

Commercial real estate owned

Hotel REO

In February 2022, the Company along with other Hotel REO investors, sold the unencumbered hotel property which was foreclosed on in the third quarter of 2021 for $55.9 million. The Company and the other investors fully recovered their aggregate initial investment of $42.0 million. The Company and the other investors recognized a gain on sale of approximately $12.2 million.

Note 7— Financings

Repurchase agreements

The Company has primarily financed its investment acquisitions with repurchase agreements, The repurchase agreements bear interest at a contractually agreed-upon rate and historically had terms ranging from one month to 12 months. The Company’s repurchase agreement borrowings are accounted for as secured borrowings when the Company maintains effective control of the financed assets. Under these repurchase agreements, the respective counterparties retain the right to determine the fair value of the underlying collateral. A reduction in the value of pledged assets normally requires the Company to post additional securities as collateral, pay down borrowings, or establish cash margin accounts with the counterparties in order to re-establish the agreed-upon collateral requirements, which is referred to as a margin call. The inability of the Company to post adequate collateral for a margin call by a counterparty, in a time frame as short as the close of the same business day, could result in a condition of default under the Company’s repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by the Company, which may have a material adverse effect on the Company’s financial position, results of operations, and cash flows.

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In order to manage the severe market conditions and the resulting large margin demands from lenders and pressure on the Company’s liquidity, the Company entered into three longer term financing arrangements to reduce its exposure to short-term financings with daily mark-to-market exposure. Below is a summary of each of these financing arrangements.

Residential whole loan facility

The facility was recently amended on October 26, 2022 and matures on October 25, 2023. It bears interest at a rate of SOFR plus 2.25%, with a SOFR floor of 0.25%. The Company finances its Non-QM residential whole loans held in RMI 2015 Trust under this facility. As of September 30, 2022, the Company had outstanding borrowings of $4.0 million. The borrowing is secured by Non-QM residential whole loans with a fair value of $5.8 million as of September 30, 2022.

Non-Agency CMBS and Non-Agency RMBS facility

The facility was extended on May 2, 2022 and matures on May 2, 2023. It bears interest at a rate of SOFR plus 2.00%. As of September 30, 2022, the outstanding balance under this facility was $101.0 million. The borrowing is secured by investments with a fair market value of $152.1 million as of September 30, 2022.

Commercial whole loan facility

The facility was recently amended on October 26, 2022 and matures on November 3, 2023. It bears interest at a rate of SOFR plus 2.25%. As of September 30, 2022, the outstanding balance under this facility was $48.0 million. The borrowing is secured by the performing commercial loans that are held in CRE LLC, with an estimated fair market value of $67.0 million as of September 30, 2022.

Financial metrics

Certain of the Company’s financing arrangements provide the counterparty with the right to terminate the agreement and accelerate amounts due under the associated agreement if the Company does not maintain financial metrics. Although specific to each financing arrangement, typical financial metrics include minimum equity, liquidity requirements, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross-default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders. With the exception of one repurchase agreement for which the Company received a waiver, the Company was in compliance with the terms of such financial tests as of September 30, 2022.

As of September 30, 2022, the Company had borrowings under five of its master repurchase agreements. The following table summarizes certain characteristics of the Company’s repurchase agreements at September 30, 2022 and December 31, 2021 (dollars in thousands):

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	September 30, 2022					December 31, 2021
Securities Pledged	Repurchase Agreement Borrowings		Weighted Average Interest Rate on Borrowings Outstanding at end of period		Weighted Average Remaining Maturity (days)	Repurchase Agreement Borrowings		Weighted Average Interest Rate on Borrowings Outstanding at end of period		Weighted Average Remaining Maturity (days)
Short-term borrowings:

Agency RMBS	$	317	3.15	%	32	$	976	1.02	%	58

Non-Agency RMBS(1)	54,228		6.17	%	88	38,354		2.94	%	4
Residential whole loans(2)	778		5.40	%	11	1,439		2.57	%	5
Residential bridge loans(2)	2,895		5.60	%	11	4,368		2.61	%	5
Commercial loans(2)	5,630		6.18	%	11	6,463		3.20	%	5
Other securities	1,966		5.75	%	17	2,457		3.50	%	18
Total short-term borrowings	65,814		6.11	%	75	54,057		2.92	%	6
Long-term borrowings:
Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency CMBS(1)	55,155		2.28	%	214	59,802		2.14	%	125
Non-Agency RMBS	21,943		2.28	%	214	15,632		2.14	%	125
Other securities	23,948		2.28	%	214	27,506		2.22	%	125
Subtotal	101,046		2.28	%	214	102,940		2.16	%	125
Residential Whole Loan Facility
Residential whole loans(2)	4,049		5.11	%	35	396,531		2.25	%	308
Commercial Whole Loan Facility
Commercial loans	48,032		4.55	%	35	63,661		2.27	%	268
Total long-term borrowings	153,127		3.07	%	153	563,132		2.24	%	270
Repurchase agreements borrowings	$	218,941	3.98	%	130	$	617,189	2.30	%	247
Less unamortized debt issuance costs	—		N/A		N/A	—		N/A		N/A
Repurchase agreements borrowings, net	$	218,941	3.98	%	130	$	617,189	2.30	%	247

(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(2)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.

At September 30, 2022 and December 31, 2021, repurchase agreements collateralized by investments had the following remaining maturities:


(dollars in thousands)	September 30, 2022		December 31, 2021

1 to 29 days	$	11,270	$	53,081
30 to 59 days	52,397		370
60 to 89 days	54,228		606

Greater than or equal to 90 days	101,046		563,132
Total	$	218,941	$	617,189

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At September 30, 2022, the following table reflects amounts of collateral at risk under its repurchase agreements greater than 10% of the Company's equity with any counterparty (dollars in thousands):


	September 30, 2022
Counterparty	Amount of Collateral at Risk, at fair value		Weighted Average Remaining Maturity (days)	Percentage of Stockholders’ Equity
Credit Suisse AG, Cayman Islands Branch	$	59,894	62	61.1	%
Citigroup Global Markets Inc.	50,806		214	51.9	%
Nomura Securities International, Inc.	11,695		11	11.9	%

Collateral for borrowings under repurchase agreements

The following table summarizes the Company’s collateral positions, with respect to its borrowings under repurchase agreements at September 30, 2022 and December 31, 2021 (dollars in thousands):


	September 30, 2022						December 31, 2021
	Assets Pledged		Accrued Interest		Assets Pledged and Accrued Interest		Assets Pledged		Accrued Interest		Assets Pledged and Accrued Interest
Assets pledged for borrowings under repurchase agreements:

Agency RMBS, at fair value	$	233	$	7	$	240	$	1,172	$	19	$	1,191
Non-Agency CMBS, at fair value(1)	90,107		439		90,546		107,624		504		108,128
Non-Agency RMBS, at fair value	122,401		610		123,011		66,555		343		66,898
Residential whole loans, at fair value(2)	7,214		57		7,271		453,447		2,674		456,121
Residential bridge loans(2)	5,120		66		5,186		5,207		91		5,298
Commercial loans, at fair value(2)	81,326		409		81,735		101,459		360		101,819


Other securities, at fair value	38,310		97		38,407		51,648		100		51,748
Cash(3)	120		—		120		3,151		—		3,151
Total	$	344,831	$	1,685	$	346,516	$	790,263	$	4,091	$	794,354

(1)Includes securities eliminated upon VIE consolidation.

(2)Loans owned through trust certificates are pledged as collateral. The trust certificates are eliminated upon consolidation.

(3)Cash posted as collateral is included in "Due from counterparties" in the Company’s Consolidated Balance Sheets.

A reduction in the value of pledged assets typically results in the repurchase agreement counterparties initiating a margin call. At September 30, 2022 and December 31, 2021, investments held by counterparties as security for repurchase agreements totaled approximately $344.7 million and $787.1 million, respectively. Cash collateral held by counterparties at September 30, 2022 and December 31, 2021 was approximately $120 thousand and $3.2 million, respectively. Cash posted by repurchase agreement counterparties at both September 30, 2022 and December 31, 2021 was zero.

Convertible Senior Unsecured Notes

6.75% Convertible Senior Unsecured Notes due 2024 (the "2024 Notes")

In September 2021, the Company issued $86.3 million aggregate principal amount of the 2024 Notes for net proceeds of $83.3 million. Interest on the 2024 Notes is paid semiannually. The 2024 Notes are convertible into, at the Company's election, cash, shares of the Company's common stock, or a combination of both, subject to the satisfaction of certain conditions and during specified periods. The conversion rate is subject to adjustment upon the occurrence of certain specified events and the holders may require the Company to repurchase all or any portion of their notes for cash equal to 100% of the principal amount of the 2024 Notes, plus accrued and unpaid interest, if the Company undergoes a fundamental change as specified in the supplemental indenture for the 2024 Notes. The post reverse stock split conversion rate is 33.7952 shares of common stock per $1,000 principal amount of notes and represented a conversion price of $29.59 per share of common stock. The 2024 Notes

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mature on September 15, 2024, unless earlier converted, redeemed, or repurchased by the holders pursuant to their terms, and are not redeemable by the Company except during the final three months prior to maturity.

6.75% Convertible Senior Unsecured Notes due 2022 (the "2022 Notes")

At September 30, 2022 and December 31, 2021, the Company had $26.0 million and $37.7 million aggregate principal of the 2022 Notes outstanding, respectively. The 2022 Notes were repaid in full upon their maturity on October 3, 2022. Refer to Note 16 - "Subsequent Event" for details.

During the quarters ended September 30, 2022, June 30, 2022, and March 31, 2022, the Company repurchased $1.0 million, $7.2 million and $3.4 million aggregate principal amount of the 2022 Notes at par value, 0.6% premium to par value, and 0.8% premium to par value, respectively, plus accrued and unpaid interest.

Securitized debt

Arroyo Trust 2019-2

In May 2019, the Company completed a residential mortgage-backed securitization comprised of $945.5 million of Non-QM residential whole loans, issuing $919.0 million of mortgage-backed notes. The Company did not elect the fair value option for these notes, so they are recorded at their principal balance less unamortized deferred financing cost and classified in "Securitized debt, net" in the Consolidated Balance Sheets. The following table summarizes the issued Arroyo Trust 2019-2's residential mortgage pass-through certificates at September 30, 2022 (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Offered Notes:
Class A-1	$	176,628	3.3%	$	176,628	4/25/2049
Class A-2	9,473		3.5%	9,473		4/25/2049
Class A-3	15,007		3.8%	15,007		4/25/2049
Class M-1	25,055		4.8%	25,055		4/25/2049
Subtotal	$	226,163		$	226,163
Less: Unamortized Deferred Financing Costs	N/A			2,830
Total	$	226,163		$	223,333

The Company retained the non-offered securities in the securitization, which include the class B, Class A-IO-S and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2019-2 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At September 30, 2022, residential whole loans, with an outstanding principal balance of approximately $249.6 million, serve as collateral for the Arroyo Trust 2019-2's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is 20% of the original principal balance. The notes are redeemable at their face value plus accrued interest.

Arroyo Trust 2020-1

In June 2020, the Company completed a residential mortgage-backed securitization comprised of $355.8 million of Non-QM residential whole loans, issuing $341.7 million of mortgage-backed notes. The Company did not elect the fair value option for these notes, so they are recorded at their principal balance less unamortized deferred financing cost and classified in "Securitized debt, net" in the Consolidated Balance Sheets. The following table summarizes the issued Arroyo Trust 2020-1's residential mortgage pass-through certificates at September 30, 2022 (dollars in thousands):

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Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Offered Notes:
Class A-1A	$	77,393	1.7%	$	77,393	3/25/2055
Class A-1B	9,184		2.1%	9,184		3/25/2055
Class A-2	13,518		2.9%	13,518		3/25/2055
Class A-3	17,963		3.3%	17,963		3/25/2055
Class M-1	11,739		4.3%	11,739		3/25/2055
Subtotal	$	129,797		$	129,797
Less: Unamortized Deferred Financing Costs	N/A			1,665
Total	$	129,797		$	128,132

The Company retained the non-offered securities in the securitization, which include the Class B, Class A-IO-S, and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2020-1 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At September 30, 2022, residential whole loans with an outstanding principal balance of approximately $143.0 million serve as collateral for the Arroyo Trust 2020-1's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is equal to or less than 30% of the original principal balance. The notes are redeemable at their face value plus accrued interest.

Arroyo Trust 2022-1

In February 2022, the Company completed a residential-mortgage backed securitization comprised of $432.0 million of Non-QM residential whole loans, issuing $398.9 million of mortgage-backed notes. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the bonds are recorded at fair value in the Consolidated Balance Sheets with the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized loss, net."

The following table summarizes the issued Arroyo Trust 2022-1's residential mortgage pass-through certificates at September 30, 2022 (dollars in thousands):


Classes	Principal Balance		Coupon	Fair Value		Contractual Maturity
Offered Notes:
Class A-1A	$	218,530	2.5%	$	199,526	12/25/2056
Class A-1B	82,942		3.3%	69,669		12/25/2056
Class A-2	21,168		3.6%	16,617		12/25/2056
Class A-3	28,079		3.7%	21,312		12/25/2056
Class M-1	17,928		3.7%	12,814		12/25/2056


Total	$	368,647		$	319,938

The Company retained the non-offered securities in the securitization, which include the Class B, Class A-IO-S, and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2022-1 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At September 30, 2022, residential whole loans with an outstanding principal balance of approximately $399.6 million serve as collateral for the Arroyo Trust 2022-1's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is equal to or less than 30% of the original principal balance. The notes are redeemable at their fair value plus accrued interest.

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Arroyo Trust 2022-2

In July 2022, the Company completed a residential-mortgage backed securitization comprised of $402.2 million of Non-QM residential whole loans, issuing $351.9 million of mortgage-backed notes. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the bonds are recorded at fair value in the Consolidated Balance Sheets with the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized loss, net."

The following table summarizes the issued Arroyo Trust 2022-2's residential mortgage pass-through certificates at September 30, 2022 (dollars in thousands):


Classes	Principal Balance		Coupon	Fair Value		Contractual Maturity
Offered Notes:
Class A-1	$	273,691	5.0%	$	263,315	7/25/2057
Class A-2	23,297		5.0%	21,916		7/25/2057
Class A-3	28,388		5.0%	26,398		7/25/2057



Class M-1	17,694		5.0%	15,097		7/25/2057


Total	$	343,070		$	326,726

The Company retained the non-offered securities in the securitization, which include the Class B-1, Class B-2, Class B-3, Class A-IO-S, and Class XS certificates. These non-offered securities were eliminated in consolidation. The securitized debt of the Arroyo Trust 2022-2 can only be settled with the residential loans that serve as collateral for the securitized debt and is non-recourse to the Company. At September 30, 2022, residential whole loans with an outstanding principal balance of approximately $390.9 million serve as collateral for the Arroyo Trust 2022-2's securitized debt. The Company may redeem the offered notes on or after the earlier of (i) the three-year anniversary of the closing date or (ii) the date on which the aggregate collateral balance is equal to or less than 30% of the original principal balance. The notes are redeemable at their fair value plus accrued interest.

Commercial mortgage-backed notes

CSMC 2014 USA

The following table summarizes CSMC 2014 USA's commercial mortgage pass-through certificates at September 30, 2022 (dollars in thousands):


Classes	Principal Balance		Coupon		Fair Value		Contractual Maturity
Class A-1	$	120,391	3.3	%	$	109,867	9/11/2025
Class A-2	531,700		4.0	%	482,628		9/11/2025
Class B	136,400		4.2	%	119,584		9/11/2025
Class C	94,500		4.3	%	79,772		9/11/2025
Class D	153,950		4.4	%	122,083		9/11/2025
Class E	180,150		4.4	%	132,952		9/11/2025
Class F	153,600		4.4	%	104,961		9/11/2025
Class X-1(1)	N/A		0.5	%	8,268		9/11/2025
Class X-2(1)	N/A		—	%	1,618		9/11/2025
	$	1,370,691			$	1,161,733

(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of September 30, 2022, respectively.

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At September 30, 2022, the Company owned a portion of the class F certificates with an outstanding principal balance of $14.9 million, which is eliminated in consolidation. The remaining CSMC USA debt that we elected the fair value option had a fair value of $1.2 billion at September 30, 2022, and is recorded in "Securitized debt, net" in the Consolidated Balance Sheets. Of the remaining outstanding principal balance of $1.4 billion, $196.7 million is owned by related parties and $1.2 billion is owned by third parties. The securitized debt of the CSMC USA can only be settled with the commercial loan with an outstanding principal balance of approximately $1.4 billion at September 30, 2022, that serves as collateral for the securitized debt and is non-recourse to the Company. The Company has chosen to make the fair value election pursuant to ASC 825 for the debt and accordingly the periodic changes in fair value are recorded in current period earnings in the Consolidated Statements of Operations as a component of "Unrealized loss, net."

Note 8 — Derivative Instruments

The Company’s derivatives may include interest rate swaps, swaptions, options, futures contracts, TBAs, Agency, and Non-Agency Interest-Only Strips that are classified as derivatives, credit default swaps, and total return swaps.

The following table summarizes the Company’s derivative instruments at September 30, 2022 and December 31, 2021 (dollars in thousands):


			September 30, 2022				December 31, 2021
Derivative Instrument	Accounting Designation	Consolidated Balance Sheets Location	Notional Amount		Fair Value			Notional Amount		Fair Value
Interest rate swaps, asset	Non-Hedge	Derivative assets, at fair value	$	152,000	$	262		$	—	$	—





Credit default swaps, asset	Non-Hedge	Derivative assets, at fair value	—		$	—		2,030		$	105

Total derivative instruments, assets					262					105

Interest rate swaps, liability	Non-Hedge	Derivative liability, at fair value	—		—			22,000		(38)




Credit default swaps, liability	Non-Hedge	Derivative liability, at fair value	—		—			4,140		(564)

Total derivative instruments, liabilities					—					(602)
Total derivative instruments, net					$	262				$	(497)

The following tables summarize the effects of the Company’s derivative positions, including Interest-Only Strips characterized as derivatives and TBAs, which are reported in "Gain on derivative instruments, net" in the Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and September 30, 2021 (dollars in thousands):

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	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Three months ended September 30, 2022
Interest rate swaps	$	(3,371)	$	3,423	$	—	$	4,790	$	298	$	5,140
Interest rate swaptions	(161)		—		—		—		—		(161)
Interest-Only Strips— accounted for as derivatives	—		—		(5)		(54)		16		(43)





Credit default swaps	(273)		—		—		283		—		10
TBAs	1,319		—		—		(1,383)		—		(64)
Total	$	(2,486)	$	3,423	$	(5)	$	3,636	$	314	$	4,882


Three months ended September 30, 2021
Interest rate swaps	$	—	$	485	$	—	$	(71)	$	96	$	510

Interest-Only Strips— accounted for as derivatives	—		—		(59)		(90)		82		(67)




Credit default swap	16		—		—		56		—		72

Total	$	16	$	485	$	(59)	$	(105)	$	178	$	515


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Nine months ended September 30, 2022
Interest rate swaps	$	(3,371)	$	14,744	$	—	$	3,670	$	(255)	$	14,788
Interest rate swaptions	(161)		—		—		—		—		(161)
Interest-Only Strips— accounted for as derivatives	—		—		(120)		(270)		160		(230)





Credit default swaps	(242)		—		—		393		—		151
TBAs	2,051		—		—		—		—		2,051
Total	$	(1,723)	$	14,744	$	(120)	$	3,793	$	(95)	$	16,599


Nine months ended September 30, 2021
Interest rate swaps	$	—	$	520	$	—	$	(25)	$	172	$	667

Interest-Only Strips— accounted for as derivatives	—		—		(232)		(124)		305		(51)




Credit default swap	48		—		—		52		—		100

Total	$	48	$	520	$	(232)	$	(97)	$	477	$	716

At September 30, 2022 and December 31, 2021, the Company had cash pledged as collateral for derivatives of approximately $3.1 million and $1.4 million, respectively, which is reported in "Due from counterparties" in the Consolidated Balance Sheets.

