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MITT AG Mortgage Investment Trust

Filed: 6 Nov 20, 6:37am

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, 2020
OR
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 001-35151
_____________________________________________________________________ 

AG MORTGAGE INVESTMENT TRUST, INC.
_____________________________________________________________________ 
Maryland27-5254382
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
245 Park Avenue, 26th Floor
New York, New York
10167
(Address of Principal Executive Offices)(Zip Code)
(212) 692-2000
(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   ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 and 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  ¨
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 ý 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. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   
Yes       No   ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:Trading Symbols:Name of each exchange on which registered:
Common Stock, $0.01 par value per shareMITTNew York Stock Exchange (NYSE)
8.25% Series A Cumulative Redeemable Preferred StockMITT PrANew York Stock Exchange (NYSE)
8.00% Series B Cumulative Redeemable Preferred StockMITT PrBNew York Stock Exchange (NYSE)
8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred StockMITT PrCNew York Stock Exchange (NYSE)

As of November 4, 2020, there were 40,721,831 outstanding shares of common stock of AG Mortgage Investment Trust, Inc.



AG MORTGAGE INVESTMENT TRUST, INC.
TABLE OF CONTENTS




PART I
 
ITEM 1. FINANCIAL STATEMENTS
 
AG Mortgage Investment Trust, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(in thousands, except per share data)
September 30, 2020December 31, 2019
Assets
Real estate securities, at fair value:
Agency - $107,252 and $2,234,921 pledged as collateral, respectively$250,123 $2,315,439 
Non-Agency - $26,711 and $682,828 pledged as collateral, respectively (1)43,271 717,470 
CMBS - $40,486 and $413,922 pledged as collateral, respectively54,228 416,923 
Residential mortgage loans, at fair value - $45,019 and $171,224 pledged as collateral, respectively (2)429,648 417,785 
Commercial loans, at fair value - $0 and $4,674 pledged as collateral, respectively122,880 158,686 
Investments in debt and equity of affiliates138,689 156,311 
Excess mortgage servicing rights, at fair value3,526 17,775 
Cash and cash equivalents44,592 81,692 
Restricted cash5,108 43,677 
Other assets9,159 21,905 
Assets held for sale - Single-family rental properties, net154 
Total Assets$1,101,224 $4,347,817 
Liabilities
Financing arrangements$225,504 $3,233,468 
Securitized debt, at fair value (1)(2)358,986 224,348 
Payable on unsettled trades105,016 
Dividend payable14,734 
Other liabilities20,944 24,675 
Liabilities held for sale - Single-family rental properties, net305 1,546 
Total Liabilities710,755 3,498,771 
Commitments and Contingencies (Note 13)
Stockholders’ Equity
Preferred stock - $0.01 par value; 50,000 shares authorized:
8.25% Series A Cumulative Redeemable Preferred Stock; 2,027 and 2,070 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively ($52,770 and $51,750 aggregate liquidation preference, respectively)48,888 49,921 
8.00% Series B Cumulative Redeemable Preferred Stock; 4,569 and 4,600 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively ($118,792 and $115,000 aggregate liquidation preference, respectively)110,541 111,293 
8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 4,571 and 4,600 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively ($118,837 and $115,000 aggregate liquidation preference, respectively)110,533 111,243 
Common stock, par value $0.01 per share; 450,000 shares of common stock authorized and 36,121 and 32,742 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively361 327 
Additional paid-in capital673,105 662,183 
Retained earnings/(deficit)(552,959)(85,921)
Total Stockholders’ Equity390,469 849,046 
Total Liabilities & Stockholders’ Equity$1,101,224 $4,347,817 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
(1)See Note 3 for details related to variable interest entities.
(2)See Note 4 for details related to variable interest entities.
3