Interest rate swaps

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The Company uses interest rate swaps to mitigate its exposure to higher short-term interest rates in connection with its repurchase agreements. Interest rate swaps generally involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. Notwithstanding the foregoing, in order to manage its hedge position with regard to its liabilities, the Company on occasion will enter into interest rate swaps which involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the interest rate swap without exchange of the underlying notional amount. The Company also enters into forward starting swaps to help mitigate the effects of changes in interest rates on a portion of its borrowings under repurchase agreements. The Company generally enters into MAC (Market Agreed Coupon) interest rate swaps in which it may receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all other interest rate swaps, these interest rate swaps are also subject to margin requirements.

The Company has not elected to account for its interest rate swaps as “hedges” under GAAP, accordingly the change in fair value of the interest rate swaps not designated in hedging relationships are recorded together with periodic net interest settlement amounts in "Gain on derivatives instruments, net" in the Consolidated Statements of Operations.

The following tables provide additional information on the Company's fixed-pay interest rate swaps as of September 30, 2022 and December 31, 2021 (dollars in thousands):


	September 30, 2022
Fixed Pay Interest Rate Swap Remaining Term	Notional Amount		Average Fixed Pay Rate		Average Variable Receive Rate		Average Maturity (Years)
Greater than 1 year and less than 3 years	$	60,000	1.4	%	1.3	%	1.5
Greater than 3 years and less than 5 years	70,000		1.4	%	1.1	%	4.3
Greater than 5 years	22,000		1.2	%	3.0	%	9.0
Total	$	152,000	1.4	%	1.4	%	3.9


	December 31, 2021
Fixed Pay Interest Rate Swap Remaining Term	Notional Amount		Average Fixed Pay Rate		Average Variable Receive Rate		Average Maturity (Years)


Greater than 5 years	$	22,000	1.2	%	0.1	%	9.8
Total	$	22,000	1.2	%	0.1	%	9.8

To-Be-Announced securities

The Company purchased and sold TBAs during the nine months ended September 30, 2022, as shown in the table below. There were no open TBA positions as of September 30, 2022 and December 31, 2021.

The following table presents additional information about the Company's contracts to purchase and sell TBAs for the nine months ended September 30, 2022 (dollars in thousands):


	Notional Amount December 31, 2021		Additions		Settlement, Termination, Expiration or Exercise		Notional Amount September 30, 2022
Purchase of TBAs	$	—	$	600,000	$	(600,000)	$	—
Sale of TBAs	$	—	$	600,000	$	(600,000)	$	—

Interest-Only strips

The Company also invests in Interest-Only strips. In determining the classification of its holdings of Interest-Only strips, the Company evaluates the securities to determine if the nature of the cash flows has been altered from that of the underlying mortgage collateral. Generally, Interest-Only strips for which the security represents a strip off of a mortgage pass through security will be considered a hybrid instrument classified as an MBS investment in the Consolidated Balance Sheets utilizing the fair value option. Alternatively, those Interest-Only strips, for which the underlying mortgage collateral has been

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included into a structured security that alters the cash flows from the underlying mortgage collateral, are accounted for as derivatives at fair value with changes recognized in "Gain on derivative instruments, net" in the Consolidated Statements of Operations, along with any interest received. The carrying value of these Interest-Only Strips is included in "Agency mortgage-backed securities, at fair value" in the Consolidated Balance Sheets.

Credit default swaps

The Company currently has no outstanding credit default swaps. Under these instruments, the buyer makes a monthly premium payment over the term of the contract in exchange for the seller making a payment for losses of the reference securities, upon the occurrence of a specified credit event.

Note 9 — Offsetting Assets and Liabilities

The following tables present information about certain assets and liabilities that are subject to master netting agreements (or similar agreements) and can potentially be offset in the Company’s Consolidated Balance Sheets at September 30, 2022 and December 31, 2021 (dollars in thousands):


	September 30, 2022
	Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets				Net Amount
Description							Financial Instruments(1)		Cash Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS	$	668	$	—	$	668	$	(181)	$	—	$	487
Derivative asset, at fair value (2)(3)	262		—		262		—		—		262

Total assets	$	930	$	—	$	930	$	(181)	$	—	$	749

Derivative Liabilities and Repurchase Agreements

Repurchase Agreements(4)	$	218,941	$	—	$	218,941	$	(218,857)	$	(84)	$	—
Total liability	$	218,941	$	—	$	218,941	$	(218,857)	$	(84)	$	—

(1)Amounts disclosed in the financial instruments column of the tables above represent securities, whole loans, securitized commercial loan collateral pledged, and derivative assets that are available to be offset against liability balances associated with repurchase agreement and derivative liabilities. Amounts disclosed in the cash collateral column of the tables above represents amounts pledged or received as collateral against derivative transactions.

(2)Derivative asset, at fair value, includes interest rate swaps.

(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $3.1 million as of September 30, 2022.

(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $344.7 million as of September 30, 2022.

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	December 31, 2021
	Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets				Net Amount
							Financial Instruments(1)		Cash Collateral (1)
Derivative Assets
Agency and Non-Agency Interest-Only Strips, accounted for as derivatives included in MBS	$	1,058	$	—	$	1,058	$	(1,058)	$	—	$	—
Derivative asset, at fair value(2)	105		—		105		(105)		—		—
Total derivative assets	$	1,163	$	—	$	1,163	$	(1,163)	$	—	$	—

Derivative Liabilities and Repurchase Agreements
Derivative liability, at fair value(2)(3)	$	602	$	—	$	602	$	(105)	$	(497)	$	—
Repurchase Agreements(4)	617,189		—		617,189		(617,189)		—		—
Total derivative liability	$	617,791	$	—	$	617,791	$	(617,294)	$	(497)	$	—

(2)Derivative asset, at fair value and Derivative liability, at fair value includes interest rate swaps and credit default swaps.

(3)Cash collateral pledged against the Company’s derivative counterparties was approximately $1.4 million as of December 31, 2021.

(4)The carrying value of investments pledged against the Company’s repurchase agreements was approximately $787.1 million as of December 31, 2021.

Certain of the Company’s repurchase agreement and derivative transactions are governed by underlying agreements that generally provide for a right of set-off in the event of default or in the event of a bankruptcy of either party to the transaction.

Note 10 — Related Party Transactions

Management Agreement

In connection with the Company’s initial public offering ("IPO") in May 2012, the Company entered into a management agreement (the “Management Agreement”) with the Manager, which describes the services to be provided by the Manager and compensation for such services. The Manager is responsible for managing the Company’s operations, including;(i) performing all of its day-to-day functions, (ii) determining investment criteria in conjunction with the Board of Directors, (iii) sourcing, analyzing and executing investments, asset sales and financings, (iv) performing asset management duties, and (v) performing financial and accounting management, subject to the direction and oversight of the Company’s Board of Directors. Pursuant to the terms of the Management Agreement, the Manager is paid a management fee equal to 1.50% per annum of the Company’s stockholders’ equity (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears. For purposes of calculating the management fee, “stockholders’ equity” means the sum of the net proceeds from any issuances of the Company’s equity securities since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus retained earnings, calculated in accordance with GAAP, at the end of the most recently completed fiscal quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount paid for repurchases of the Company’s shares of common stock, excluding any unrealized gains or losses on our investments and derivatives and other non-cash items (excluding other than temporary impairment) that have impacted stockholders' equity as reported in the Company’s consolidated financial statements prepared in accordance with GAAP, regardless of whether such items are included in other comprehensive income or loss, or in net income, and excluding one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between the Manager and the Company’s independent directors and after approval by a majority of the Company’s independent directors. However, if the Company’s stockholders’ equity for any given quarter is negative based on the calculation described above, the Manager will not be entitled to receive any management fee for that quarter.

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In addition, the Company may be required to reimburse the Manager for certain expenses as described below, and shall reimburse the Manager for the compensation paid to the Company’s chief financial officer, controller, and their staff. Expense reimbursements to the Manager are made in cash on a regular basis. The Company’s reimbursement obligation is not subject to any dollar limitation. Because the Manager’s personnel perform certain legal, accounting, due diligence tasks and other services that outside professionals or outside consultants otherwise would perform, the Manager may be paid or reimbursed for the documented cost of performing such tasks, provided that such costs and reimbursements are in amounts which are no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis.

The Management Agreement may be amended, supplemented or modified by agreement between the Company and the Manager. The Management Agreement expires on May 16, 2023. It is automatically renewed for one-year terms on each May 15th unless previously terminated as described below. The Company’s independent directors review the Manager’s performance and any fees payable to the Manager annually and, the Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds (2/3) of the Company’s independent directors, based upon: (i) the Manager’s unsatisfactory performance that is materially detrimental to the Company; or (ii) the Company’s determination that any fees payable to the Manager are not fair, subject to the Manager’s right to prevent such termination due to unfair fees by accepting a reduction of management fees agreed to by at least two-thirds (2/3) of the Company’s independent directors. The Company will provide the Manager 180 days prior notice of any such termination. Unless terminated for cause, the Company will pay the Manager a termination fee equal to three times the average annual management fee earned by the Manager during the prior 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

The Company may also terminate the Management Agreement at any time, without the payment of any termination fee, with 30 days prior written notice from the Company’s Board of Directors for cause, which will be determined by at least two-thirds (2/3) of the Company’s independent directors, which is defined as: (i) the Manager’s continued material breach of any provision of the Management Agreement (including the Manager’s failure to comply with the Company’s investment guidelines); (ii) the Manager’s fraud, misappropriation of funds, or embezzlement against the Company; (iii) the Manager’s gross negligence in the performance of its duties under the Management Agreement; (iv) the occurrence of certain events with respect to the bankruptcy or insolvency of the Manager, including an order for relief in an involuntary bankruptcy case or the Manager authorizing or filing a voluntary bankruptcy petition; (v) the Manager is convicted (including a plea of nolo contendere) of a felony; or (vi) the dissolution of the Manager.

In December 2021, the Manager agreed to voluntarily waive 25% of its management fee solely for the duration of calendar year 2022 in order to support the earnings potential of the Company and its transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.

For the three months ended September 30, 2022 and September 30, 2021, the Company incurred approximately $850 thousand and approximately $1.5 million in management fees, respectively. For the nine months ended September 30, 2022 and September 30, 2021, the Company incurred approximately $3.0 million and approximately $4.5 million in management fees, respectively.

In addition to the management fee, the Company is also responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of the Company as defined in the Management Agreement. For the three months ended September 30, 2022 and September 30, 2021, the Company recorded expenses included in general and administrative expenses totaling approximately $64 thousand and approximately $201 thousand, respectively, related to reimbursable employee costs. For the nine months ended September 30, 2022 and September 30, 2021, the Company recorded expenses included in general and administrative expenses totaling approximately $511 thousand and approximately $1.5 million, respectively, related to reimbursable employee costs. Any such expenses incurred by the Manager and reimbursed by the Company, including the employee compensation expense, are typically included in the Company’s general and administrative expense in the Consolidated Statements of Operations. At September 30, 2022 and December 31, 2021, approximately $3.0 million and approximately $1.5 million, respectively, for management fees incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets. In addition, at September 30, 2022 and December 31, 2021, approximately $402 thousand and approximately $457 thousand, respectively, of reimbursable costs incurred but not yet paid was included in "Payable to affiliate" in the Consolidated Balance Sheets.

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Note 11 — Share-Based Payments

The Company's ability to grant new equity-based awards under the Company's existing equity incentive plans expired on May 9, 2022. At the Annual Meeting of Stockholders held on June 24, 2022, the Company's stockholders approved the Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive Plan and the Western Asset Mortgage Capital Corporation 2022 Manager Omnibus Incentive Plan (collectively, the “2022 Plans”). The 2022 Plans provide for the issuance of options (including non-statutory stock options and incentive stock options), stock appreciation rights (referred to as SARs), restricted stock, restricted stock units (referred to as RSUs), stock bonuses, other stock based awards and cash awards.

The aggregate maximum number of shares of our common stock available for future issuances under the 2022 Plans is 1,000,000 shares, which was reduced to 100,000 shares following the completion of the reverse stock split. The Manager and the officers, employees, non-employee directors, independent contractors, and consultants of the Company or any affiliate of the Company, including any individuals who are employees of the Manager or one of the Manager’s affiliates, are eligible to participate in the 2022 Plans, provided that they have been selected by the Plan Administrator.

On June 30, 2022, the Company granted 200,000 restricted stock units, or 20,000 restricted stock units on a post reverse stock split basis under the Western Asset Mortgage Capital Corporation 2022 Omnibus Incentive Plan to the Company’s Chief Financial Officer. These restricted stock units will vest in equal installments on the first and second anniversary of the grant date.

On June 24, 2022, the Company granted a total of 217,040 restricted stock units (54,260 per each independent director) or 21,704 shares (5,425 per each independent director) on a post reverse stock split basis, to each of the Company's four independent directors. These restricted stock units will vest in full on June 24, 2023, the first anniversary of the grant date, and will be settled in shares of the Company’s common stock upon each of the independent director’s separation from service with the Company.

On June 25, 2021, the Company granted a total of 81,160 restricted stock units (20,290 each per each independent director), or 8,116 shares (2,029 per each independent director) on a post reverse stock split basis, to each of the Company’s four independent directors. These restricted stock units in this grant vested in full on June 25, 2022, the first anniversary of the grant date, and will be settled in shares of the Company’s common stock upon each of the independent director’s separation from service with the Company.

During the nine months ended September 30, 2022 and September 30, 2021, 11,716 and 13,782 restricted stock units vested, respectively. The Company recognized stock-based compensation expense of approximately $100 thousand and approximately $165 thousand for the three months ended September 30, 2022 and September 30, 2021, respectively. The Company recognized stock-based compensation expense of approximately $335 thousand and approximately $453 thousand for the nine months ended September 30, 2022 and September 30, 2021, respectively. In addition, the Company had unamortized compensation expense of $398 thousand and $211 thousand for equity awards at September 30, 2022 and December 31, 2021, respectively.

Holders of restricted stock units are entitled to receive dividends (or dividend equivalent payments) and distributions that become payable on the restricted stock units during the restricted period. Dividend equivalent payments allocable to restricted stock units are deemed to purchase additional phantom shares of the Company's common stock that are credited to each participant's deferral account. The award agreements include restrictions whereby the restricted stock units cannot be sold, assigned, transferred, pledged, hypothecated, or otherwise disposed of prior to the lapse of restrictions under the respective award agreement. The restrictions lapse on the unvested restricted stock units awarded when vested, subject to the grantee's continuing to provide services to the Company as of the vesting date. Unvested restricted stock units and rights to dividends thereon are forfeited upon termination of the grantee.

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The following is a summary of restricted equity awards vesting dates as of September 30, 2022 and December 31, 2021:


	September 30, 2022	December 31, 2021
Vesting Date	Shares Vesting	Shares Vesting
March 2022	—	3,600
June 2022	—	8,116
June 2023	31,704	—
June 2024	10,000	—
Total	41,704	11,716

The following table presents information with respect to shares issued under the Company’s Equity Incentive Plans for the nine months ended September 30, 2022 and September 30, 2021:


	September 30, 2022			September 30, 2021
	Restricted Stock Units	Weighted Average Grant Date Fair Value (1)		Restricted Stock Units	Weighted Average Grant Date Fair Value (1)
Outstanding at beginning of period	114,825	$	131.85	102,554	$	140.99
Granted(2)	45,954	12.75		14,057	52.08
Cancelled/forfeited	—	—		(2,546)	27.50
Outstanding at end of period	160,779	97.81		114,065	132.56
Unvested at end of period	41,704	$	12.52	11,716	$	56.19

(1)The grant date fair value of the awards is based on the closing market price of the Company’s common stock at the grant date.

(2)Includes 4,250 and 5,941 shares attributed to dividends on restricted stock under the Director Deferred Fee Plan for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Note 12 — Stockholders’ Equity

Reverse stock split

On June 30, 2022, the Company announced that its board of directors approved a one-for-ten reverse stock split of the Company's outstanding shares of common stock. The one-for-ten reverse stock split was effected on July 11, 2022, which reduced the total number of authorized shares of common stock from 500,000,000 to 50,000,000 shares, resulting in the number of common shares outstanding reducing from 60,380,105 to 6,038,010. The par value per share of our common stock remained unchanged at $0.01. All per share amounts and common shares outstanding have been adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

Our stockholders' equity, in the aggregate, remains unchanged. Per share net income or loss increased because there are fewer shares of common stock outstanding. The common stock held in treasury was reduced in proportion to the Reverse Stock Split Ratio. There were no other accounting consequences, including changes to the amount of stock-based compensation expense to be recognized in any period, that arose as a result of the reverse stock split. No fractional shares were issued in connection with the reverse stock split. Instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined based on the closing price of the Company's common stock the business day prior to the Effective Date. The reverse stock split applied to all of the Company's outstanding shares of common stock and did not affect any stockholder’s ownership percentage of shares of the Company's common stock, except for immaterial changes resulting from the payment of cash for fractional shares.

At-The-Market Program

In March 2017, the Company entered into an equity distribution agreement with JMP Securities LLC, which was amended on June 5, 2020, under which the Company may offer and sell up to $100.0 million shares of common stock in an At-

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The-Market equity offering. During the nine months ended September 30, 2022, the Company did not sell any shares under the amended agreement.