AG Mortgage Investment Trust, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Net Interest Income
Interest income$9,717 $40,735 $63,354 $123,126 
Interest expense4,357 21,887 32,941 67,011 
Total Net Interest Income5,360 18,848 30,413 56,115 
Other Income/(Loss)
Net realized gain/(loss)(14,431)(16,132)(257,183)(64,225)
Net interest component of interest rate swaps(13)2,179 910 5,760 
Unrealized gain/(loss) on real estate securities and loans, net19,495 11,726 (184,770)101,644 
Unrealized gain/(loss) on derivative and other instruments, net1,970 3,258 (1,797)(17,667)
Foreign currency gain/(loss), net(10)667 1,483 667 
Other income210 840 
Total Other Income/(Loss)7,011 1,908 (441,353)27,019 
Expenses
Management fee to affiliate1,698 2,346 5,525 7,091 
Other operating expenses5,929 6,062 11,253 13,650 
Restructuring related expenses1,345 9,949 
Equity based compensation to affiliate76 163 275 
Excise tax186 (815)464 
Servicing fees540 416 1,685 1,203 
Total Expenses9,512 9,086 27,760 22,683 
Income/(loss) before equity in earnings/(loss) from affiliates2,859 11,670 (438,700)60,451 
Equity in earnings/(loss) from affiliates17,187 (564)(23,571)715 
Net Income/(Loss) from Continuing Operations20,046 11,106 (462,271)61,166 
Net Income/(Loss) from Discontinued Operations(1,057)361 (3,284)
Net Income/(Loss)20,046 10,049 (461,910)57,882 
Gain on Exchange Offer, net (Note 12)539 539 
Dividends on preferred stock (1)(5,563)(3,720)(16,897)(10,455)
Net Income/(Loss) Available to Common Stockholders$15,022 $6,329 $(478,268)$47,427 
Earnings/(Loss) Per Share - Basic
Continuing Operations$0.44 $0.22 $(14.35)$1.58 
Discontinued Operations(0.03)0.01 (0.10)
Total Earnings/(Loss) Per Share of Common Stock$0.44 $0.19 $(14.34)$1.48 
Earnings/(Loss) Per Share - Diluted
Continuing Operations$0.44 $0.22 $(14.35)$1.58 
Discontinued Operations(0.03)0.01 (0.10)
Total Earnings/(Loss) Per Share of Common Stock$0.44 $0.19 $(14.34)$1.48 
Weighted Average Number of Shares of Common Stock Outstanding
Basic34,422 32,736 33,347 32,007 
Diluted34,422 32,748 33,347 32,016 
(1) The three and nine months ended September 30, 2020 include cumulative and undeclared dividends of $5.6 million and $11.2 million, respectively, on the Company's Preferred Stock as of September 30, 2020. As further described in Note 2, undeclared dividends are not recorded on the balance sheet. Subsequent to quarter end, the Board of Directors has approved and the Company has declared and set apart for payment all accrued and unpaid dividends on the Company's Preferred Stock. See Note 15 for additional information. The three and nine months ended September 30, 2019 include cumulative and undeclared dividends of $0.4 million on the Company's 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock as of September 30, 2019.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4


AG Mortgage Investment Trust, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ Equity (Unaudited)
(in thousands)
For the Three Months Ended September 30, 2020 and September 30, 2019
Common Stock8.25% Series A
Cumulative
Redeemable
Preferred Stock
8.00% Series B
Cumulative
Redeemable
Preferred Stock
8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred StockAdditional
Paid-in Capital
Retained
Earnings/(Deficit)
SharesAmountTotal
Balance at July 1, 202033,825 $338 $49,921 $111,293 $111,243 $666,127 $(573,544)$365,378 
Net proceeds from issuance of common stock1,736 18 — — — 5,467 — 5,485 
Grant of restricted stock and amortization of equity based compensation44 — — — — 60 — 60 
Exchange Offer (Note 12)516 (1,033)(752)(710)1,451 539 (500)
Net Income/(Loss)— — — — — — 20,046 20,046 
Balance at September 30, 202036,121 $361 $48,888 $110,541 $110,533 $673,105 $(552,959)$390,469 

Common Stock8.25% Series A
Cumulative
Redeemable
Preferred Stock
8.00% Series B
Cumulative
Redeemable
Preferred Stock
8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred StockAdditional
Paid-in Capital
Retained
Earnings/(Deficit)
SharesAmountTotal
Balance at July 1, 201932,709 $327 $49,921 $111,293 $$661,833 $(92,510)$730,864 
Net proceeds from issuance of preferred stock— — — — 111,183 — — 111,183 
Grant of restricted stock and amortization of equity based compensation27 — — — — 176 — 176 
Common dividends declared— — — — — — (14,731)(14,731)
Preferred Series A dividends declared— — — — — — (1,068)(1,068)
Preferred Series B dividends declared— — — — — — (2,300)(2,300)
Net Income/(Loss)— — — — — — 10,049 10,049 
Balance at September 30, 201932,736 $327 $49,921 $111,293 $111,183 $662,009 $(100,560)$834,173 
 
For the Nine Months Ended September 30, 2020 and September 30, 2019
Common Stock8.25% Series A
Cumulative
Redeemable
Preferred Stock
8.00% Series B
Cumulative
Redeemable
Preferred Stock
8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred StockAdditional
Paid-in Capital
Retained
Earnings/(Deficit)
SharesAmountTotal
Balance at January 1, 202032,742 $327 $49,921 $111,293 $111,243 $662,183 $(85,921)$849,046 
Net proceeds from issuance of common stock2,738 28 — — — 8,956 — 8,984 
Grant of restricted stock and amortization of equity based compensation125 — — — 515 — 516 
Preferred Series A dividends declared— — — — — — (1,067)(1,067)
Preferred Series B dividends declared— — — — — — (2,300)(2,300)
Preferred Series C dividends declared— — — — — — (2,300)(2,300)
Exchange Offer (Note 12)516 (1,033)(752)(710)1,451 539 (500)
Net Income/(Loss)— — — — — — (461,910)(461,910)
Balance at September 30, 202036,121 $361 $48,888 $110,541 $110,533 $673,105 $(552,959)$390,469 

5


Common Stock8.25% Series A
Cumulative
Redeemable
Preferred Stock
8.00% Series B
Cumulative
Redeemable
Preferred Stock
8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred StockAdditional
Paid-in Capital
Retained
Earnings/(Deficit)
SharesAmountTotal
Balance at January 1, 201928,744 $287 $49,921 $111,293 $$595,412 $(100,902)$656,011 
Net proceeds from issuance of common stock3,953 40 — — — 66,023 — 66,063 
Net proceeds from issuance of preferred stock— — — — 111,183 — — 111,183 
Grant of restricted stock and amortization of equity based compensation39 — — — — 574 — 574 
Common dividends declared— — — — — — (47,438)(47,438)
Preferred Series A dividends declared— — — — — — (3,202)(3,202)
Preferred Series B dividends declared— — — — — — (6,900)(6,900)
Net Income/(Loss)— — — — — — 57,882 57,882 
Balance at September 30, 201932,736 $327 $49,921 $111,293 $111,183 $662,009 $(100,560)$834,173 

6


AG Mortgage Investment Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended
September 30, 2020September 30, 2019
Cash Flows from Operating Activities
Net income/(loss)$(461,910)$57,882 
Net (income)/loss from discontinued operations(361)3,284 
Net income/(loss) from continuing operations(462,271)61,166 
Adjustments to reconcile net income/(loss) to net cash provided by (used in) operating activities:
Net amortization of premium/(discount)(4,401)(1,605)
Net realized (gain)/loss257,183 64,225 
Unrealized (gain)/loss on real estate securities and loans, net184,770 (101,644)
Unrealized (gain)/loss on derivative and other instruments, net1,797 17,667 
Foreign currency (gain)/loss, net(1,483)(667)
Equity based compensation to affiliate163 275 
Equity based compensation expense353 299 
(Income)/Loss from investments in debt and equity of affiliates in excess of distributions received25,712 6,896 
Change in operating assets/liabilities:
Other assets8,644 (4,683)
Other liabilities(12,025)(7,624)
Net cash provided by (used in) continuing operating activities(1,558)34,305 
Net cash provided by (used in) discontinued operating activities(726)(1,508)
Net cash provided by (used in) operating activities(2,284)32,797 
Cash Flows from Investing Activities
Purchase of real estate securities(174,845)(1,767,918)
Purchase of residential mortgage loans(541,823)(207,048)
Origination of commercial loans(8,228)(67,386)
Purchase of commercial loans(19,280)(23,065)
Purchase of U.S. Treasury securities(81,917)
Investments in debt and equity of affiliates(44,869)(75,528)
Proceeds from sales of excess MSRs7,735 
Proceeds from sales of real estate securities2,722,425 677,554 
Proceeds from sales of residential mortgage loans393,633 12,780 
Proceeds from sales of commercial loans36,935 
Proceeds from sales of U.S. Treasury securities82,048 
Principal repayments on real estate securities104,213 251,684 
Principal repayments on excess MSRs2,579 3,053 
Principal repayments on commercial loans5,710 43,217 
Principal repayments on residential mortgage loans50,563 13,729 
Distributions received in excess of income from investments in debt and equity of affiliates26,444 12,276 
Net proceeds from (payments made on) reverse repurchase agreements11,499 
Net proceeds from (payments made on) sales of securities borrowed under reverse repurchase agreements(11,479)
Net settlement of interest rate swaps and other instruments(73,180)(73,330)
Net settlement of TBAs4,610 2,753 
Cash flows provided by (used in) other investing activities(743)(364)
Net cash provided by (used in) continuing investing activities2,491,879 (1,197,442)
Net cash provided by (used in) discontinued investing activities374 
Net cash provided by (used in) investing activities2,491,879 (1,197,068)
Cash Flows from Financing Activities
Net proceeds from issuance of common stock4,669 66,063 
Net proceeds from issuance of preferred stock111,183 
Borrowings under financing arrangements13,374,192 34,984,677 
7