Stock Repurchase Program

In December 2021, the Company extended its stock repurchase program as authorized by its Board of Directors. Under the extended program, the Company is permitted to repurchase up to 300,000 shares of its common stock, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split, through December 31, 2023. The previous authorization expired December 31, 2021. Any purchases made pursuant to the program will be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18 of the Securities and Exchange Commission Act of 1934, as amended. The authorization does not obligate the Company to acquire any particular amount of common shares, or any shares at all, and the program may be suspended or discontinued at the Company's discretion without prior notice.

During the nine months ended September 30, 2022, the Company did not repurchase any shares under the stock repurchase program.

Dividends

The following table presents cash dividends declared and paid by the Company on its common stock, adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

Declaration Date

Record Date

Payment Date

Amount per Share

Tax Characterization

2022

September 22, 2022

October 3, 2022

October 26, 2022

0.40

Not yet determined

June 21, 2022

July 1, 2022

July 25, 2022

0.40

Not yet determined

March 23, 2022

April 4, 2022

April 26, 2022

0.40

Not yet determined

2021

December 21, 2021

December 31, 2021

January 26, 2022

0.60

Not yet determined(1)

September 23, 2021

October 4, 2021

October 26, 2021

0.60

Return of capital

June 22, 2021

July 2, 2021

July 26, 2021

0.60

Return of capital

March 23, 2021

April 2, 2021

April 26, 2021

0.60

Return of capital

(1)The cash distributions made on January 26, 2022, with a record date of December 31, 2021, are treated as received by stockholders on January 26, 2022 and taxable in calendar year 2022. The tax characterization of these distributions will be determined in January 2023.

Note 13 — Net Loss per Common Share

The table below presents basic and diluted net loss per share of common stock using the two-class method for the three and nine months ended September 30, 2022 and September 30, 2021 (dollars, other than shares and per share amounts, in thousands), adjusted on a retroactive basis to reflect the Company's one-for-ten reverse stock split.

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	For the three months ended September 30, 2022		For the three months ended September 30, 2021		For the nine months ended September 30, 2022		For the nine months ended September 30, 2021
Numerator:
Net loss attributable to common stockholders and participating securities for basic and diluted earnings per share	$	(40,010)	$	(4,213)	$	(88,250)	$	(36,423)
Less:
Dividends and undistributed earnings allocated to participating securities	32		24		62		65
Net loss allocable to common stockholders — basic and diluted	$	(40,042)	$	(4,237)	$	(88,312)	$	(36,488)

Denominator:
Weighted average common shares outstanding for basic earnings per share	6,038,010		6,079,569		6,036,876		6,077,176
Weighted average common shares outstanding for diluted earnings per share	6,038,010		6,079,569		6,036,876		6,077,176
Basic loss per common share	$	(6.63)	$	(0.70)	$	(14.63)	$	(6.00)
Diluted loss per common share	$	(6.63)	$	(0.70)	$	(14.63)	$	(6.00)

For the three and nine months ended September 30, 2022 and September 30, 2021, the Company excluded the effects of the convertible senior unsecured notes from the computation of diluted earnings per share since the average market value per share of the Company’s common stock was below the exercise price of the convertible senior unsecured notes.

Note 14 — Income Taxes

As a REIT, the Company is not subject to federal income tax to the extent that it makes qualifying distributions to its stockholders and satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income and stock ownership tests.

Based on the Company’s analysis of any potential uncertain income tax positions, the Company concluded that it does not have any uncertain tax positions that meet the recognition or measurement criteria as of September 30, 2022. The Company files U.S. federal and state income tax returns. As of September 30, 2022, U.S. federal tax returns filed by the Company for 2020, 2019 and 2018 and state tax returns filed for 2020, 2019, 2018, 2017, and 2016 are open for examination pursuant to relevant statutes of limitation. In the event that the Company incurs income tax related interest and penalties, the Company’s policy is to classify them as a component of its provision for income taxes.

Income Tax Provision

Subject to the limitation under the REIT asset test rules, the Company is permitted to own up to 100% of the stock of one or more taxable REIT subsidiaries ("TRS"). Currently, the Company owns one TRS that is taxable as a corporation and is subject to federal, state and local income tax on its net income at the applicable corporate rates. The TRS, which was formed in Delaware on July 28, 2014, is a limited liability company and a wholly-owned subsidiary of the Company. During the three months ended September 30, 2022 and September 30, 2021, the Company recorded a federal and state tax provision of $266 thousand and tax benefit of $218 thousand, respectively, which is recorded in "Income tax provision (benefit)" in the Consolidated Statements of Operations. During the nine months ended September 30, 2022 and September 30, 2021, the Company recorded a federal and state tax provision of $276 thousand and tax benefit of $19 thousand, respectively.

Deferred Tax Asset

As of September 30, 2022 and December 31, 2021, the Company recorded a deferred tax asset of approximately $16.2 million and $13.0 million, respectively, relating to capital loss carryforward and temporary differences as a result of the timing

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of income recognition of certain investments held in the TRS. The capital loss carryforwards may only be recognized to the extent of capital gains. There is uncertainty as to the TRS ability to recognize capital gains in the future. As a result, the Company has concluded it is more likely than not the deferred tax asset will not be realized and has recorded a full valuation allowance.

In addition, the REIT generated net operating losses ("NOLs") during the year ended December 31, 2021 related to ordinary losses on its MBS portfolio and it generated NOLs for the years ended December 31, 2020 and December 31, 2017, related to its interest rate swap terminations, and for its California return a portion of the NOLs is apportioned to the TRS. The Company recorded a deferred tax asset relating to the NOLs of $18.6 million and $18.6 million in the REIT and $2.0 million and $2.0 million in the TRS as of September 30, 2022 and December 31, 2021, respectively. The TRS can carryback the NOLs generated during the years ended December 31, 2020 and December 31, 2017 to each of the two preceding years to request a refund for taxes paid. As of September 30, 2022 and December 31, 2021, the Company has concluded it is more likely than not the deferred tax asset relating to the NOLs will not be realized, with the exception of the TRS carryback to 2015, and it has recorded a combined valuation allowance of $20.6 million and $20.6 million, respectively.

Effective Tax Rate

The Company's effective tax rate differs from its combined federal and state income tax rate primarily due to its valuation allowance and the deduction of dividends distributions to be paid under Code Section 857(a).

Note 15 — Contingencies

From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. Management is not aware of any material contingencies at September 30, 2022.

Note 16 — Subsequent Event

2022 Convertible Senior Unsecured Notes Maturity

The Company's 2022 Notes outstanding on September 30, 2022 of $26.0 million were repaid in full upon their maturity on October 3, 2022. The Company had an unrestricted cash balance of $28.6 million at October 3, 2022, after the retirement of the 2022 Notes.

CRE 3 Loan

As of September 30, 2022, the CRE 3 junior mezzanine loan with an outstanding principal balance of $90.0 million secured by an indirect pledge of equity in the mortgage borrower and owner of a retail facility was non-performing and past its maturity date of June 29, 2021. Interest payments on this loan were received from a reserve that was exhausted in May 2021. On October 25, 2022, the senior mezzanine lender notified the Company that it had consummated a strict foreclosure under the Uniform Commercial Code of its equity interest in the mortgage borrower and owner of the property, which had the effect of foreclosing out the Company’s subordinate pledge of equity in the retail facility owner that served as collateral for the junior mezzanine loan. As a result, the Company’s junior mezzanine loan remains outstanding but without the benefit of the primary collateral supporting the loan. The Company continues to benefit from certain corporate and personal guarantees with respect to its loan and has certain rights to excess proceeds generated by two other large retail and entertainment properties owned by the borrower in Canada and the American Midwest. As a result of the foreclosure noted above, the Company has marked down the value of its investment in the CRE 3 junior mezzanine loan from $26.9 million at June 30, 2022 to $8.8 million at September 30, 2022. The Company is currently exploring all available measures to maximize its recovery with respect to this loan, but if none of these measures is successful, the Company could experience a total loss of its investment, which would result in a $8.8 million reduction in the Company’s book value. There can be no assurance that the Company will be able to obtain any recovery with respect to such loan.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING INFORMATION

The Company makes forward-looking statements herein and will make forward-looking statements in future filings with the Securities and Exchange Commission (the “SEC”), press releases or other written or oral communications within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). For these statements, the Company claims the protections of the safe harbor for forward-looking statements contained in such sections. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond the Company’s control.

These forward-looking statements include information about possible or assumed future results of the Company’s business, financial condition, liquidity, results of operations, plans and objectives. When the Company uses the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, the Company intends to identify forward-looking statements. Statements regarding the following subjects, among others, may be forward-looking: market trends in the Company’s industry, interest rates, real estate values, the debt securities markets, the U.S. housing and the U.S. and foreign commercial real estate markets or the general economy or the market for residential and/or commercial mortgage loans; the Company’s business and investment strategy; the Company’s projected operating results; changes in interest rates and the market value of the Company’s target assets; credit risks; servicing-related risks, including those associated with foreclosure and liquidation; the state of the U.S. and to a lesser extent, international economy generally or in specific geographic regions; economic trends and economic recoveries; the Company’s ability to obtain and maintain financing arrangements, including under the Company’s repurchase agreements, a form of secured financing, and securitizations; the current potential return dynamics available in residential mortgage-backed securities (“RMBS”), and commercial mortgage-backed securities (“CMBS” and collectively with RMBS, “MBS”); the level of government involvement in the U.S. mortgage market; the anticipated default rates on CMBS and Commercial Loans; the loss severity on Non-Agency MBS; the general volatility of the securities markets in which the Company participates; changes in the value of the Company’s assets; the Company’s expected portfolio of assets; the Company’s expected investment and underwriting process; interest rate mismatches between the Company’s target assets and any borrowings used to fund such assets; changes in prepayment rates on the Company’s target assets; effects of hedging instruments on the Company’s target assets; rates of default or decreased recovery rates on the Company’s target assets; the degree to which the Company’s hedging strategies may or may not protect the Company from interest rate volatility; the impact of and changes in governmental regulations, tax law and rates, accounting guidance and similar matters; the Company’s ability to maintain the Company’s qualification as a real estate investment trust for U.S. federal income tax purposes; the Company’s ability to maintain its exemption from registration under the Investment Company Act of 1940, as amended (the “1940 Act”); the availability of opportunities to acquire Agency RMBS, Non-Agency RMBS, CMBS, residential and commercial whole loans, residential and commercial bridge loans and other mortgage assets; the availability of qualified personnel; estimates relating to the Company’s ability to make distributions to its stockholders in the future; the Company’s understanding of its competition; outcome and impact of the strategic alternatives review process announced in August 2022; the uncertainty and economic impact of pandemics, epidemics or other public health emergencies, such as the ongoing effects of the COVID-19 pandemic; and the Manager's expectations regarding the ongoing COVID-19 recovery.

The forward-looking statements are based on the Company’s beliefs, assumptions and expectations of its future performance, taking into account all information currently available to it. Forward-looking statements are not predictions of future events. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to the Company. Some of these factors, are described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 8, 2022. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that the Company files with the SEC, could cause its actual results to differ materially from those included in any forward-looking statements the Company makes. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise over time and it is not possible to predict those events or how they may affect the Company. Except as required by law, the Company is not obligated to, and does not intend to, update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

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Western Asset Mortgage Capital Corporation, a Delaware corporation, and its subsidiaries (the “Company” unless otherwise indicated or except where the context otherwise requires “we,” “us” or “our”) commenced operations in May 2012, focused on investing in, financing and managing a portfolio of real estate related securities, Whole Loans and other financial assets, which we collectively refer to as our target assets. We are externally managed by Western Asset Management Company, LLC (our “Manager”) pursuant to the terms of a management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust, or REIT, for U.S. federal income tax purposes. Accordingly, we generally will not be subject to U.S. federal income taxes on our taxable income that we distribute currently to our stockholders as long as we maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated a subsidiary as a taxable REIT subsidiary, or TRS, to engage in such activities. We also intend to operate our business in a manner that permits us to maintain our exemption from registration under the 1940 Act. Our common stock is traded on the New York Stock Exchange, or the NYSE, under the symbol "WMC."

Our objective is to provide attractive risk adjusted returns to our stockholders primarily through an attractive dividend, which we intend to support with sustainable distributable earnings (which we previously referred to as core earnings), as well as the potential for higher returns through capital appreciation. Our investment strategy is based on our Manager's perspective of which mix of our target assets it believes provides us with the best risk-reward opportunities at any given time. We also deploy leverage as part of our investment strategy to increase potential returns.

Our Investment Strategy

Our Manager’s investment philosophy, which developed from a singular focus in fixed-income asset management over a variety of credit cycles and conditions, is to provide clients with a long-term value-oriented portfolio. We benefit from the breadth and depth of our Manager’s overall investment philosophy, which focuses on a macroeconomic analysis as well as an in-depth analysis of individual assets and their relative value. In making investment decisions on our behalf, our Manager seeks to identify assets across the broad mortgage universe with attractive risk adjusted returns, which incorporates its view on the outlook for the mortgage markets, including relative valuation, supply and demand trends, the level of interest rates, the shape of the yield curve, prepayment rates, financing and liquidity, residential real estate prices, delinquencies, default rates, recovery of various segments of the economy and vintage of collateral, subject to maintaining our REIT qualification and our exemption from registration under the 1940 Act.

In December 2021, we announced that our investment strategy will focus on residential real estate-related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We believe this focus will allow us to address attractive market opportunities while maintaining alignment with our Manager’s core competencies. We are continuing to transition out of the commercial investments in our portfolio, though we may from time to time make commercial investments on an opportunistic basis.

Our Target Assets

Residential Whole Loans — Residential Whole Loans are mortgages secured by single family residences held directly by us or through consolidated trusts with us holding the beneficial interest in the trusts. Our Residential Whole Loans are mainly adjustable rate mortgages that do not qualify for the Consumer Finance Protection Bureau’s (or CFPB) safe harbor provision for “qualified mortgages” ("Non-QM mortgages"). Our Manager’s review, relating to Non-QM mortgages, includes an analysis of the loan originator’s procedures and documentation for compliance with Ability to Repay requirements. As discussed in Note 7 "Financing," to the financial statements contained in this Quarterly Report on Form 10-Q, we have and may continue to securitize Whole Loan interests, selling more senior interests in the pool of loans and retaining residual portions. The characteristics of our Residential Whole Loans may vary going forward.

Non-Agency RMBS — RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by a U.S. Government agency or U.S. Government-sponsored entity due to certain factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and/or level of documentation, and therefore are not issued or guaranteed by a U.S. Government agency or U.S. Government-sponsored entity. The mortgage loan collateral may be classified as subprime, Alternative-A or prime depending on the borrower’s credit rating and the underlying level of documentation. Non-Agency RMBS collateral may also include reperforming loans, which are conventional mortgage loans that were current at the time of the securitization, but had been

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delinquent in the past. Non-Agency RMBS may be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages.

Agency RMBS — Agency RMBS, which are RMBS for which the principal and interest payments are guaranteed by a U.S. Government agency, such as the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), or a U.S. Government-sponsored entity ("GSE"), such as the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). The Agency RMBS we acquire can be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. Fixed-rate mortgages have interest rates that are fixed for the term of the loan and do not adjust. The interest rates on adjustable-rate mortgages generally adjust annually (although some may adjust more frequently) to an increment over a specified interest rate index. Hybrid adjustable-rate mortgages have interest rates that are fixed for a specified period of time (typically three, five, seven or ten years) and, thereafter, adjust to an increment over a specified interest rate index. Adjustable-rate mortgages and hybrid adjustable-rate mortgages generally have periodic and lifetime constraints on the amount by which the loan interest rate can change on any predetermined interest rate reset date. These investments can be in the form of pools, TBA and CMO (including interest only, principal only or other structures).

GSE Risk Sharing Securities Issued by Fannie Mae and Freddie Mac — From time to time we have and may in the future continue to invest in risk sharing securities issued by Fannie Mae and Freddie Mac. Principal and interest payments on these securities are based on the performance of a specified pool of Agency residential mortgages. The payments due on these securities, however, are not secured by the referenced mortgages. The payments due are full faith and credit obligations of Fannie Mae or Freddie Mac respectively, but neither agency guarantees full payment of the underlying mortgages. Investments in these securities generally are not qualifying assets for purposes of the 75% real estate asset test applicable to REITs and generally do not generate qualifying income for purposes of the 75% real estate income test applicable to REITs. As a result, we may be limited in our ability to invest in such assets.

Other investments — In addition to Residential Whole Loans and Non-Agency RMBS, our current target investments, we may also make investments in Commercial Loans and Non-Agency CMBS and other securities on an opportunistic basis, which our Manager believes will assist us in meeting our investment objective and are consistent with our overall investment policies. These investments will normally be limited by the REIT requirements that 75% our assets be real estate assets and that 75% of our income be generated from real estate, thereby limiting our ability to invest in such assets.

Our Investment Portfolio

Our investment strategy will focus on residential real estate related investments, including but not limited to non-qualified mortgage loans, Non-Agency RMBS, and other related investments. We are continuing to transition out of our commercial loan investments.

Our investment portfolio composition at September 30, 2022:

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Our Financing Strategy

During 2020, the uncertainties created by the COVID-19 pandemic made it challenging to obtain financing arrangements on favorable terms. In the latter part of 2020 and the beginning of 2021, terms for financing arrangements began to improve significantly. As a result, we diversified our financing sources to provide an alternative to short-term repurchase agreements with daily margin requirements. We expect to continue to seek financing arrangements without daily margin requirements or with margin requirements that apply only after a significant reduction in the valuation of the assets financed, including but not limited to repurchase agreements, term financing, securitization and convertible senior unsecured notes, as the market permits. We believe the amount of leverage we use is consistent with our intention of keeping total borrowings within a prudent range, as determined by our Manager, taking into account a variety of factors such as general economic, political and financial market conditions, the anticipated liquidity and price volatility of our assets, the availability and cost of financing the assets, the creditworthiness of financing counterparties and the health of the U.S. residential and commercial mortgage markets. We expect to maintain a debt-to-equity ratio of two to four and a half times the amount of our stockholders' equity, depending on our investment composition. We seek to enhance equity returns by effectively utilizing leverage and seeking to limit our exposure to interest rate volatility and daily margin calls. The following table presents our debt-to-equity ratio on September 30, 2022 and December 31, 2021:


(dollars in thousands)	September 30, 2022		December 31, 2021
Total debt(1)	$	328,103	$	736,357
Total equity	$	97,948	$	193,109
Debt-to-equity ratio	3.3		3.8

(1) Total debt excludes the securitized debt which is non-recourse to us.