Nine Months Ended
September 30, 2020September 30, 2019
Repayments of financing arrangements(16,037,399)(34,180,260)
Borrowings under secured debt20,000 
Repayments of secured debt(10,000)
Proceeds from issuance of securitized debt166,487 224,931 
Principal repayments on securitized debt(16,021)(2,474)
Net collateral received from (paid to) derivative counterparty(724)
Net collateral received from (paid to) repurchase counterparty(46,613)1,456 
Dividends paid on common stock(14,734)(47,078)
Dividends paid on preferred stock(5,667)(10,102)
Net cash provided by continuing financing activities(2,565,086)1,147,672 
Net cash provided by (used in) financing activities(2,565,086)1,147,672 
Net change in cash, cash equivalents and restricted cash(75,491)(16,599)
Cash, cash equivalents, and restricted cash, Beginning of Period125,369 84,358 
Effect of exchange rate changes on cash(178)82 
Cash, cash equivalents, and restricted cash, End of Period$49,700 $67,841 
Supplemental disclosure of cash flow information:
Cash paid for interest on financing arrangements$42,625 $74,483 
Cash paid for excise and income taxes$1,058 $1,413 
Supplemental disclosure of non-cash financing and investing activities:
Payable on unsettled trades$105,016 $15,544 
Receivable on unsettled trades$$4,509 
Common stock dividends declared but not paid$$14,731 
Exchange Offer (Note 12)$2,495 $
Holdback on sale of excess MSRs$725 $
Management fees paid using Common Stock in lieu of cash$4,315 $
Decrease in securitized debt$7,091 $2,846 
Transfer of real estate securities in satisfaction of repurchase agreements$345,066 $
Change in repurchase agreements from transfer of real estate securities$344,685 $
Transfer from residential mortgage loans to other assets$2,100 $2,265 
Transfer from investments in debt and equity of affiliates to CMBS$11,769 $
 
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows:
 
September 30, 2020September 30, 2019
Cash and cash equivalents$44,592 $31,468 
Restricted cash5,108 30,785 
Restricted cash included assets held for sale - Single-family rental properties, net5,588 
Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows$49,700 $67,841 
 
The accompanying notes are an integral part of these unaudited consolidated financial statements.

8


AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
 
1. Organization

AG Mortgage Investment Trust, Inc. (the "Company") was incorporated in the state of Maryland on March 1, 2011. The Company is a hybrid mortgage REIT that opportunistically invests in a diversified risk adjusted portfolio of agency investments and credit investments, which contain the asset classes further described below.
 
Residential mortgage-backed securities ("RMBS") include mortgage pass-through certificates or collateralized mortgage obligations ("CMOs") representing interests in or obligations backed by pools of residential mortgage loans issued or guaranteed by a U.S. government-sponsored entity such as Fannie Mae or Freddie Mac (collectively, "GSEs"), or any agency of the U.S. Government such as Ginnie Mae (collectively, "Agency RMBS"). The principal and interest payments on Agency RMBS securities have an explicit guarantee by either an agency of the U.S. government or a U.S. government-sponsored entity.

Non-Agency RMBS represent fixed- and floating-rate RMBS issued by entities or organizations other than a GSE or agency of the U.S. government, or that are collateralized by non-U.S. mortgages, including investment grade (AAA through BBB) and non-investment grade classes (BB and below). The mortgage loan collateral for Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by U.S. government agencies or U.S. government-sponsored entities or are non-U.S. mortgages. Non-Agency RMBS also includes securities issued by companies whose primary assets are land and real estate.
 
Asset Backed Securities ("ABS") are securitized investments for which the underlying assets are diverse, not only representing real estate related assets.
 
Commercial Mortgage Backed Securities ("CMBS") represent investments of fixed- and floating-rate CMBS, including investment grade (AAA through BBB) and non-investment grade classes (BB and below), secured by, or evidencing an ownership interest in, a single commercial mortgage loan or a pool of commercial mortgage loans. Conduit CMBS are CMBS that are collateralized by multiple commercial loans and multiple borrowers. Single-Asset/Single-Borrower securities are CMBS which securitize a single loan that is backed by a single asset (usually a large commercial property) or by a pool of cross collateralized mortgage obligations to a single borrower or related borrowers.

The Company’s Non-Agency RMBS, CMBS and ABS portfolios are generally not issued or guaranteed by Fannie Mae, Freddie Mac or any agency of the U.S. Government, or are collateralized by non-U.S. mortgages and are therefore subject to credit risk.
 
Collectively, the Company refers to Agency RMBS, Non-Agency RMBS, ABS and CMBS asset types as "real estate securities" or "securities."

Residential mortgage loans refer to performing, re-performing and non-performing loans secured by a first lien mortgage on residential mortgaged property located in any of the 50 states of the United States or in the District of Columbia. Commercial loans are secured by an interest in commercial real estate and represent a contractual right to receive money on demand or on fixed or determinable dates. The Company refers to its residential and commercial mortgage loans as "mortgage loans" or "loans."

Excess MSRs refer to the excess servicing spread related to mortgage servicing rights, whose underlying collateral is securitized in a trust either held by a U.S. government agency or GSE ("Agency Excess MSR") or not held by a U.S. government agency or GSE ("Credit Excess MSR").

Agency investments include Agency RMBS and Agency Excess MSRs, and credit investments include Non-Agency RMBS, ABS, CMBS, loans, and Credit Excess MSRs.

Prior to December 31, 2019, the Company conducted its business through the following segments; (i) Securities and Loans and (ii) Single-Family Rental Properties. On November 15, 2019, the Company sold its portfolio of single-family rental properties ("SFR portfolio") to a third party and no longer separated its business into segments. The sale of the Company's SFR portfolio has met the criteria for discontinued operations. Accordingly, for all current and prior periods presented, the related assets and
9

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
liabilities are presented as assets and liabilities held for sale on the consolidated balance sheets and the related operating results are presented as income/(loss) from discontinued operations on the consolidated statement of operations. See Note 14 for further details.

The Company is externally managed by AG REIT Management, LLC, a Delaware limited liability company (the "Manager"), a wholly-owned subsidiary of Angelo, Gordon & Co., L.P. ("Angelo Gordon"), a privately-held, SEC-registered investment adviser, pursuant to a management agreement. The Manager, pursuant to a delegation agreement dated as of June 29, 2011, has delegated to Angelo Gordon the overall responsibility of its day-to-day duties and obligations arising under the management agreement.
 
The Company conducts its operations to qualify and be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code").
 
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

COVID-19 Impact

On March 11, 2020, the World Health Organization declared the outbreak of the novel coronavirus ("COVID-19") a pandemic. On March 13, 2020, the U.S. declared a national emergency concerning the COVID-19 pandemic, and several states and municipalities have subsequently declared public health emergencies. These conditions have caused, and continue to cause, a significant disruption in the U.S. and world economies. To slow the spread of COVID-19, many countries, including the U.S., have implemented social distancing measures, which have substantially prohibited large gatherings, including at sporting events, religious services and schools. Further, many regions, including the majority of U.S. states, implemented additional measures, such as shelter-in-place and stay-at-home orders. Many businesses moved to a remote working environment, temporarily suspended operations, laid off a significant percentage of their workforce and/or shut down completely. Moreover, the COVID-19 pandemic and certain of the actions taken to reduce its spread have resulted in lost business revenue, rapid and significant increases in unemployment, changes in consumer behavior and significant reductions in liquidity and the fair value of many assets, including those in which the Company invests. Although many of the government restrictions were relaxed over the summer and early fall, these conditions, or some level thereof, are expected to continue over the near term and may continue into 2021, depending on state and local outbreaks and the success of availability of an effective vaccine.