Our Hedging and Risk Management Strategy

Our overall portfolio strategy is designed to generate attractive returns to our investors through various economic cycles. In connection with our risk management activities, we may enter into a variety of derivative and non-derivative instruments. When purchased, our primary objective for acquiring these derivatives and non-derivative instruments is to

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mitigate our exposure to future events that are outside our control. Our derivative instruments are designed to mitigate the effects of market risk and cash flow volatility associated with interest rate risk, including prepayment risk. As part of our hedging strategy, we may enter into interest rate swaps, including forward starting swaps, interest rate swaptions, U.S. Treasury options, future contracts, TBAs, credit default swaps, forwards and other similar instruments. There can be no assurance that appropriate hedging strategies will be available or that if implemented they will be successful.

Critical Accounting Policies

The consolidated financial statements include our accounts, those of our wholly-owned subsidiaries and certain VIEs in which we are the primary beneficiary. All intercompany amounts have been eliminated in consolidation. In accordance with GAAP, our consolidated financial statements require the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Our most critical accounting policies will involve decisions and assessments that could affect our reported assets and liabilities, as well as our reported revenues and expenses. We believe that all of the decisions and assessments upon which our consolidated financial statements have been based were reasonable at the time made and based upon information available to us at that time. There have been no significant changes to our critical accounting policies that are disclosed in our most recent Annual Report on Form 10-K for the year ended December 31, 2021.

2022 Activity

Investment Activity

We continually evaluate potential investments and our investment selection is based on supply and demand of our target assets, costs of financing, and the expected future interest rate volatility costs of hedging. During the nine months ended September 30, 2022, we acquired $411.9 million of residential whole loans and $40.0 million of Non-Agency RMBS. We also, along with the other investors, sold a Commercial REO for total proceeds of $54.7 million.

The following table presents our investing activity for the nine months ended September 30, 2022 (dollars in thousands):


	Balance at				Loan Modification/Capitalized Interest		Principal Payments and Basis Recovery		Proceeds from Sales		Transfers to REO		Realized Gain/(Loss)		Unrealized Gain/(Loss)		Premium and discount amortization, net			Balance at
Investment Type	December 31, 2021		Purchases																September 30, 2022
Agency RMBS and Agency RMBS IOs	$	1,172	$	—	N/A		$	(124)	$	—	N/A		$	—	$	(328)	$	—		$	720
Non-Agency RMBS	27,769		39,952		N/A		(875)		(27,729)		N/A		(1,170)		(8,420)		159			29,686

Non-Agency CMBS	105,358		—		N/A		(5,705)		(10,152)		N/A		(43,934)		42,869		386			88,822
Other securities(1)	51,648		—		N/A		—		(4,406)		N/A		(478)		(8,677)		223			38,310
Total MBS and other securities	185,947		39,952		N/A		(6,704)		(42,287)		N/A		(45,582)		25,444		768			157,538
Residential whole loans	1,023,502		411,917		79		(193,363)		(11,735)		—		(33)		(125,482)		(5,260)			1,099,625
Residential bridge loans	5,428		—		—		(250)		—		—		—		(58)		—			5,120
Commercial loans	130,572		—		—		(20,593)		—		—		—		(19,876)		—			90,103
Securitized commercial loans	1,355,808		—		—		—		—		—		—		(203,828)		19,934			1,171,914
REO	43,607		—		N/A		—		(54,681)		—		12,198		—		N/A			1,124
Total Investments	$	2,744,864	$	451,869	$	79	$	(220,910)	$	(108,703)	$	—	$	(33,417)	$	(323,800)	$	15,442		$	2,525,424

(1) Other securities include $32.3 million of GSE CRTs and $6.0 million of ABS at September 30, 2022.

Portfolio Characteristics

Residential whole loans

The residential whole loans have low LTV's and are comprised of 2,990 Non-QM adjustable rate mortgages and five investor fixed rate mortgages. The following table presents certain information about our residential whole loans investment portfolio at September 30, 2022 (dollars in thousands):

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				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Original FICO Score(1)	Expected Life (years)	Contractual Maturity (years)	Coupon Rate
2.01% – 3.00%	40	$	22,510	66.3	%	758	9.2	28.5	2.9	%
3.01% – 4.00%	431	224,994		65.7	%	758	7.3	28.5	3.7	%
4.01% – 5.00%	1,372	467,195		64.0	%	749	5.8	26.2	4.6	%
5.01% – 6.00%	902	366,708		65.8	%	742	5.1	27.1	5.4	%
6.01% – 7.00%	235	103,067		70.3	%	742	3.9	28.8	6.4	%
7.01% - 8.00%	15	5,852		75.1	%	731	3.2	29.4	7.4	%

Total	2,995	$	1,190,326	65.5	%	748	5.8	27.2	4.8	%

(1)The original FICO score is not available for 236 loans with a principal balance of approximately $77.7 million at September 30, 2022. We have excluded these loans from the weighted average computations.

Residential bridge loans

We are no longer allocating capital to residential bridge loans. The following table presents certain information about the remaining eight residential bridge loans left in the portfolio at September 30, 2022 (dollars in thousands):


				Weighted Average
Current Coupon Rate	Number of Loans	Principal Balance		Original LTV		Contractual Maturity (months)(1)	Coupon Rate

7.01% – 9.00%	3	$	2,946	70.4	%	0.0	8.8	%
9.01% – 11.00%	2	2,144		78.1	%	0.0	10.4	%
11.01% – 13.00%	2	495		69.7	%	0.0	11.4	%





Total	7	$	5,585	73.3	%	0.0	9.7	%

Non-performing residential loans

The following table presents the aging of the residential whole loans and bridge loans as of September 30, 2022 (dollars in thousands):


	Residential Whole Loans					Bridge Loans
	No of Loans	Principal		Fair Value		No of Loans	Principal		Fair Value
Current	2,985	$	1,184,619	$	1,094,291	—	$	—	$	—
1-30 days	3	2,448		2,324		1	849		858
31-60 days	—	—		—		—	—		—
61-90 days	—	—		—		—	—		—
90+ days	7	3,259		3,010		6	4,736		4,262
Total	2,995	$	1,190,326	$	1,099,625	7	$	5,585	$	5,120

Residential whole loans in non-accrual status

As of September 30, 2022, there were seven Non-QM loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $3.3 million and a fair value of $3.0 million. These nonperforming loans represent approximately 0.3% of the total outstanding principal balance. No allowance or provision for credit losses was recorded as of and for the three and nine months ended September 30, 2022, since the valuation adjustment, if any, would be reflected in the

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fair value of these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.

As of September 30, 2022, there were six residential bridge loans carried at fair value in non-accrual status with an unpaid principal balance of approximately $4.7 million and a fair value of $4.3 million. No allowance and provision for credit losses was recorded for loans carried at fair value as of and for the three and nine months ended September 30, 2022, since valuation adjustments, if any, would be reflected in the fair value of these loans. We stopped accruing interest income for these loans when they became contractually 90 days delinquent.

As of September 30, 2022, we had four real estate owned ("REO") properties with an aggregate carrying value of $1.1 million related to foreclosed bridge loans. The REO properties are held for sale and accordingly carried at the lower of cost or fair value less cost to sell. The REO properties are classified in "Other assets" in the Consolidated Balance Sheet.

Non-Agency RMBS

The following table presents the fair value and weighted average purchase price for each of our Non-Agency RMBS categories, including IOs accounted for as derivatives, together with certain of their respective underlying loan collateral attributes and current performance metrics as of September 30, 2022 (fair value dollars in thousands):


			Weighted Average
Category	Fair Value		Purchase Price		Life (Years)	Original LTV		Original FICO	60+ Day Delinquent		CPR
Prime	$	12,865	$	79.89	12.1	67.8	%	748	5.0	%	18.0	%
Alt-A	16,821		63.55		14.3	74.5	%	675	11.8	%	12.6	%

Total	$	29,686	$	70.63	13.3	71.6	%	707	8.8	%	15.0	%

Agency RMBS Portfolio

The following table summarizes our Agency portfolio by investment category as of September 30, 2022 (dollars in thousands):


	Principal Balance		Amortized Cost		Fair Value		Net Weighted Average Coupon







Agency RMBS IOs and IIOs (1)	N/A		$	56	$	52	—	%
Agency RMBS IOs and IIOs accounted for as derivatives (1)	N/A		N/A		668		0.7	%

Total	$	—	$	56	$	720	0.6	%

(1)IOs and IIOs have no principal balances and bear interest based on a notional balance. The notional balance is used solely to determine interest distributions on the interest-only class of securities.

Non-Agency CMBS

The following table presents certain characteristics of our Non-Agency CMBS portfolio as of September 30, 2022 (dollars in thousands):

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		Principal				Weighted Average
Type	Vintage	Balance		Fair Value		Life (Years)	Original LTV
Conduit:
	2006-2009	$	76	$	75	0.6	88.7	%
	2010-2020	14,982		10,490		6.4	62.3	%
		15,058		10,565		6.4	62.5	%
Single Asset:
	2010-2020	95,057		78,257		1.2	65.5	%
Total		$	110,115	$	88,822	1.9	65.1	%

Commercial real estate investments

With the new focus on residential real estate related investments, we are continuing to transition out of our commercial loan investments. The following table presents our commercial loan investments as of September 30, 2022 (dollars in thousands):

Loan

Loan Type

Principal Balance

Fair Value

Original LTV

Interest Rate

Maturity Date

Extension Option

Collateral

Geographic Location

CRE 3

Interest-Only Mezzanine loan

90,000

8,777

58%

1-Month LIBOR plus 9.25%

6/29/2021

None(1)

Entertainment and Retail

CRE 4

Interest-Only First Mortgage

22,204

63%

1-Month LIBOR plus 3.02%

8/6/2025(2)

None

Retail

CRE 5

Interest-Only First Mortgage

24,535

24,405

62%

1-Month LIBOR plus 3.75%

11/6/2023(3)

None

Hotel

CRE 6

Interest-Only First Mortgage

13,207

13,136

62%

1-Month LIBOR plus 3.75%

11/6/2023(3)

None

Hotel

CRE 7

Interest-Only First Mortgage

7,259

7,220

62%

1-Month LIBOR plus 3.75%

11/6/2023(3)

None

Hotel

IL, FL

SBC 3

Interest-Only First Mortgage

14,362

14,361

49%

1-Month LIBOR plus 4.35%

1/6/2023

None

Nursing Facilities

171,567

90,103

(1) CRE 3 is in default and not eligible for extension.

(2) The CRE 4 loan was granted a 3 year extension through August 6, 2025, with a principal pay down of $16.2 million.

(3) CRE 5, 6, and 7 were each granted one-year extensions through November 6, 2023.

Non-performing commercial loans

All but the one loan discussed below remain current.

CRE 3 Loan

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mezzanine loan. As a result, the Company’s junior mezzanine loan remains outstanding but without the benefit of the primary collateral supporting the loan. The Company continues to benefit from certain corporate and personal guarantees with respect to its loan and has certain rights to excess proceeds generated by two other large retail and entertainment properties owned by the borrower in Canada and the American Midwest. As a result of the foreclosure, the Company has marked down the value of its investment in the CRE 3 junior mezzanine loan from $26.9 million at June 30, 2022 to $8.8 million at September 30, 2022. The Company is currently exploring all available measures to maximize its recovery with respect to this loan, but if none of these measures is successful, the Company could experience a total loss of its investment, which would result in an $8.8 million reduction in the Company’s book value. There can be no assurance that the Company will be able to obtain any recovery with respect to such loan.

The following table presents the aging of the Commercial Loans as of September 30, 2022 (dollars in thousands):


	Commercial Loans
	No of Loans	Principal		Fair Value
Current	5	$	81,567	$	81,326
1-30 days	—	—		—
31-60 days	—	—		—
61-90 days	—	—		—
90+ days	1	90,000		8,777
Total	6	$	171,567	$	90,103

Commercial loan investment payoffs

On September 16, 2022, CRE 8, which had an outstanding principal balance of $4.4 million collateralized by assisted living facilities, was paid off in full.

Commercial Real Estate Owned

In February 2022, we and the other investors sold the unencumbered hotel property for $55.9 million which was foreclosed on in the third quarter of 2021. We and the other investors fully recovered our aggregate initial investment of $42.0 million. We recognized a gain on sale of approximately $12.2 million.

Geographic Concentration

The mortgages underlying our Non-Agency RMBS and Non-Agency CMBS are located in various states across the United States and other countries. The following table presents the five largest concentrations by location for the mortgages collateralizing our Non-Agency RMBS and Non-Agency CMBS as of September 30, 2022, based on fair value (dollars in thousands):


	Non-Agency RMBS					Non-Agency CMBS
	Concentration		Fair Value			Concentration		Fair Value
California	29.0	%	$	8,614	California	41.9	%	$	37,176
Florida	12.7	%	3,759		Nevada	22.1	%	19,651
New York	6.4	%	1,910		Bahamas	16.4	%	14,527
Texas	4.5	%	1,327		Texas	4.0	%	3,511
New Jersey	4.2	%	1,244		Pennsylvania	2.2	%	1,913

The following table presents the various states across the United States in which the collateral securing our residential whole loans and residential bridge loans at September 30, 2022, based on principal balance, is located (dollars in thousands):

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	Residential Whole Loans					Residential Bridge Loans
	State Concentration		Principal Balance			State Concentration		Principal Balance
California	66.6	%	$	793,123	New York	47.1	%	$	2,631
New York	9.4	%	112,329		California	31.4	%	1,754
Texas	4.8	%	56,856		Florida	20.1	%	1,125
Florida	4.1	%	48,959		New Jersey	1.4	%	75
Georgia	3.6	%	42,347		Total	100.0	%	$	5,585
Other	11.5	%	136,712
Total	100.0	%	$	1,190,326

Financing Activity

We will look to continue to expand and diversify our financing sources, especially those sources that provide an alternative to short-term repurchase agreements with daily margin requirements.

Repurchase Agreements

Our repurchase agreements bear interest at a contractually agreed-upon rate and have terms ranging from one month to 12 months. Our counterparties generally require collateral in excess of the loan amount, or haircuts. As of September 30, 2022, the contractual haircuts required under repurchase agreements on our investments were as follows:


	Minimum	Maximum
Short-Term Borrowings
Agency RMBS IOs	25%	25%
Non-Agency RMBS	35%	60%
Residential Whole Loans	25%	25%
Residential Bridge Loans	25%	25%
Commercial Loans	60%	60%
Other Securities	60%	60%

Long-Term Borrowings
Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency RMBS	35%	45%
Non-Agency CMBS	40%	40%
Other Securities	35%	35%

Residential Whole Loan Facility
Residential Whole Loans(1)	10%	10%

Commercial Whole Loan Facility
Commercial Loans(2)	22%	32%

(1) The haircut is based on 10% of the outstanding principal amount of the Residential Whole Loans.

(2) Each Commercial Loan is financed separately under this facility and the haircuts are dependent on the type of collateral.

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Convertible Senior Unsecured Notes

During the quarter ended March 31, 2022, we repurchased $3.4 million aggregate principal amount of the 2022 Notes at an approximate 0.8% premium to par value, plus accrued and unpaid interest.

During the quarter ended June 30, 2022, we repurchased $7.2 million aggregate principal amount of the 2022 Notes at an approximate 0.6% premium to par value, plus accrued and unpaid interest.

During the quarter ended September 30, 2022, we repurchased $1.0 million aggregate principal amount of the 2022 Notes at par value, plus accrued and unpaid interest.

Securitized Debt

In February 2022, we completed a residential mortgage-backed securitization. The Arroyo Trust 2022-1 issued $398.9 million of mortgage-backed notes and we retained the subordinate non-offered securities in the securitization, which include the Class B, Class A-IO-S and Class XS certificates. These non-offered securities were eliminated in the consolidation. As of September 30, 2022, Residential Whole Loans, with an outstanding principal balance of approximately $399.6 million, serve as collateral for the Arroyo Trust 2022-1's securitized debt.

In July 2022, we completed a residential mortgage-backed securitization. The Arroyo Trust 2022-2 issued $351.9 million of mortgage-backed notes and we retained the subordinate non-offered securities in the securitization, which included the Class B-1, Class B-2, Class B-3, Class A-IO-S and Class XS certificates. These non-offered securities were eliminated in the consolidation. As of September 30, 2022, Residential Whole Loans, with an outstanding principal balance of approximately $390.9 million, serve as collateral for the Arroyo Trust 2022-2's securitized debt.

Repurchase Agreements

At September 30, 2022, we had outstanding borrowings under five of our repurchase agreements. The following table summarizes certain characteristics of our repurchase agreements at September 30, 2022 (dollars in thousands):

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Securities Pledged	Repurchase Agreement Borrowings		Weighted Average Interest Rate on Borrowings Outstanding at end of period		Weighted Average Remaining Maturity (days)
Short-Term Borrowings:

Agency RMBS	$	317	3.15	%	32

Non-Agency RMBS(1)	54,228		6.17	%	88
Residential Whole Loans (2)	778		5.40	%	11
Residential Bridge Loans (2)	2,895		5.60	%	11
Commercial Loans (2)	5,630		6.18	%	11

Other Securities	1,966		5.75	%	17
Total short term borrowings	65,814		6.11	%	75
Long Term Borrowings:
Non-Agency CMBS and Non-Agency RMBS Facility
Non-Agency CMBS (1)	55,155		2.28	%	214
Non-Agency RMBS	21,943		2.28	%	214
Other Securities	23,948		2.28	%	214
Subtotal	101,046		2.28	%	214
Residential Whole Loan Facility
Residential Whole Loans (2)	4,049		5.11	%	35
Commercial Whole Loan Facility
Commercial Loans	48,032		4.55	%	35
Total long term borrowings	153,127		3.07	%	153
Repurchase agreements borrowings	$	218,941	3.98	%	130
Less unamortized debt issuance costs	—		N/A		N/A
Repurchase agreement borrowings, net	$	218,941	3.98	%	130

(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(2)Repurchase agreement borrowings on loans owned are through trust certificates. The trust certificates are eliminated in consolidation.

At September 30, 2022, we had outstanding repurchase agreement borrowings with the following counterparties:


(dollars in thousands) Repurchase Agreement Counterparties	Amount Outstanding		Percent of Total Amount Outstanding		Company Investments Held as Collateral		Counterparty Rating(1)
Credit Suisse AG, Cayman Islands Branch (2)	$	106,309	48.6	%	$	165,521	A
Citigroup Global Markets Inc.	101,046		46.2	%	152,099		A+
Nomura Securities International, Inc. (3)	9,303		4.2	%	20,857		Unrated (3)
Credit Suisse Securities (USA) LLC	1,966		0.9	%	6,001		A












All other counterparties (4)	317		0.1	%	233
Total	$	218,941	100.0	%	$	344,711

(1)The counterparty ratings presented above are the long-term issuer credit ratings as rated at September 30, 2022 by S&P.