Beginning in mid-March, the global pandemic associated with COVID-19 and related economic conditions caused financial and mortgage-related asset markets to come under extreme duress, resulting in credit spread widening, a sharp decrease in interest rates and unprecedented illiquidity in repurchase agreement financing and mortgage-backed securities ("MBS") markets. The illiquidity was exacerbated by inadequate demand for MBS among primary dealers due to balance sheet constraints. These events, in turn, resulted in declines in the value of our assets and margin calls from the Company's repurchase agreement financing counterparties. In order to satisfy the margin calls, the Company sold a significant portion of its investments resulting in a material adverse impact on book value, earnings and financial position. The Company's book value decreased from $17.61 at December 31, 2019 to $3.34 at September 30, 2020.

In an effort to manage the Company's portfolio through this unprecedented turmoil in the financial markets and improve liquidity, the Company executed the following during the nine months ended September 30, 2020:

The Company reduced its investment portfolio from $4.0 billion at December 31, 2019 to $903.7 million at September 30, 2020 through sales, directly or as a result of financing counterparty seizures.
The Company terminated its entire portfolio of pay-fixed, receive-variable interest rate swaps, recognizing net realized losses of $(65.4) million.
The Company reduced its outstanding financing arrangements from $3.2 billion at December 31, 2019 to $225.5 million at September 30, 2020, resulting in a decline of its overall leverage ratio from 4.1x to 1.8x.

The Company executed the following during the three months ended September 30, 2020:

The Company purchased $250.1 million of Agency RMBS and $60.2 million of Residential Mortgage Loans.
The Company participated in a non-rated securitization, in which Residential Mortgage Loans with a fair value of $199.6 million were securitized, converting financing from recourse financing that was mark-to-market with respect to margin calls to non-recourse financing that is no longer mark-to-market with respect to margin calls.
10

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
The Company sold real estate securities for proceeds of $38.8 million, residential mortgage loans for proceeds of $6.2 million, commercial loans for proceeds of $2.7 million and Excess MSRs for proceeds of $8.5 million.
The Company, alongside private funds under the management of Angelo Gordon, participated through its unconsolidated ownership interest in MATT, as defined below, in a rated Non-QM loan securitization, in which Non-QM loans with a fair value of $226.0 million were securitized. Certain senior tranches in the securitization were sold to third parties with the Company and private funds under the management of Angelo Gordon retaining the subordinate tranches, which had a fair value of $24.3 million as of September 30, 2020. The Company has a 44.6% interest in the retained subordinate tranches.
On September 24, 2020, the Company issued (i) 1,215,370 shares of common stock to the Manager in full satisfaction of the deferred base management fee of $3.8 million payable by the Company in respect to the first and second quarters of 2020 and (ii) 154,500 shares of common stock in satisfaction of $0.5 million of the base management fee payable by the Company in respect to the third quarter of 2020. The shares of Common Stock issued to the Manager were valued at $3.15 per share based on the midpoint of the estimated range of the Company’s book value per share as of August 31, 2020. The remaining third quarter management fee will be paid in the normal course of business.

The full impact of COVID-19 on the mortgage REIT industry, the credit markets and consequently on the Company’s financial condition and results of operations for future periods is uncertain and cannot be predicted at the current time as it depends on several factors beyond the control of the Company including, but not limited to (i) the uncertainty around the severity, duration and spread of the outbreak, (ii) the effectiveness of the United States and global public health response, (iii) the pandemic’s impact on the U.S. and global economies, (iv) the timing, scope and effectiveness of additional governmental responses to the pandemic, including the availability of a treatment or vaccination for COVID-19, (v) the impact of government interventions, and (vi) the negative impact on the Company's borrowers, asset values and cost of capital.

2. Summary of significant accounting policies
 
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. In the opinion of management, all adjustments considered necessary for a fair statement of the Company’s financial position, results of operations and cash flows have been included for the interim period and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. Certain reclassifications have been made to the prior year's consolidated financial statements to conform to the three months ended September 30, 2020 presentation, primarily in the Consolidated Statement of Operations and all related notes in which prior periods have been retrospectively adjusted to reflect the classification of the operations of the Company's SFR portfolio to discontinued operations. The Company also included additional detail on certain asset classes within the real estate securities portfolio given the Company's reduction in portfolio size.

The accompanying unaudited consolidated financial statements and related notes have been prepared assuming that the Company will continue as a going concern. The Company has conducted a going concern analysis which has a look-forward period of one year from the financial statement issuance date. The Company expects its current cash resources, operating cash flows, positive equity on its remaining assets, and its ability to obtain financing will be sufficient to sustain operations for a period greater than one year after the issuance of the date of this report. Management believes that the Company will have sufficient liquidity to meet its obligations, as they become due, for the next twelve months. To the extent that actual available cash differs materially from the current cash flow forecast, management has the ability to consider certain asset sales to increase the amount of available cash.

The global impact of the COVID-19 pandemic continues to evolve as state and local governments adopted a number of measures and recommendations in response to the outbreak, including imposing travel restrictions, "shelter in place" restrictions, curfews, canceling events, banning large gatherings, closing non-essential businesses and generally promoting social distancing. Although certain states and localities have recently begun easing some of these new measures and providing recommendations regarding recommencing economic activity, renewed outbreaks of COVID-19 may continue to occur and result in additional or different policy action at the federal, state and local level in the near future. The COVID-19 pandemic and resulting emergency measures has led (and may continue to lead) to significant disruptions in the global supply chain, global capital markets, the economy of the U.S. and the economies of other countries impacted by COVID-19. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. The Company believes the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as of September 30, 2020; however, uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company's business in particular, makes any estimates and assumptions as of September 30, 2020 inherently less certain than they would be absent the current and potential
11

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
impacts of COVID-19. Accordingly, it is reasonably possible that actual conditions could be different than anticipated in those estimates, which could materially impact the Company’s results of operations and its financial condition and therefore the going concern analysis.
 
Cash and cash equivalents

Cash is comprised of cash on deposit with financial institutions. The Company classifies highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents. Cash equivalents includes cash invested in money market funds. As of September 30, 2020, the Company held $44.6 million of cash and cash equivalents, NaN of which were cash equivalents. As of December 31, 2019, the Company held $81.7 million of cash and cash equivalents, of which $53.2 million were cash equivalents. The Company places its cash with high credit quality institutions to reduce credit risk exposure. Cash pledged to the Company as collateral is unrestricted in use and, accordingly, is included as a component of "Cash and cash equivalents" on the consolidated balance sheets. Any cash held by the Company as collateral is included in the "Other liabilities" line item on the consolidated balance sheets and in cash flows from financing activities on the consolidated statement of cash flows. Due to broker, which is included in the "Other liabilities" line item on the consolidated balance sheets, does not include variation margin received on centrally cleared derivatives. See Note 8 for more detail. Any cash due to the Company in the form of principal payments is included in the "Other assets" line item on the consolidated balance sheets and in cash flows from operating activities on the consolidated statement of cash flows.
 
Restricted cash
 
Restricted cash includes cash pledged as collateral for clearing and executing trades, derivatives, and financing arrangements, as well as restricted cash deposited into accounts held at certain consolidated trusts. Prior to the disposition of the Company's SFR portfolio, restricted cash also included cash deposited into accounts related to rent deposits and collections, security deposits, property taxes, insurance premiums, interest expenses, property management fees and capital expenditures. Restricted cash is not available to the Company for general corporate purposes. Restricted cash may be returned to the Company when the related collateral requirements are exceeded or at the maturity of the derivative or financing arrangement. Restricted cash is carried at cost, which approximates fair value. Restricted cash does not include variation margin pledged on centrally cleared derivatives. See Note 8 for more detail.
 
Offering costs
 
The Company has incurred offering costs in connection with common stock offerings, registration statements, preferred stock offerings and exchanges. Where applicable, the offering costs were paid out of the proceeds of the respective offerings. Offering costs in connection with common stock offerings and costs in connection with registration statements have been accounted for as a reduction of additional paid-in capital. Offering costs in connection with preferred stock offerings have been accounted for as a reduction of their respective gross proceeds. Exchange costs in connection with the Company's preferred stock exchanges have been accounted for as a reduction to the Company's retained earnings.
 