(2)Includes master repurchase agreements in which the buyer includes Alpine Securitization LTD., a Credit Suisse sponsored asset-backed commercial paper conduit.

(3) Nomura Holdings, Inc., the parent company of Nomura Securities International, Inc., is rated BBB+ by S&P at September 30, 2022.

(4) Represents amount outstanding with one counterparty, which holds collateral valued less than 5% of our stockholders’ equity as security for our obligations under the applicable repurchase agreements as of September 30, 2022.

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The following table presents our average repurchase agreement borrowings, excluding unamortized debt issuance costs, by type of collateral pledged for the three and nine months ended September 30, 2022 (dollars in thousands):


Collateral	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Agency RMBS	$	321	$	501

Non-Agency RMBS(1)	56,775		58,521
Non-Agency CMBS(1)	55,155		61,279
Residential Whole Loans	49,838		180,961
Commercial loans	72,456		66,068

Residential Bridge Loans	4,955		5,345

Other securities	25,944		30,195
Total	$	265,444	$	402,870
Maximum borrowings during the period(2)	$	218,941	$	613,518

(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(2)Amount represents the maximum borrowings at month-end during each of the respective periods.

Repurchase agreements financial metrics

Certain of our financing agreements provide the counterparty with the right to terminate the agreement and accelerate amounts due under the associated agreement if we do not maintain certain financial metrics. Although specific to each financing arrangement, typical financial metrics include minimum equity and liquidity requirements, leverage ratios, and performance triggers. In addition, some of the financing arrangements contain cross-default features, whereby default under an agreement with one lender simultaneously causes default under agreements with other lenders with borrowings outstanding as of September 30, 2022. With the exception of one repurchase agreement for which we received a waiver, we were in compliance with the terms of such financial tests as of September 30, 2022.

Securitized Debt

Residential Mortgage-Backed Notes

Arroyo Trust 2019

The following table summarizes the consolidated Arroyo Trust 2019's issued mortgage-backed notes at September 30, 2022 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1	$	176,628	3.3%	$	176,628	4/25/2049
Class A-2	9,473		3.5%	9,473		4/25/2049
Class A-3	15,007		3.8%	15,007		4/25/2049
Class M-1	25,055		4.8%	25,055		4/25/2049
Subtotal	$	226,163		$	226,163
Less: Unamortized deferred financing costs	N/A			2,830
Total	$	226,163		$	223,333

Arroyo Trust 2020

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The following table summarizes the consolidated Arroyo Trust 2020's issued mortgage-backed notes at September 30, 2022 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Carrying Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1A	$	77,393	1.7%	$	77,393	3/25/2055
Class A-1B	9,184		2.1%	9,184		3/25/2055
Class A-2	13,518		2.9%	13,518		3/25/2055
Class A-3	17,963		3.3%	17,963		3/25/2055
Class M-1	11,739		4.3%	11,739		3/25/2055
Subtotal	$	129,797		$	129,797
Less: Unamortized deferred financing costs	N/A			1,665
Total	$	129,797		$	128,132

Arroyo Trust 2022-1

The following table summarizes the consolidated Arroyo Trust 2022-1's issued mortgage-backed notes at September 30, 2022 which is classified as "Securitized debt, net" on the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Fair Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1A	$	218,530	2.5%	$	199,526	12/25/2056
Class A-1B	82,942		3.3%	69,669		12/25/2056
Class A-2	21,168		3.6%	16,617		12/25/2056
Class A-3	28,079		3.7%	21,312		12/25/2056
Class M-1	17,928		3.7%	12,814		12/25/2056


Total	$	368,647		$	319,938

Arroyo Trust 2022-2

The following table summarizes the consolidated Arroyo Trust 2022-2's issued mortgage-backed notes at September 30, 2022 which is classified as "Securitized debt, net" on the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon	Fair Value		Contractual Maturity
Issued Mortgage-Backed Notes
Class A-1	$	273,691	5.0%	$	263,315	7/25/2057
Class A-2	23,297		5.0%	21,916		7/25/2057
Class A-3	28,388		5.0%	26,398		7/25/2057
Class M-1	17,694		5.0%	15,097		7/25/2057


Total	$	343,070		$	326,726

Commercial Mortgage-Backed Notes

We hold a controlling financial variable interest in CSMC USA and are required to consolidate the CMBS VIE. Refer to Note 7 - "Financings" for details. The following table summarizes the consolidated CSMC USA's commercial mortgage

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pass-through certificates at September 30, 2022 which is classified in "Securitized debt, net" in the Consolidated Balance Sheets (dollars in thousands):


Classes	Principal Balance		Coupon		Fair Value		Contractual Maturity
Class A-1	$	120,391	3.3	%	$	109,867	9/11/2025
Class A-2	531,700		4.0	%	482,628		9/11/2025
Class B	136,400		4.2	%	119,584		9/11/2025
Class C	94,500		4.3	%	79,772		9/11/2025
Class D	153,950		4.4	%	122,083		9/11/2025
Class E	180,150		4.4	%	132,952		9/11/2025
Class F	153,600		4.4	%	104,961		9/11/2025
Class X-1(1)	N/A		0.5	%	8,268		9/11/2025
Class X-2(1)	N/A		—	%	1,618		9/11/2025
	$	1,370,691			$	1,161,733

(1) Class X-1 and X-2 are interest-only classes with notional balances of $652.1 million and $733.5 million as of September 30, 2022, respectively.

The above table does not reflect the portion of the class F bond held by us because the bond is eliminated in consolidation. Our ownership interest in the F bond represents a controlling financial interest, which resulted in consolidation of the trust. The bond had a fair market value of $10.2 million at September 30, 2022, and our exposure to loss is limited to our ownership interest in this bond.

Convertible Senior Unsecured Notes

2022 Notes

As of September 30, 2022, we had $26.0 million of the 2022 Notes outstanding. The 2022 Notes were repaid in full upon their maturity on October 3, 2022. Refer to Note 16 - Subsequent Events for details.

2024 Notes

As of September 30, 2022, we had $86.3 million aggregate principal amount of the 2024 Notes outstanding. The 2024 notes mature on September 15, 2024, unless earlier converted, redeemed or repurchased by the holders pursuant to their terms, and are not redeemable by us except during the final three months prior to maturity.

Recourse and Non-Recourse Financing

We utilize both recourse and non-recourse debt to finance our portfolio. Our recourse debt included our short and long-term repurchase agreement financings and our convertible senior unsecured notes. At September 30, 2022, our total non-recourse financing is comprised of $998.1 million of securitized debt issued in connection with our four Residential Whole Loan securitizations and $1.2 billion of securitized debt from owning a Non-Agency CMBS bond with a fair value of $10.2 million that was deemed to be a controlling financial variable interest in CSMC USA which required us to consolidate the CMBS VIE.

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(dollars in thousands)	September 30, 2022			December 31, 2021
Recourse and non-recourse financing	$	2,487,965		$	2,599,845
Non-recourse financing
Arroyo 2019-2	223,333			337,571
Arroyo 2020-1	128,132			181,547
Arroyo 2022-1	319,938			—
Arroyo 2022-2	326,726			—
CMSC USA	1,161,733			1,344,370
Total recourse financing	$	328,103	$328,103	$	736,357

Stockholders' equity	$	97,948		$	193,109

Recourse leverage	3.3x			3.8x

Hedging Activity

The following tables summarize the hedging activity during the nine months ended September 30, 2022 (dollars in thousands):


	Notional Amount at				Settlements, Terminations or Expirations		Notional Amount at
Derivative Instrument	December 31, 2021		Acquisitions				September 30, 2022
Fixed pay interest rate swaps	$	22,000	$	309,500	$	(179,500)	$	152,000

Interest rate swaptions	—		560,000		(560,000)		—






Credit default swaps	6,170		—		(6,170)		—
TBA securities - long positions	—		600,000		(600,000)		—
TBA securities - short positions	—		600,000		(600,000)		—
Total derivative instruments	$	28,170	$	2,069,500	$	(1,945,670)	$	152,000


	Fair Value at		Acquisitions		Settlements, Terminations or Expirations		Realized Gains / Losses		Mark-to-market		Fair Value at
Derivative Instrument	December 31, 2021										September 30, 2022
Fixed pay interest rate swaps	$	(38)	$	—	$	(14,743)	$	11,373	$	3,670	$	262

Interest rate swaptions	—		473		(312)		(161)		—		—






Credit default swaps	(459)		—		347		(281)		393		—
TBA securities	—		—		(2,051)		2,051		(1,383)		(1,383)
Total derivative instruments	$	(497)	$	473	$	(16,759)	$	12,982	$	2,680	$	(1,121)

Dividends

During the nine months ended September 30, 2022, we declared dividends totaling $1.20 per share generating a dividend yield of approximately 14.3% based on the stock closing price of $11.19 on September 30, 2022.

Book Value

The following chart reflects our book value per common share basic and diluted over five consecutive quarters:

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We continue to implement measures to improve our balance sheet by increasing liquidity, reducing leverage, and seeking alternative financing arrangements to preserve long-term shareholder value. The decrease in book value from $23.23 as of June 30, 2022, to $16.22 as of September 30, 2022, was primarily driven by spread widening across our holdings, but mainly from our residential whole-loans due to their relative size in the overall portfolio.

Review of Strategic Alternatives

On August, 4, 2022, we announced that our Board of Directors had authorized a review of strategic alternatives for the Company aimed at enhancing shareholder value, which may include a sale or merger of the Company. JMP Securities, A Citizens Company, was retained as exclusive financial advisor to the Company. No assurance can be given that the review being undertaken will result in a sale, merger, or other transaction sale or other business combination involving the Company, and we have not set a timetable for completion of the review process. As previously announced, we do not intend to make any further statements regarding this process unless and until a definitive agreement for a transaction has been reached, or until the process of exploring strategic alternatives has ended.

Results of Operations

Comparison of the three months ended September 30, 2022 to the three months ended September 30, 2021.

General

Due to financial results which occurred during the evolving COVID-19 pandemic, our results of operations for the three months ended September 30, 2022 and September 30, 2021 may not be comparable. During the third quarter of 2022, we continued to make progress towards strengthening our balance sheet, improving liquidity, and the transition of our portfolio to residential investments.

During the three months ended September 30, 2022, we sold approximately $11.7 million of residential whole loans and repurchased $1.0 million aggregate principal amount outstanding of our 2022 Notes at par. Due to spread widening, we experienced a significant decline in the fair value of residential whole loan investments. This decline in fair value of $45.3 million was offset by $3.6 million of unrealized gains on derivatives due to our hedging activity. We also reduced the fair value of CRE 3, a commercial junior mezzanine loan by $18.1 million, as a senior lender consummated a foreclosure on the equity interest in the property. See Note 6 for further discussion. Overall, our net loss was $40.0 million, or $6.63 per basic and diluted weighted common share, for the three months ended September 30, 2022.

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In contrast, for the three months ended September 30, 2021, we had a net loss of $4.2 million, or $0.70 per basic and diluted weighted common share, which was primarily attributable to a decline in fair value in our commercial real estate loans.

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Net Interest Income

The following tables set forth certain information regarding our net interest income on our investment portfolio for the three months ended September 30, 2022 and September 30, 2021 (dollars in thousands):


Three Months Ended September 30, 2022	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	53	$	2	14.97	%
Non-Agency CMBS	109,898		2,336		8.43	%
Non-Agency RMBS	36,075		472		5.19	%
Residential whole loans	1,248,772		13,884		4.41	%
Residential bridge loans	5,585		28		1.99	%
Commercial loans	191,929		1,540		3.18	%
Securitized commercial loans	1,288,238		22,099		6.81	%
Other securities	42,768		1,045		9.69	%
Total investments	$	2,923,318	$	41,406	5.62	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	265,444	$	2,187	3.27	%
Convertible senior unsecured notes, net	109,329		2,402		8.72	%
Securitized debt	2,348,073		31,118		5.26	%
Total borrowings	$	2,722,846	$	35,707	5.20	%

Net interest income and net interest margin(2)			$	5,699	0.77	%


Three Months Ended September 30, 2021	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	70	$	4	22.67	%
Non-Agency CMBS	200,824		4,290		8.48	%
Non-Agency RMBS	28,528		369		5.13	%
Residential whole loans	831,634		8,147		3.89	%
Residential bridge loans	8,714		89		4.05	%
Commercial loans	243,534		2,847		4.64	%
Securitized commercial loan	1,407,129		23,622		6.66	%
Other securities	48,364		773		6.34	%
Total investments	$	2,768,797	$	40,141	5.75	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	391,559	$	3,037	3.08	%
Convertible senior unsecured notes, net	145,356		3,099		8.46	%
Securitized debt	1,995,098		26,842		5.34	%
Total borrowings	$	2,532,013	$	32,978	5.17	%

Net interest income and net interest margin(2)			$	7,163	1.03	%

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(1) Average cost of funds does not include the interest expense related to our derivatives. In accordance with GAAP, such costs are included in "Gain on derivative instruments, net" in the Consolidated Statements of Operations.

(2) Since we do not apply hedge accounting, our net interest margin in this table does not reflect the benefit / cost of our interest rate swaps. See "Non-GAAP Financial Measures" for net investment income table that includes the benefit / cost from our interest rate swaps.

Interest Income

For the three months ended September 30, 2022, and September 30, 2021, we earned interest income on our investments of approximately $41.4 million and $40.1 million, respectively. The increase of approximately $1.3 million was mainly due to an increase in interest rates and principal payments and payoffs residential and commercial investments, including partial and full payoffs on two commercial loans.

Interest Expense

Interest expense increased from $33.0 million for the three months ended September 30, 2021 to $35.7 million for the three months ended September 30, 2022. The increase in interest expense was primarily attributable to increased borrowing costs on our repurchase facilities due to increasing market interest rates.

Other income (loss), net

Realized gain (loss), net

Realized gain (loss) represents the net gain (loss) on sales or settlements from our investment portfolio and debt. The following table presents the realized gains (losses) of our investments and debt for each of the three months ended September 30, 2022 and September 30, 2021 (dollars in thousands):


	For the three months ended September 30, 2022								For the three months ended September 30, 2021
	Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)





Residential whole loans	$	11,736	$	43	$	(76)	$	(33)	$	—	$	—	$	—	$	—
Residential bridge loans(1)	—		—		—		—		—		19		(37)		(18)
Loans transferred to REO(1)	—		—		—		—		68		15		—		15
Disposition of REO	—		—		—		—		738		54		—		54
Convertible senior unsecured notes(2)	(1,000)		—		(2)		(2)		(122,330)		165		(1,742)		(1,577)
Total	$	10,736	$	43	$	(78)	$	(35)	$	(121,524)	$	253	$	(1,779)	$	(1,526)

(1)Realized gains/losses recognized on the final settlement of the loans.

(2)Realized gains/losses recognized on the extinguishment of the 2022 Notes. See Note 7 - Financings for details.

Unrealized gain (loss), net

Our investments and securitized debt, for which we have elected the fair value option, are recorded at fair value with the periodic changes in fair value being recorded in earnings. The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period.

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The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt (dollars in thousands):


	Three months ended September 30, 2022		Three months ended September 30, 2021

Agency RMBS	$	(8)	$	(3)
Non-Agency CMBS	(628)		(2,980)
Non-Agency RMBS	(2,506)		2,241
Residential whole loans	(45,327)		(2,394)
Residential bridge loans	25		175
Commercial loans	(17,729)		(5,494)
Securitized commercial loans	(78,046)		(9,616)
Other securities	(2,409)		930
Securitized debt	103,046		11,138


Total	$	(43,582)	$	(6,003)

Gain (loss) on derivatives, net

As of September 30, 2022, we had interest rate swaps with a notional amount of $152.0 million and no forward starting swaps. Our hedging strategy is designed to mitigate our exposure to interest rate volatility.

The following table presents the components of gain (loss) on derivatives for the three months ended September 30, 2022 and September 30, 2021 (dollars in thousands):


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Three months ended September 30, 2022
Interest rate swaps	$	(3,371)	$	3,423	$	—	$	4,790	$	298	$	5,140
Interest rate swaptions	$	(161)	$	—	$	—	$	—	$	—	$	(161)
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(5)		(54)		16		(43)





Credit default swaps	(273)		—		—		283		—		10
TBAs	1,319		—		—		(1,383)		—		(64)
Total	$	(2,486)	$	3,423	$	(5)	$	3,636	$	314	$	4,882

Three months ended September 30, 2021
Interest rate swaps	$	—	$	485	$	—	$	(71)	$	96	$	510

Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(59)		(90)		82		(67)




Credit default swaps	16		—		—		56		—		72

Total	$	16	$	485	$	(59)	$	(105)	$	178	$	515

(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.

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Other, net

For the three months ended September 30, 2022 and September 30, 2021, "Other, net" was a loss of $61 thousand and income of $277 thousand, respectively. The balance is mainly comprised of income on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives, and miscellaneous fees and expenses on residential mortgage loans.

Expenses

Management Fee

We incurred management fee expense of approximately $850 thousand and $1.5 million for the three months ended September 30, 2022 and September 30, 2021, respectively. The decline in management fees was a result of our Manager voluntarily waiving 25% of its management fee solely for the duration of calendar year 2022 in order to support our earnings potential and our transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.

The management fees, expense reimbursements and the relationship between our Manager and us are discussed further in Note 10, “Related Party Transactions” to the financial statements contained in this Quarterly Report on Form 10-Q.

Other Operating Expenses

We incurred other operating expenses of approximately $343 thousand and $352 thousand for the three months ended September 30, 2022, and September 30, 2021, respectively. Other operating costs comprise bank fees, trustee fees, and asset management/loan servicing fees for loans acquired serving released. Formerly, transaction and financing costs were included in this expense category.

Transaction costs

We incurred transaction costs of $2.6 million and $954 thousand for the three months ended September 30, 2022 and September 30, 2021, respectively. The increase in transaction costs is primarily associated with the Arroyo Trust 2022-2 securitization that was completed in July 2022. Transaction costs incurred for the three months ended September 30, 2021 were associated with the foreclosure of one of our commercial loans.

General and Administrative Expenses

We incurred general and administrative expenses of approximately $2.8 million and $2.3 million for the three months ended September 30, 2022, and September 30, 2021, respectively. The increased expense was primarily driven by an increase in professional fees resulting from accounting related consulting fees incurred during the third quarter to address recent turnover.

Comparison of the nine months ended September 30, 2022 to the nine months ended September 30, 2021.

General

Due to the evolving COVID-19 pandemic, our results of operations for the nine months ended September 30, 2022 and September 30, 2021 may not be comparable. During the first three quarters of 2022, we continued to make progress towards strengthening our balance sheet, improving liquidity, and the transition of our portfolio to residential investments.

During the nine months ended September 30, 2022, we acquired $405.3 million of residential whole loans, sold $42.3 million of investments, including Non-Agency RMBS and CMBS, sold $11.7 million in residential whole loans, realized a gain on the sale of a REO hotel of $12.2 million, and repurchased $1.0 million aggregate principal amount of our existing 2022 Notes at par. We also reduced the fair value of CRE 3, a commercial junior mezzanine loan by $18.1 million, as a senior lender consummated a foreclosure on the equity interest in the property. See Note 6 for further discussion. Also, due to spread widening, we experienced a significant decline in the fair value of our residential whole loan investments. This decline in fair value of $125.5 million, coupled with transaction costs incurred in the securitizations of Arroyo 2022-1 and Arroyo 2022-2 of

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$5.6 million were key contributors to the generation of a net loss of $88.3 million, or $14.63 per basic and diluted weighted common share for the nine months ended September 30, 2022.

In contrast, for the nine months ended September 30, 2021, the key driver of a net loss of $36.4 million, or $6.00 per basic and diluted weighted common share, was declines in fair values of our non-performing commercial mezzanine loan and of our Non-Agency CMBS holdings of $48.6 million and $16.3 million, respectively. These were offset by unrealized gains from other investments.

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Net Interest Income

The following tables set forth certain information regarding our net interest income on our investment portfolio for the nine months ended September 30, 2022 and September 30, 2021 (dollars in thousands):


Nine Months Ended September 30, 2022	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	59	$	9	20.39	%
Non-Agency CMBS	142,362		7,436		6.98	%
Non-Agency RMBS	43,815		1,663		5.07	%
Residential whole loans	1,165,929		34,712		3.98	%
Residential bridge loans	5,688		64		1.50	%
Commercial loans	192,079		4,046		2.82	%
Securitized commercial loans	1,274,894		65,957		6.92	%
Other securities	45,340		2,738		8.07	%
Total investments	$	2,870,166	$	116,625	5.43	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	402,870	$	8,288	2.75	%
Convertible senior unsecured notes, net	113,670		7,499		8.82	%
Securitized debt	2,129,146		84,621		5.31	%
Total borrowings	$	2,645,686	$	100,408	5.07	%

Net interest income and net interest margin(2)			$	16,217	0.76	%


Nine Months Ended September 30, 2021	Average Amortized Cost of Assets		Total Interest Income		Yield on Average Assets

Investments

Agency RMBS	$	89	$	12	18.03	%
Non-Agency CMBS	202,937		13,401		8.83	%
Non-Agency RMBS	29,270		1,058		4.83	%
Residential whole loans	883,711		25,724		3.89	%
Residential bridge loans	11,383		806		9.47	%
Commercial loans	297,593		11,263		5.06	%
Securitized commercial loan	1,487,050		72,586		6.53	%
Other securities	49,355		2,503		6.78	%
Total investments	$	2,961,388	$	127,353	5.75	%

	Average Carrying Value		Total Interest Expense		Average Cost of Funds(1)
Borrowings
Repurchase agreements	$	364,009	$	9,755	3.58	%
Convertible senior unsecured notes, net	159,862		10,056		8.41	%
Securitized debt	2,170,148		84,541		5.21	%
Total borrowings	$	2,694,019	$	104,352	5.18	%

Net interest income and net interest margin(2)			$	23,001	1.04	%

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Interest Income

For the nine months ended September 30, 2022, and September 30, 2021, we earned interest income on our investments of approximately $116.6 million and $127.4 million, respectively. The decrease of approximately $10.7 million was mainly due to a smaller investment portfolio from principal payments and payoffs of commercial and residential investments. The decrease was partially offset by acquisitions of residential investments during the nine months ended September 30, 2022.

Interest Expense

Interest expense decreased from $104.4 million for the nine months ended September 30, 2021 to $100.4 million for the nine months ended September 30, 2022. The decrease in interest expense was primarily a result of a smaller investment portfolio, offset by increased borrowing costs on our repurchase facilities due to increasing market interest rates.

Other income (loss), net

Realized gain (loss), net

Realized gain (loss) represents the net gain (loss) on sales or settlements from our investment portfolio and debt. The following table presents the realized gains (losses) of our investments and debt for each of the nine months ended September 30, 2022 and September 30, 2021 (dollars in thousands):


	For the nine months ended September 30, 2022								For the nine months ended September 30, 2021
	Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)		Proceeds (Payments)		Gross Gains		Gross Losses		Net Gain (Loss)


Non-Agency CMBS	$	10,152	$	—	$	(43,934)	$	(43,934)	$	—	$	—	$	(5,929)	$	(5,929)
Non-Agency RMBS	27,729		255		(1,425)		(1,170)		—		—		—		—
Other securities	4,406		—		(478)		(478)		—		—		—		—
Residential Whole-Loans	11,736		43		(76)		(33)		—		—		—		—
Residential Bridge Loans(1)	—		—		—		—		—		19		(153)		(134)
Loans transferred to REO(2)	—		—		—		—		752		15		(36)		(21)
Disposition of REO(3)	54,681		12,198		—		12,198		738		54		—		54
Convertible senior unsecured notes(4)	(11,689)		—		(134)		(134)		(128,645)		405		(1,742)		(1,337)
Total	$	97,015	$	12,496	$	(46,047)	$	(33,551)	$	(127,155)	$	493	$	(7,860)	$	(7,367)

(1)Realized gains/losses recognized on the final settlement of the loans.

(2)Realized gains/losses recognized on the transfer of Residential Bridge Loans to REO. Proceeds represent the fair value less estimated selling costs of the real estate on the date of transfer.

(3)Realized gains/losses recognized in connection with the sale of the hotel REO.

(4)Realized gains/losses recognized on the extinguishment of the 2022 Notes. See Note 7 - Financings for details.

Unrealized gain (loss), net

Our investments, and securitized debt, for which we have elected the fair value option are recorded at fair value with the periodic changes in fair value being recorded in earnings. The change in unrealized gain (loss) is directly attributable to changes in market pricing on the underlying investments and securitized debt during the period.

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The following table presents the net unrealized gains (losses) we recorded on our investments and securitized debt (dollars in thousands):


	Nine months ended September 30, 2022		Nine months ended September 30, 2021

Agency RMBS	$	(59)	$	16
Non-Agency CMBS	42,869		(16,254)
Non-Agency RMBS	(8,420)		3,710
Residential whole loans	(125,482)		13,667
Residential bridge loans	(58)		639
Commercial loans	(19,876)		(48,630)
Securitized commercial loans	(203,828)		107,423
Other securities	(8,677)		4,553
Securitized debt	257,231		(104,395)


Total	$	(66,300)	$	(39,271)

Gain (loss) on derivatives, net

As of September 30, 2022, we had interest rate swaps with a notional amount of $152.0 million, and no forward starting swaps. Our hedging strategy is designed to mitigate our exposure to interest rate volatility.

The following table presents the components of gain (loss) on derivatives for the nine months ended September 30, 2022 and September 30, 2021 (dollars in thousands):


	Realized Gain (Loss), net
Description	Other Settlements / Expirations		Variation Margin Settlement		Return (Recovery) of Basis		Mark-to-Market		Contractual interest income (expense), net(1)		Total
Nine months ended September 30, 2022
Interest rate swaps	$	(3,371)	$	14,744	$	—	$	3,670	$	(255)	$	14,788
Interest rate swaptions	(161)		—		—		—		—		(161)
Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(120)		(270)		160		(230)





Credit default swaps	(242)		—		—		393		—		151
TBAs	2,051		—		—		—		—		2,051
Total	$	(1,723)	$	14,744	$	(120)	$	3,793	$	(95)	$	16,599

Nine months ended September 30, 2021
Interest rate swaps	$	—	$	520	$	—	$	(25)	$	172	$	667

Agency and Non-Agency Interest-Only Strips— accounted for as derivatives	—		—		(232)		(124)		305		(51)




Credit default swaps	48		—		—		52		—		100

Total	$	48	$	520	$	(232)	$	(97)	$	477	$	716

(1)Contractual interest income (expense), net on derivative instruments includes interest settlement paid or received.

Other, net

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For the nine months ended September 30, 2022 and September 30, 2021, "Other, net" was a loss of $252 thousand and income of $449 thousand, respectively. The balance is mainly comprised of income on cash balances, miscellaneous net interest income (expense) on cash collateral for our repurchase agreements and derivatives, and miscellaneous fees and expenses on residential mortgage loans.

Expenses

Management Fee

We incurred management fee expense of approximately $3.0 million and $4.5 million for the nine months ended September 30, 2022 and September 30, 2021, respectively. The decline in management fees was a result of our Manager voluntarily waiving 25% of its management fee solely for the duration of calendar year 2022 in order to support our earnings potential and our transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.

Other Operating Expenses

We incurred other operating expenses of approximately $901 thousand and $1.2 million for the nine months ended September 30, 2022, and September 30, 2021, respectively. Other operating costs comprise bank fees, trustee fees and asset management/loan servicing fees for loans acquired serving released. Formerly, transaction and financing costs were included in this expense category.

Transaction costs

We incurred transaction costs of $5.6 million and $954 thousand for the nine months ended September 30, 2022 and September 30, 2021, respectively. The increase in transaction costs was primarily associated with the securitizations of Arroyo Trust 2022-1 in February 2022 and of Arroyo Trust 2022-2 in July 2022. Transaction costs incurred for the three months ended September 30, 2021 were associated with the foreclosure of one of our commercial loans.

General and Administrative Expenses

We incurred general and administrative expenses of approximately $7.6 million and $7.6 million for the nine months ended September 30, 2022, and September 30, 2021, respectively. There was no change between comparable periods.

Non-GAAP Financial Measures

We believe that our non-GAAP measures (described below), when considered with GAAP, provide supplemental information useful to investors in evaluating the results of our operations. Our presentations of such non-GAAP measures may not be comparable to similarly-titled measures of other companies, who may use different calculations. As a result, such non-GAAP measures should not be considered as substitutes for our GAAP net income, as measures of our financial performance or any measure of our liquidity under GAAP.

Distributable Earnings

Distributable Earnings (formerly referred to as Core Earnings) is a non-GAAP financial measure that is used by us to approximate cash yield or income associated with our portfolio and is defined as GAAP net income (loss) as adjusted, excluding: (i) net realized gain (loss) on investments and termination of derivative contracts; (ii) net unrealized gain (loss) on investments and debt; (iii) net unrealized gain (loss) resulting from mark-to-market adjustments on derivative contracts; (iv) provision for income taxes; (v) non-cash stock-based compensation expense; (vi) non-cash amortization of the convertible senior unsecured notes discount; (vii) one-time charges such as acquisition costs and impairment on loans; and (viii) one-time events pursuant to changes in GAAP and certain other non-cash charges after discussions between us, our Manager and our independent directors and after approval by a majority of our independent directors.

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We utilize Distributable Earnings as a key metric to evaluate the effective yield of the portfolio. Distributable Earnings allows us to reflect the net investment income of our portfolio as adjusted to reflect the net interest rate swap interest expense. Distributable Earnings allows us to isolate the interest expense associated with our interest rate swaps in order to monitor and project our borrowing costs and interest rate spread. It is one metric of several used in determining the appropriate distributions to our shareholders.

The table below reconciles Net Loss to Distributable Earnings for the three and nine months ended September 30, 2022 and September 30, 2021:


(dollars in thousands)	Three months ended September 30, 2022		Three months ended September 30, 2021		Nine months ended September 30, 2022		Nine months ended September 30, 2021
Net loss attributable to common stockholders and participating securities	$	(40,010)	$	(4,213)	$	(88,250)	$	(36,423)
Income tax provision (benefit)	266		(218)		276		(19)
Net loss before income taxes	(39,744)		(4,431)		(87,974)		(36,442)

Adjustments:
Investments:
Net unrealized loss on investments and securitized debt	43,582		6,003		66,300		39,271
Net realized (gain) loss on investments	33		(51)		36,902		6,030
Realized loss on foreign currency transactions	1		—		1		—

One-time transaction costs	2,632		681		5,708		781

Derivative Instruments:
Net realized gain on derivatives	(929)		(485)		(12,982)		(520)
Net unrealized (gain) loss on derivatives	(3,636)		105		(3,793)		97

Other:
Realized loss on extinguishment of convertible senior unsecured notes	2		1,577		134		1,337
Amortization of discount on convertible senior unsecured notes	209		228		648		712
Other non-cash adjustments	—		—		—		977
Non-cash stock-based compensation expense	100		165		335		453
Total adjustments	41,994		8,223		93,253		49,138
Distributable Earnings	$	2,250	$	3,792	$	5,279	$	12,696

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Alternatively, our Distributable Earnings can also be derived as presented in the table below by starting with adjusted net interest income, which includes interest income on Interest-Only Strips accounted for as derivatives and other derivatives, and net interest expense incurred on interest rate swaps and foreign currency swaps and forwards (a Non-GAAP financial measure) subtracting Total expenses, adding Non-cash stock based compensation, adding one-time transaction costs, adding amortization of discount on convertible senior notes and adding interest income on cash balances and other income (loss), net:


(dollars in thousands)	Three months ended September 30, 2022		Three months ended September 30, 2021		Nine months ended September 30, 2022		Nine months ended September 30, 2021
Net interest income	$	5,699	$	7,163	$	16,217	$	23,001
Interest income from IOs and IIOs accounted for as derivatives	11		23		40		73
Net interest income (expense) from interest rate swaps	298		96		(255)		172
Adjusted net interest income	6,008		7,282		16,002		23,246
Total expenses	(6,645)		(5,128)		(17,069)		(14,237)
Other non-cash adjustments	—		—		—		977
Non-cash stock-based compensation	100		165		335		453
One-time transaction costs	2,632		681		5,708		781
Amortization of discount on convertible unsecured senior notes	209		228		648		712
Interest income on cash balances and other income (loss), net	(52)		293		(212)		497
Income attributable to non-controlling interest	(2)		271		(133)		267
Distributable Earnings	$	2,250	$	3,792	$	5,279	$	12,696

Reconciliation of GAAP Book Value to Non-GAAP Economic Book Value

"Economic book value" is a non-GAAP financial measure of our financial position on an unconsolidated basis. We own certain securities that represent a controlling variable interest, which under GAAP requires consolidation; however, our economic exposure to these variable interests is limited to the fair value of the individual investments. Economic book value is calculated by taking the GAAP book value and 1) adding the fair value of the retained interest or acquired security of the VIEs held by us and 2) removing the asset and liabilities associated with each of consolidated trusts (CSMC USA, Arroyo 2019-2, Arroyo 2020-1, Arroyo 2022-1, and Arroyo 2022-2). Management believes that Economic book value provides investors with a useful supplemental measure to evaluate our financial position as it reflects the actual financial interest of these investments irrespective of the variable interest consolidation model applied for GAAP reporting purposes. Economic book value does not represent and should not be considered as a substitute for Stockholders' Equity, as determined in accordance with GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The table below is a reconciliation of the GAAP Book Value to Non-GAAP Economic Book Value (dollars in thousands - except per share data):


	$ Amount		Per Share



















GAAP Book Value at September 30, 2022	$	97,948	$	16.22

Adjustments to deconsolidate VIEs and reflect the Company's interest in the securities owned
Deconsolidation of VIEs assets	(2,281,396)		(377.84)
Deconsolidation of VIEs liabilities	2,168,088		359.07
Interest in securities of VIEs owned, at fair value	131,618		21.80
Economic Book Value at September 30, 2022	$	116,258	$	19.25

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Adjusted Net Investment Income and Net Interest Margin

Adjusted net investment income is a non-GAAP financial measure that is an adjustment to net income which excludes the net interest income for third-party consolidated VIEs, and includes premium amortization for interest rate swaps included in gain/loss on derivative instruments. Adjusted net investment income is used as an input when calculating net interest margin in the below tables and gives investors another view of portfolio performance. Adjusted net investment income may not be comparable to similar measures presented by other companies, as it is a non-GAAP financial measure that is not based on a comprehensive set of accounting rules or principles and therefore may be defined differently by other companies. Adjusted net investment income should be considered in addition to, not as a substitute for, or superior to, financial measures determined in accordance with GAAP.

Net interest margin is a non-GAAP financial measure calculated by dividing annualized adjusted net investment income for the period by adjusted total investments for the period. Net interest margin provides investors visibility into the Company’s profitability of interest income versus interest expense after excluding consolidating VIEs and adding the net effect of our interest rate swaps and derivatives. However, since net interest margin is an adjusted measure derived from net investment income (non-GAAP), and differs from net income (loss) as computed in accordance with GAAP, which may not be comparable to similar measures provided by other companies, it should be considered as supplementary to, and not as a substitute for, net income margin computed by net income (loss) in accordance with GAAP.

The following tables set forth certain information regarding our non-GAAP adjusted net investment income and net interest margin which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives and excludes the interest expense for third-party consolidated VIEs for the three and nine months ended September 30, 2022 and September 30, 2021 (dollars in thousands):

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Three Months Ended September 30, 2022	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments

Agency RMBS	$	902	$	13	5.72	%
Non-Agency CMBS	109,898		2,336		8.43	%
Non-Agency RMBS	36,075		472		5.19	%
Residential whole loans	1,248,772		13,884		4.41	%
Residential bridge loans	5,585		28		1.99	%
Commercial loans	191,929		1,540		3.18	%
Securitized commercial loans	1,288,238		22,099		6.81	%
Other securities	42,768		1,045		9.69	%

Total investments	2,924,167		41,417		5.62	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,288,238)		(22,099)		6.81	%
Investments in consolidated VIEs eliminated in consolidation	14,079		220		6.20	%
Adjusted total investments	$	1,650,008	$	19,538	4.70	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	265,444	$	2,187	3.27	%
Convertible senior unsecured notes, net	109,329		2,402		8.72	%
Securitized debt	2,348,073		31,118		5.26	%
Interest rate swaps	n/a		(298)		(0.04)	%
Total borrowings	2,722,846		35,409		5.16	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,270,756)		(21,132)		6.60	%
Adjusted total borrowings	$	1,452,090	$	14,277	3.90	%

Adjusted net investment income and net interest margin			$	5,261	1.26	%

(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.

(2)Refer to below table for components of interest income.

(3)Includes only the third-party sponsored securitized debt from CSMC USA.

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Three Months Ended September 30, 2021	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments
Agency RMBS	$	1,160	$	27	9.23	%
Non-Agency CMBS	200,824		4,290		8.48	%
Non-Agency RMBS	28,528		369		5.13	%
Residential whole loans	831,634		8,147		3.89	%
Residential bridge loans	8,714		89		4.05	%
Commercial loans	243,534		2,847		4.64	%
Securitized commercial loan	1,407,129		23,622		6.66	%
Other securities	48,364		773		6.34	%
Total investments	2,769,887		40,164		5.75	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,407,129)		(23,622)		6.66	%
Investments in consolidated VIEs eliminated in consolidation	51,278		1,038		8.03	%
Adjusted total investments	$	1,414,036	$	17,580	4.93	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	391,559	$	3,037	3.08	%
Convertible senior unsecured notes, net	145,356		3,099		8.46	%
Securitized debt	1,995,098		26,842		5.34	%
Interest rate swaps	n/a		(96)		(0.02)	%
Total borrowings	2,532,013		32,882		5.15	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,361,048)		(21,745)		6.34	%
Adjusted total borrowings	$	1,170,965	$	11,137	3.77	%

Adjusted net investment income and net interest margin			$	6,443	1.81	%

(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.

(2)Refer to below table for components of interest income.

(3)Includes only the third-party sponsored securitized debt from RETL Trust and CSMC USA.

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Nine Months Ended September 30, 2022	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments

Agency RMBS	$	1,023	$	49	6.40	%
Non-Agency CMBS	142,362		7,436		6.98	%
Non-Agency RMBS	43,815		1,663		5.07	%
Residential whole loans	1,165,929		34,712		3.98	%
Residential bridge loans	5,688		64		1.50	%
Commercial loans	192,079		4,046		2.82	%
Securitized commercial loans	1,274,894		65,957		6.92	%
Other securities	45,340		2,738		8.07	%

Total investments	2,871,130		116,665		5.43	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,274,894)		(65,957)		6.92	%
Investments in consolidated VIEs eliminated in consolidation	13,966		659		6.31	%
Adjusted total investments	$	1,610,202	$	51,367	4.27	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	402,870	$	8,288	2.75	%
Convertible senior unsecured notes, net	113,670		7,499		8.82	%
Securitized debt	2,129,146		84,621		5.31	%
Interest rate swaps	n/a		255		0.01	%
Total borrowings	2,645,686		100,663		5.09	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,264,942)		(62,940)		6.65	%
Adjusted total borrowings	$	1,380,744	$	37,723	3.65	%

Adjusted net investment income and net interest margin			$	13,644	1.13	%

(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.

(2)Refer to below table for components of interest income.

(3)Includes only the third-party sponsored securitized debt from CSMC USA.

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Nine Months Ended September 30, 2021	Average Amortized Cost of Assets(1)		Total Interest Income(2)		Yield on Average Assets

Investments

Agency RMBS	$	1,353	$	85	8.40	%
Non-Agency CMBS	202,937		13,401		8.83	%
Non-Agency RMBS	29,270		1,058		4.83	%
Residential whole loans	883,711		25,724		3.89	%
Residential bridge loans	11,383		806		9.47	%
Commercial loans	297,593		11,263		5.06	%
Securitized commercial loans	1,487,050		72,586		6.53	%
Other securities	49,355		2,503		6.78	%

Total investments	2,962,652		127,426		5.75	%
Adjustments:
Securitized commercial loans from consolidated VIEs	(1,487,050)		(72,586)		6.53	%
Investments in consolidated VIEs eliminated in consolidation	56,396		3,432		8.14	%
Adjusted total investments	$	1,531,998	$	58,272	5.09	%

	Average Carrying Value		Total Interest Expense		Average Effective Cost of Funds
Borrowings
Repurchase agreements	$	364,009	$	9,755	3.58	%
Convertible senior unsecured notes, net	159,862		10,056		8.41	%
Securitized debt	2,170,148		84,541		5.21	%
Interest rate swaps	n/a		(172)		(0.01)	%
Total borrowings	2,694,019		104,180		5.17	%
Adjustments:
Securitized debt from consolidated VIEs(3)	(1,434,559)		(67,057)		6.25	%
Adjusted total borrowings	$	1,259,460	$	37,123	3.94	%

Adjusted net investment income and net interest margin			$	21,149	1.85	%

(1)Includes Agency and Non-Agency Interest-Only Strips accounted for as derivatives.

(2)Refer to below table for components of interest income.

(3)Includes only the third-party sponsored securitized debt from RETL Trust and CSMC USA.

The following table reconciles total interest income to adjusted interest income, which includes interest income on Agency and Non-Agency Interest-Only Strips classified as derivatives (Non-GAAP financial measure) for the three and nine months ended September 30, 2022 and September 30, 2021:

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(dollars in thousands)	Three months ended September 30, 2022		Three months ended September 30, 2021		Nine months ended September 30, 2022		Nine months ended September 30, 2021
Coupon interest income:

Agency RMBS	$	—	$	11	$	13	$	38
Non-Agency CMBS	1,949		2,621		7,050		7,171
Non-Agency RMBS	446		609		1,804		1,762
Residential whole loans	14,829		10,268		39,972		32,993
Residential bridge loans	28		108		64		827
Commercial loans	1,540		2,820		4,046		11,118
Securitized commercial loans	15,510		17,533		46,023		54,137
Other securities	860		1,043		2,515		3,717
Subtotal coupon interest	35,162		35,013		101,487		111,763
Premium accretion, discount amortization and amortization of basis, net:

Agency RMBS	2		(7)		(4)		(26)
Non-Agency CMBS	387		1,669		386		6,230
Non-Agency RMBS	26		(240)		(141)		(704)
Residential whole loans	(945)		(2,121)		(5,260)		(7,269)
Residential bridge loans	—		(19)		—		(21)
Commercial loans	—		27		—		145
Securitized commercial loans	6,589		6,089		19,934		18,449
Other securities	185		(270)		223		(1,214)
Subtotal accretion and amortization	6,244		5,128		15,138		15,590
Interest income	$	41,406	$	40,141	$	116,625	$	127,353
Contractual interest income, net of amortization of basis on Agency and Non-Agency Interest-Only Strips, classified as derivatives(1):
Coupon interest income	$	16	$	82	$	160	$	305
Amortization of basis	(5)		(59)		(120)		(232)


Subtotal	11		23		40		73
Total adjusted interest income	$	41,417	$	40,164	$	116,665	$	127,426

(1)Reported in "Gain on derivative instruments, net" in our Consolidated Statements of Operations.

Effective Cost of Funds

Effective Cost of Funds includes the net interest component related to our interest rate swaps, as well as the impact of our foreign currency swaps and forwards. While we have not elected hedge accounting for these instruments, such derivative instruments are viewed by us as an economic hedge against increases in future market interest rates on our liabilities and changes in foreign currency exchange rates on our assets and liabilities and are characterized as hedges for purposes of satisfying the REIT requirements and therefore the Effective Cost of Funds reflects interest expense adjusted to include the realized gain/loss (i.e., the interest income/expense component) for all of our interest rate swaps and the impact of our foreign currency swaps and forwards.

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The following table reconciles the Effective Cost of Funds (Non-GAAP financial measure) with interest expense for the three and nine months ended September 30, 2022 and September 30, 2021:


	Three months ended September 30, 2022				Three months ended September 30, 2021				Nine months ended September 30, 2022				Nine months ended September 30, 2021
(dollars in thousands)	Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs		Reconciliation		Cost of Funds/ Effective Borrowing Costs
Interest expense	$	35,707	5.20	%	$	32,978	5.17	%	$	100,408	5.07	%	$	104,352	5.18	%
Adjustments:
Interest expense on Securitized debt from consolidated VIEs	(21,132)		(6.60)	%	(21,745)		(6.34)	%	(62,940)		(6.65)	%	(67,057)		(6.25)	%
Net interest paid - interest rate swaps	(298)		(0.04)	%	(96)		(0.02)	%	255		0.01	%	(172)		(0.01)	%
Effective Cost of Funds	$	14,277	3.90	%	$	11,137	3.77	%	$	37,723	3.65	%	$	37,123	3.94	%
Weighted average borrowings	$	1,452,090			$	1,170,965			$	1,380,744			$	1,259,460

Liquidity and Capital Resources

General

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make distributions to our stockholders, and other general business needs. To maintain our REIT qualifications under the Internal Revenue Code, we must distribute annually at least 90% of our taxable income, excluding capital gains and, such distributions requirements limit our ability to retain earnings and increase capital for operations. Our principal sources of funds generally consist of borrowings under repurchase agreements, Residential Whole Loan securitizations, payments of principal and interest we receive on our investment portfolio, cash generated from investment sales, and to the extent such transactions are entered into, proceeds from capital market and unsecured convertible note transactions.

We currently believe we have sufficient liquidity and capital resources available, for at least the next 12 months, to fund our operations, meet our financial obligations, purchase our target assets, and make dividend payments to maintain our REIT qualifications. As of September 30, 2022, we had $55.4 million in cash and cash equivalents. Also our other sources of liquidity were unencumbered investments, and unused borrowing capacity in certain borrowing facilities since the amount borrowed is less than the maximum advance rate.

Sources of Liquidity

Our primary sources of liquidity are as follows:

Cash Generated from Operations

For the nine months ended September 30, 2022, net cash provided by operating activities was approximately $13.1 million. This was primarily attributable to margin settlements of interest rate swaps, the net interest income on our investments, realized gain on the sale of an REO hotel, less operating expenses, and general and administrative expenses. For the nine months ended September 30, 2021, net cash provided by operating activities was approximately $1.3 million. This was primarily attributable to net interest income on our investments, less operating expenses, and general and administrative expenses.

Cash Provided by and Used in Investing Activities

For the nine months ended September 30, 2022, net cash used in investing activities was approximately $100.2 million. This was primarily attributable to purchases of Non-Agency RMBS and residential whole loans during the period,

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which was partially offset by receipts of principal payments and payoffs on our investments and the sale of an REO hotel. For the nine months ended September 30, 2021, net cash provided by investing activities was approximately $560.6 million. This was primarily attributable to receipts of principal payments and payoffs on our investments.

Cash Provided by and Used in Financing Activities

For the nine months ended September 30, 2022, net cash provided by financing activities was approximately $102.3 million. This was attributable to the net cash proceeds from the Arroyo Trust 2022-1 and Arroyo Trust 2022-2 securitizations, which was partially offset by a net decrease in repurchase agreement borrowings, paydowns in our securitized debt, and extinguishment of convertible senior unsecured notes. For the nine months ended September 30, 2021, net cash used in financing activities was approximately $605.5 million. This was attributable to repayment of securitized debt and distribution of escrows related to consolidated VIEs.

Repurchase Agreements

As of September 30, 2022, we had borrowings under five of our master repurchase agreements of approximately $218.9 million. The following tables present our repurchase agreement borrowings by type of collateral pledged, as of September 30, 2022 and September 30, 2021, and the respective effective cost of funds (Non-GAAP financial measure) for the three and nine months ended September 30, 2022 and September 30, 2021, respectively (dollars in thousands). See “Non-GAAP Financial Measures” for more information:


	September 30, 2022						Three months ended September 30, 2022				Nine months ended September 30, 2022
Collateral	Borrowings Outstanding		Value of Collateral Pledged		Weighted Average Interest Rate end of period		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Haircut end of period

Agency RMBS, at fair value	$	317	$	233	3.15	%	2.47	%	2.47	%	1.60	%	1.60	%	25.00	%
Non-Agency CMBS, at fair value(2)	55,155		90,107		2.28	%	2.31	%	2.31	%	2.07	%	2.07	%	40.00	%
Non-Agency RMBS, at fair value	76,171		122,401		5.05	%	3.89	%	3.89	%	3.04	%	3.04	%	41.26	%
Residential whole loans, at fair value(3)	4,827		7,214		5.16	%	2.40	%	2.40	%	2.73	%	2.73	%	48.34	%
Residential bridge loans, at fair value(3)	2,895		5,120		5.60	%	4.72	%	4.72	%	3.53	%	3.53	%	25.00	%
Commercial loans, at fair value(3)	53,662		81,326		4.72	%	4.27	%	4.27	%	3.34	%	3.34	%	31.57	%


Other securities, at fair value	25,914		38,310		2.54	%	2.57	%	2.57	%	2.27	%	2.27	%	36.90	%
Interest rate swaps	n/a		n/a		n/a		n/a		(0.45)	%	n/a		0.08	%	n/a
Total	$	218,941	$	344,711	3.98	%	3.27	%	2.82	%	2.75	%	2.84	%	38.70	%

(1)The effective cost of funds for the period presented is calculated on an annualized basis and includes interest expense for the period and net periodic interest payments on interest rate swaps of approximately $298 thousand received and $255 thousand paid for the three and nine months ended September 30, 2022. While interest rate swaps are not accounted for using hedge accounting, such instruments are viewed by us as an economic hedge against increases in interest rates on our liabilities and are treated as hedges for purposes of satisfying the REIT requirements. See “Non-GAAP Financial Measures.”

(2)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(3)Repurchase agreement borrowings collateralized by whole loans, bridge loans, and commercial loans owned through trust certificates. The trust certificates are eliminated upon consolidation.

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	September 30, 2021						Three months ended September 30, 2021				Nine months ended September 30, 2021
Collateral	Borrowings Outstanding		Fair Value of Collateral Pledged(3)		Weighted Average Interest Rate end of period		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)		Weighted Average Cost of Funds		Weighted Average Effective Cost of Funds (Non-GAAP)(1)		Weighted Average Haircut end of period

Agency RMBS, at fair value	$	1,048	$	1,342	1.05	%	1.06	%	1.06	%	1.19	%	1.19	%	25.00	%
Non-Agency CMBS, at fair value(1)	78,666		136,968		2.07	%	2.12	%	2.12	%	3.33	%	3.33	%	38.03	%
Non-Agency RMBS, at fair value	15,632		28,003		2.12	%	2.18	%	2.18	%	3.55	%	3.55	%	35.00	%
Residential whole loans, at fair value(2)	277,780		328,811		2.95	%	4.10	%	4.10	%	5.70	%	5.70	%	18.71	%
Residential bridge loans(2)	5,817		5,960		2.60	%	2.66	%	2.66	%	2.71	%	2.71	%	20.00	%
Commercial loans, at fair value(2)	74,272		101,271		2.40	%	2.93	%	2.93	%	2.63	%	2.63	%	31.14	%
Membership interest(3)	—		—		—	%	3.08	%	3.08	%	3.02	%	3.02	%	—	%

Other securities, at fair value	30,093		52,093		2.24	%	2.30	%	2.30	%	3.20	%	3.20	%	37.15	%
Interest rate swaps	n/a		n/a		n/a		n/a		(0.10)	%	n/a		(0.06)	%	n/a
Total	$	483,308	$	654,448	2.64	%	3.08	%	2.98	%	3.58	%	3.52	%	25.47	%

(1)Includes repurchase agreement borrowings on securities eliminated upon VIE consolidation.

(2)Repurchase agreement borrowings collateralized by whole loans, bridge loans, and commercial loan owned through trust certificates. The trust certificates are eliminated upon consolidation.

(3)The pledged amount relates to our non-controlling membership interest in our wholly-owned subsidiary, WMC RETL LLC, which was financed under a repurchase agreement. The membership interest is eliminated in consolidation.

Contractual Obligations and Commitments

Our contractual obligations as of September 30, 2022 are as follows (dollars in thousands):


	Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years		Total
Borrowings under repurchase agreements	$	218,941	$	—	$	—	$	—	$	218,941
Contractual interest on repurchase agreements	3,570		—		—		—		3,570
Convertible senior unsecured notes	26,049		86,250		—		—		112,299
Contractual interest on convertible senior unsecured notes	6,701		5,822		—		—		12,523
Securitized debt(2)	—		1,370,691		—		1,067,676		2,438,367
Contractual interest on securitized debt	94,702		189,404		77,146		1,071,579		1,432,831




Total	$	349,963	$	1,652,167	$	77,146	$	2,139,255	$	4,218,531

(1)The table above does not include amounts due under the Management Agreement (as defined herein) with our Manager, as those obligations do not have fixed and determinable payments.

(2)The securitized debt is non-recourse to us and can only be settled with the loans that serve as collateral. The collateral for the securitized debt has a principal balance of $2.6 billion. Assumes entire outstanding principal balance at September 30, 2022 is paid at maturity.

Management Agreement

On May 9, 2012, we entered into a management agreement (the “Management Agreement”) with our Manager which describes the services to be provided by our Manager and compensation for such services. Our Manager is responsible for managing our operations, including: (i) performing all of our day-to-day functions; (ii) determining investment criteria in conjunction with our Board of Directors; (iii) sourcing, analyzing and executing investments, asset sales and financings; (iv) performing asset management duties; and (v) performing financial and accounting management, subject to the direction and oversight of our Board of Directors. Pursuant to the terms of the Management Agreement, our Manager is paid a management

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fee equal to 1.50% per annum of our stockholders’ equity, (as defined in the Management Agreement), calculated and payable (in cash) quarterly in arrears.

In December 2021, the Manager agreed to voluntarily waive 25% of its management fee solely for the duration of calendar year 2022 in order to support our earnings potential and our transition to a residential focused investment portfolio. Future waivers, if any, will be at the Manager's discretion.

Off-Balance Sheet Arrangements

We do not have any relationships with any entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes.

Further, other than guaranteeing certain obligations of our wholly-owned taxable REIT subsidiary or TRS and the obligations of our wholly-owned subsidiary, WMC CRE LLC, we have not guaranteed any obligations of any entities or entered into any commitment to provide additional funding to any such entities.

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 capital gains. We must pay tax at regular corporate rates to the extent that we annually distribute less than 100% of our taxable income.

We evaluate each quarter to determine our ability to pay dividends to our stockholders based on our net taxable income if and to the extent authorized by our Board of Directors. 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 payments. If our cash available for distribution is less than our net 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.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.

We seek to manage the risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market values while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns from our assets through ownership of our common stock. While we do not seek to avoid risk completely, our Manager seeks to actively manage risk for us, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

Credit Risk

We are subject to varying degrees of credit risk in connection with our assets. Although we do not expect to encounter credit risk in our Agency CMBS and Agency RMBS, we are exposed to the risk of potential credit losses from general credit spread widening related to Non-Agency RMBS, Non-Agency CMBS, residential whole loans, residential bridge loans, commercial loans, and other portfolio investments in addition to unexpected increase in borrower defaults on these investments. Investment decisions are made following a bottom-up credit analysis and specific relevant risk assumptions. As part of the risk management process, our Manager uses detailed proprietary models, applicable to evaluate, depending on the asset class, house price appreciation and depreciation by region, prepayment speeds and foreclosure/default frequency, cost and timing. If our Manager determines that the proposed investment can meet the appropriate risk and return criteria as well as complement our existing asset portfolio, the investment will undergo a more thorough analysis.

As of September 30, 2022, four of the counterparties with which we had outstanding repurchase agreement borrowings held collateral which we posted as security for such borrowings in excess of 5% of our stockholders’ equity. Prior to entering into a repurchase agreement with any particular institution, our Manager does a thorough review of such potential counterparty. Such review, however, does not assure the creditworthiness of such counterparty nor that the financial wherewithal of the counterparty will not deteriorate in the future.

Interest Rate Risk

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our assets and our related financing obligations. In general, we expect to finance the acquisition of our assets through financings in the form of repurchase agreements, warehouse facilities, securitizations, bank credit facilities (including term loans and revolving facilities) and public and private equity and debt issuances in addition to transaction or asset specific funding arrangements. Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes, we may utilize derivative financial instruments to hedge the interest rate risk associated with our borrowings. These hedging activities may not be effective. We also may engage in a variety of interest rate management techniques that seek to mitigate changes in interest rates or other potential influences on the values of our assets.

Interest Rate Effect on Net Interest Income

Our operating results will depend in large part on differences between the income earned on our assets and our borrowing costs. The cost of our borrowings is generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase and the yields earned on our leveraged fixed-rate mortgage assets will remain static. Further, the cost of such financing could increase at a faster pace than the yields earned on our leveraged ARM and hybrid ARM assets. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could adversely affect our liquidity and results of operations.

Interest Rate Cap Risk

To the extent we invest in adjustable-rate RMBS and whole loans, such instruments may be subject to interest rate caps, which potentially could cause such instruments to acquire many of the characteristics of fixed-rate securities if interest rates were to rise above the cap levels. This issue is magnified to the extent we acquire ARM and hybrid ARM assets that are not based on mortgages which are fully indexed. In addition, ARM and hybrid ARM assets may be subject to periodic payment

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caps that result in some portion of the interest being deferred and added to the principal outstanding or a portion of the incremental interest rate increase being deferred. To the extent we invest in such ARM and/or hybrid ARM assets, we could potentially receive less cash income on such assets than we would need to pay the interest cost on our related borrowings. To mitigate interest rate mismatches, we may utilize the hedging strategies discussed above under “Interest Rate Risk.”

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. See “Market Risk” below.

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.

Market Risk

Our MBS and other assets are reflected at their fair value with unrealized gains and losses included in earnings. The fair value of our investments fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the fair value of these assets would be expected to decrease; conversely, in a decreasing interest rate environment, the fair value of these securities would be expected to increase.

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 investments, including interest rate swaps, Interest-Only Strips, and net interest income at September 30, 2022, assuming a static portfolio of assets. 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 utilizes our Manager’s assumptions, models and estimates, which are based on our Manager’s judgment and experience.


Change in Interest Rates	Percentage Change in Projected Net Interest Income		Percentage Change in Projected Portfolio Value
+1.00%	(43.43)	%	(1.14)	%
+0.50%	(21.74)	%	(0.58)	%
-0.50%	21.80	%	0.59	%
-1.00%	43.71	%	1.20	%

While the table above reflects the estimated immediate impact of interest rate increases and decreases on a static portfolio, we may rebalance our portfolio from time to time either to seek to take advantage of or reduce the impact of changes in interest rates. It is important to note that the impact of changing interest rates on market value and net interest income can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the market value of our assets could increase significantly when interest rates change beyond amounts shown in the table above. In addition, other factors impact the market value of and net interest income from our interest rate-sensitive investments and derivative instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, interest income would likely differ from that shown above and such difference might be material and adverse to our stockholders.

Certain assumptions have been made in connection with the calculation of the information set forth in the table above 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 base interest rate scenario assumes interest rates at September 30, 2022. The analysis presented utilizes assumptions and estimates based on our Manager’s judgment and experience. Furthermore, while we generally expect to retain such assets and the associated interest rate risk, future purchases and sales of assets could materially change our interest rate risk profile.

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Prepayment Risk

The value of our Agency and Non-Agency RMBS and our residential whole loans may be affected by prepayment rates on the underlying residential mortgage. We acquire RMBS and residential whole loans and anticipate that the underlying residential mortgages will prepay at a projected rate generating an expected yield. If we purchase assets at a premium to par value, when borrowers prepay their residential mortgage loans faster than expected, the corresponding prepayments may reduce the expected yield on our residential mortgage assets because we will have to amortize the related premium on an accelerated basis and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we are required to make a retrospective adjustment to historical amortization. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their residential mortgage loans slower than expected, such decrease may reduce the expected yield on such assets because we will not be able to accrete the related discount as quickly as originally anticipated and, in the case of Agency RMBS, other than interest-only strips, and certain other investment grade rated securities, we will be required to make a retrospective adjustment to historical amortization.

The value of our Agency and Non-Agency CMBS, as well as commercial whole loans, will also be affected by prepayment rates; however, commercial mortgages frequently limit the ability of the borrower to prepay, thereby providing a certain level of prepayment protection. Common restrictions include yield maintenance and prepayment penalties, the proceeds of which are generally at least partially allocable to these securities, as well as defeasance.

Likewise, the value of our ABS and other structured securities will also be affected by prepayment rates. The collateral underlying such securities may, similar to most residential mortgages, allow the borrower to prepay at any time or, similar to commercial mortgages, limit the ability of the borrower to prepay by imposing lock-out provisions, prepayment penalties and/or make whole provisions.

Extension Risk

Most residential mortgage loans do not prohibit the partial or full prepayment of principal outstanding. Accordingly, while the stated maturity of a residential mortgage loan may be 30 years, or in some cases even longer, historically the vast majority of residential mortgage loans are satisfied prior to their maturity date. In periods of rising interest rates, borrowers have less incentive to refinance their existing mortgages and mortgage financing may not be as readily available. This generally results in a slower rate of prepayments and a corresponding longer weighted average life for RMBS and residential whole loans. The increase, or extension, in weighted average life is commonly referred to as “Extension Risk” which can negatively impact our portfolio. To the extent we receive smaller pre-payments of principal, we will have less capital to invest in new assets. This is extremely detrimental in periods of rising interest rates as we will be unable to invest in new higher coupon investments and a larger portion of our portfolio will remain invested in lower coupon investments. Further, our borrowing costs are generally short-term and, even if hedged, are likely to increase in a rising interest rate environment, thereby reducing our net interest margin. Finally, to the extent we acquired securities at a discount to par, a portion of the overall return on such investments is based on the recovery of this discount. Slower principal prepayments will result in a longer recovery period and a lower overall return on our investment.

Prepayment rates on Agency and Non-Agency CMBS, as well as commercial whole loans, are generally less volatile than residential mortgage assets as commercial mortgages usually limit the ability of the borrower to prepay the mortgage prior to maturity or a period shortly before maturity. Accordingly, extension risk for Agency and Non-Agency CMBS and commercial whole loans is generally less than RMBS and residential whole loans as it presumed that other than defaults (i.e., involuntary prepayments), most commercial mortgages will remain outstanding for the contractual term of the mortgage.

Prepayment rates on ABS and our other structured securities will be determined by the underlying collateral. The extension risk of such securities will generally be less than residential mortgages, but greater than commercial mortgages.

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); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to

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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 our loans, which could also cause us to suffer losses.

Counterparty Risk

The following discussion on counterparty risk reflects how these transactions are structured, rather than how they are presented for financial reporting purposes.

When we engage in repurchase transactions, we generally sell securities to lenders (i.e., repurchase agreement counterparties) and receive cash from the lenders. The lenders are obligated to resell the same securities back to us at the end of the term of the transaction. Because the cash we receive from the lender when we initially sell the securities to the lender is less than the value of those securities (this difference is the haircut), if the lender defaults on its obligation to resell the same securities back to us, we could incur a loss on the transaction up to the amount of the haircut (assuming there was no change in the value of the securities).

If a counterparty to a bi-lateral interest rate swap cannot perform under the terms of the interest rate swap, we may not receive payments due under that agreement, and thus, we may lose any unrealized gain associated with the interest rate swap. We may also risk the loss of any collateral we have pledged to secure our obligations under an interest rate swap if the counterparty becomes insolvent or files for bankruptcy. In the case of a cleared swap, if our clearing broker were to default, become insolvent or file for bankruptcy, we may also risk the loss of any collateral we have posted to the clearing broker unless we were able to transfer or “port” our positions and held collateral to another clearing broker. In addition, the interest rate swap would no longer mitigate the impact of changes in interest rates as intended. Most of our interest swaps are currently cleared through a central clearing house which reduces but does not eliminate the aforementioned risks. Also see “Liquidity Risk” below.

Prior to entering into a trading agreement or transaction with any particular institution where we take on counterparty risk, our Manager does a thorough review of such potential counterparty. Such review, however, does not assure the creditworthiness of such counterparty nor that the financial wherewithal of the counterparty will not deteriorate in the future.

Funding Risk

We have financed a substantial majority of our assets with repurchase agreement financing. Over time, as market conditions change, in addition to these financings, we may use other forms of leverage. Changes in the regulatory environment, as well as, weakness in the financial markets, the residential mortgage markets, the commercial mortgage markets, the asset-backed securitization markets and the economy generally could adversely affect one or more of our potential lenders and could cause one or more of our potential lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing.

Liquidity Risk

Our liquidity risk is principally associated with the financing of long-maturity assets with short-term borrowings in the form of repurchase agreements. Although the interest rate adjustments of these assets and liabilities fall within the guidelines established by our operating policies, maturities are not required to be, nor are they, matched.

Should the value of our assets pledged as collateral suddenly decrease, margin calls relating to our repurchase agreements could increase, causing an adverse change in our liquidity position. Our inability to post adequate collateral for a margin call by the counterparty could result in a condition of default under our repurchase agreements, thereby enabling the counterparty to liquidate the collateral pledged by us, which may have a material adverse consequence on our business and results of operations.

In an instance of severe volatility, or where the additional stress on liquidity resulting from volatility is sustained over an extended period of time, we could be required to sell securities, possibly even at a loss to generate sufficient liquidity to satisfy collateral and margin requirements which could have a material adverse effect on our financial position, results of operations and cash flows.

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Additionally, if one or more of our repurchase agreement counterparties chose not to provide on-going funding, our ability to finance would decline or exist at possibly less advantageous terms. Further, if we are unable to renew, replace or expand repurchase financing with other sources of financing on substantially similar terms, it may have a material adverse effect on our business, financial position, results of operations and cash flows, due to the long term nature of our investments and relatively short-term maturities of our repurchase agreements. As such, there is no assurance that we will always be able to roll over our repurchase agreements.

The costs associated with our borrowings are generally based on prevailing market interest rates. During a period of rising interest rates, our borrowing costs generally will increase while the yields earned on our existing portfolio of leveraged fixed-rate MBS and other fixed rate assets will remain static. Further, certain of our floating rate assets may contain annual or lifetime interest rate caps as well as limit the frequency or timing of changes to the underlying interest rate index. This could result in a decline in our net interest spread and net interest margin. The severity of any such decline would depend on our asset/liability composition at the time, as well as the magnitude and duration of the interest rate increase. Further, an increase in short-term interest rates could also have a negative impact on the market value of our assets. If any of these events happen, we could experience a decrease in net income or incur a net loss during these periods, which could have a material adverse effect on our liquidity and results of operations.

In addition, the assets that comprise our investment portfolio are not traded on a public exchange. A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions. Recent regulatory changes have imposed new capital requirements and other restrictions on banks and other market intermediaries’ ability and desire to hold assets on their balance sheets and otherwise make markets in fixed income securities and other assets resulting in reduced liquidity in many sectors of the market. This regulatory trend is expected to continue. As a result of these developments, it may become increasingly difficult for us to sell assets in the market, especially in credit oriented sectors such as Non-Agency RMBS and CMBS, ABS and Whole Loans.

We enter into interest rate swaps to manage our interest rate risk. We are required to pledge cash or securities as collateral as part of a margin arrangement, calculated daily, in connection with the interest rate swaps. The amount of margin that we are required to post will vary and generally reflects collateral required to be posted with respect to interest rate swaps that are in an unrealized loss position to us and is generally based on a percentage of the aggregate notional amount of interest rate swaps per counterparty. Margin calls could adversely affect our liquidity. Our inability to post adequate collateral for a margin call could result in a condition of default under our interest rate swap agreements, thereby resulting in liquidation of the collateral pledged by us, which may have a material adverse consequence on our business, financial position, results of operations and cash flows. Conversely, if our interest rate swaps are in an unrealized gain position, our counterparties to bilateral swaps are required to post collateral with us, under the same terms that we post collateral with them. We at times enter into a MAC interest rate swap in which we receive or make a payment at the time of entering such interest rate swap to compensate for the out of the market nature of such interest rate swap. Similar to all other interest rate swaps, MAC interest rate swaps are subject to the margin requirements previously described.

Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily directly correlate with inflation rates or changes in inflation rates. Our consolidated financial statements are prepared in accordance with GAAP and our distributions will be determined by our Board of Directors consistent with our obligation to distribute to our stockholders at least 90% of our net taxable income on an annual basis, in accordance with the REIT regulations, in order to maintain our REIT qualification. In each case, our activities and consolidated balance sheets are measured with reference to historical cost and/or fair market value without considering inflation.

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Foreign Investment risk

We have invested in non U.S. CMBS transactions and, in the future, we may make other investments in non U.S. issuers and transactions. These investments present certain unique risks, including those resulting from future political, legal, and economic developments, which could include favorable or unfavorable changes in currency exchange rates, exchange control regulations (including currency blockage), expropriation, nationalization, or confiscatory taxation of assets, adverse changes in investment capital or exchange control regulations (which may include suspension of the ability to transfer currency from a country), political changes, diplomatic developments, difficulty in obtaining and enforcing judgments against non U.S. entities, the possible imposition of the applicable country’s governmental laws or restrictions, and the reduced availability of public information concerning issuers. In the event of a nationalization, expropriation, or other confiscation of assets, we could lose our entire investment in a security. Legal remedies available to investors in certain jurisdictions may be more limited than those available to investors in the United States. Issuers of non U.S. securities may not be subject to the same degree of regulation as U.S. issuers.

Furthermore, non U.S. issuers are not generally subject to uniform accounting, auditing, and financial reporting standards or other regulatory practices and requirements comparable to those applicable to U.S. issuers. There is generally less government supervision and regulation of non U.S. exchanges, brokers, and issuers than there is in the United States, and there is greater difficulty in taking appropriate legal action in non U.S. courts. There are also special tax considerations that apply to securities of non U.S. issuers and securities principally traded overseas.

To the extent that our investments are denominated in U.S. dollars, these investments are not affected directly by changes in currency exchange rates relative to the dollar and exchange control regulations. We are, however, subject to currency risk with respect to such investments to the extent that a decline in a non U.S. issuer’s or borrower’s own currency relative to the dollar may impair such issuer’s or borrower’s ability to make timely payments of principal and/or interest on a loan or other debt security. To the extent that our investments are in non-dollar denominated securities, the value of the investment and the net investment income available for distribution may be affected favorably or unfavorably by changes in currency exchange rates relative to the dollar and exchange control regulations.

Currency exchange rates can be volatile and affected by, among other factors, the general economics of a country, the actions of governments or central banks and the imposition of currency controls and speculation. In addition, a security may be denominated in a currency that is different from the currency where the issuer is domiciled.

Currency Risk

We have and may continue in the future to invest in assets which are denominated in a currency other than U.S. dollars and may finance such investments with repurchase financing or other forms of financing which may also be denominated in a currency other than U.S. dollars. To the extent we make such investments and/or enter into such financing arrangements, we may utilize foreign currency swaps, forwards or other derivative instruments to hedge our exposure to foreign currency risk. Despite being economic hedges, we have elected not to treat such derivative instruments as hedges for accounting purposes and therefore the changes in the value of such instruments, including actual and accrued payments, will be included in our Consolidated Statements of Operations. While such transactions are entered into in an effort to minimize our foreign currency risk, there can be no assurance that they will perform as expected. If actual prepayments of the foreign denominated asset are faster, or slower, than expected, the hedge instrument is unlikely to fully protect us from changes in the valuation of such foreign currency. Further, as with interest rate swaps, there is counterparty risk associated with the future creditworthiness of such counterparty.

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ITEM 4. Controls and Procedures

Disclosure Controls and Procedures: Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information we are required to disclose 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 SEC’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that the required information 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.

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 September 30, 2022. 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. 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.

No change occurred in our internal control over financial reporting (as defined in Rule13a-15(f) and Rule 15d-15(f) of the Exchange Act) during the three months ended September 30, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business. During the three months ended September 30, 2022, the Company was not involved in any material legal proceedings.

ITEM 1A. Risk Factors

There were no material changes during the period covered by this report to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on March 8, 2022. Additional risks not presently known, or that we currently deem immaterial, also may have a material adverse effect on our business, financial condition and results of operations.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not Applicable.

ITEM 5. Other Information

None.

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ITEM 6. Exhibits

The following exhibits are filed as part of this report.


Exhibit No.						Description

3.1*						Amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.1 to Amendment No. 10 Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012.

3.2*						Amendment to the amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, dated June 3, 2016, incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K, filed March 7, 2017.

3.3*						Amendment to the amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, dated July 8, 2022, incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K, filed on July 11, 2022.

3.4*						Amended and restated bylaws of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.2 to Amendment No. 10 to Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012

4.1*						Specimen Common Stock Certificate of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 4.1 to Amendment No. 10 to Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012.

4.2*						Indenture, dated as of October 2, 2017, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K, filed on October 3, 2017.

4.3*						First Supplemental Indenture, dated as of October 2, 2017, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on October 3, 2017.

4.4*						Form of 6.75% Convertible Senior Notes due 2022 (attached as Exhibit A to the First Supplemental Indenture filed as Exhibit 4.3 hereto), incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed on October 3, 2017.

4.5*						Second Supplemental Indenture, dated as of September 14, 2021, between Western Asset Mortgage Capital Corporation and Wells Fargo Bank, National Association, incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K, filed on October 3, 2017.

4.6*						Form of 6.75% Convertible Senior Notes due 2024 (attached as Exhibit A to the Second Supplemental Indenture filed as Exhibit 4.5 hereto), incorporated by reference to Exhibit 4.3 to the Current Report on Form 8-K, filed on October 3, 2017.

31.1						Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer.

31.2						Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer.

32.1						Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.

101						The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021; (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2022 and 2021; (iii) the Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2022 and 2021; (iv) the Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2022 and 2021; and (v) the Notes to Consolidated Financial Statements.

104						Cover Page Interactive Data File (the cover page XBRL tags are embedded within the iXBRL document).

Amended and restated certificate of incorporation of Western Asset Mortgage Capital Corporation, incorporated by reference to Exhibit 3.1 to Amendment No. 10 Form S-11 (Registration Statement No. 333-159962), filed May 8, 2012

__________________________________

*Fully or partly previously filed.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


			By:			/s/ BONNIE M. WONGTRAKOOL

			Bonnie M. Wongtrakool
			Chief Executive Officer and Director (Principal Executive Officer)

			November 9, 2022


			By:			/s/ ROBERT W. LEHMAN

			Robert W. Lehman
			Chief Financial Officer

			November 9, 2022