Use of estimates
 
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from those estimates. See Note 1 under "COVID-19 Impact" for more detail.
 
Earnings/(Loss) per share
 
In accordance with the provisions of Accounting Standards Codification ("ASC") 260, "Earnings per Share," the Company calculates basic income/(loss) per share by dividing net income/(loss) available to common stockholders for the period by weighted average shares of the Company’s common stock outstanding for that period. Diluted income per share takes into account the effect of dilutive instruments, such as stock options, warrants, unvested restricted stock and unvested restricted stock units but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding. In periods in which the Company records a loss, potentially dilutive securities are excluded from the diluted loss per share calculation, as their effect on loss per share is anti-dilutive. See Note 9 for aggregate amounts of arrearages in cumulative preferred dividends and Note 12 for further detail on the Company’s common and preferred stock.
 
12

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
Valuation of financial instruments
 
The fair value of the financial instruments that the Company records at fair value is determined by the Manager, subject to oversight of the Company’s Board of Directors, and 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.
 
The three levels of the hierarchy under ASC 820 are described below: 
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Prices determined using other significant observable inputs. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk and others.
Level 3 – Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used. Unobservable inputs reflect the Company’s assumptions about the factors that market participants would use in pricing an asset or liability, and would be based on the best information available.

Transfers between levels are assumed to occur at the beginning of the reporting period.

At the beginning of the first quarter of 2020, the Manager completed a data collection and analysis effort, which supported an update to its Leveling policy under ASC 820. Among the data collected and analyzed were: (i) reports from TRACE, FINRA’s Trade Reporting and Compliance Engine, that reports over-the-counter secondary market transactions in eligible fixed income securities, (ii) information from pricing vendors regarding valuation approaches and observability of market color, (iii) data points collected from discussions with industry sources, including peer firms and audit firms, and (iv) its own data from back testing vendor pricing against its own trades. After analyzing this data, the Manager concluded that there was sufficient observability of market inputs used by its third-party pricing services for certain RMBS and CMBS positions previously categorized as Level 3 to meet the criteria for a Level 2 classification.

The Company considered whether the volatile market conditions related to the COVID-19 pandemic would have an impact on its Leveling policy under ASC 820, as amended on January 1, 2020. Based on due diligence, there have been no significant changes in any of the pricing services’ fair value methodologies or processes as a result of COVID-19. The Company does not believe the pricing services’ ability to determine fair values has been adversely impacted. As a result, the Company concluded there was no migration from Level 2 to Level 3 as a result of COVID-19.
 
Accounting for real estate securities
 
Investments in real estate securities are recorded in accordance with ASC 320-10, "Investments – Debt and Equity Securities," ASC 325-40, "Beneficial Interests in Securitized Financial Assets," or ASC 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality." The Company has chosen to make a fair value election pursuant to ASC 825, "Financial Instruments" for its real estate securities portfolio. Real estate securities are recorded at fair value on the consolidated balance sheets and the periodic change in fair value is recorded in current period earnings on the consolidated statement of operations as a component of "Unrealized gain/(loss) on real estate securities and loans, net." Real estate securities acquired are shown in the line item "Purchase of real estate securities" on the consolidated statement of cash flows. Purchases and sales of real estate securities are recorded on the trade date.
 
These investments meet the requirements to be classified as available for sale under ASC 320-10-25 which requires the securities to be carried at fair value on the consolidated balance sheets with changes in fair value recorded to other comprehensive income, a component of stockholders’ equity. Electing the fair value option allows the Company to record changes in fair value in the consolidated statement of operations, which, in management’s view, more appropriately reflects the results of operations for a particular reporting period as all securities activities will be recorded in a similar manner. The Company recognizes certain upfront costs and fees relating to securities for which the fair value option has been elected in current period earnings as incurred and does not defer those costs, which is in accordance with ASC 825-10-25.
 
When the Company purchases securities with evidence of credit deterioration since origination, it will analyze the securities to determine if the guidance found in ASC 310-30 is applicable.
13

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
 
In June 2016, FASB issued ASU 2016-13, "Financial Instruments – Credit Losses" ("ASU 2016-13"). This new guidance significantly changes how entities will measure credit losses for most financial assets, including loans, that are not measured at fair value with changes in fair value recognized through net income. The Company adopted the new guidance as of January 1, 2020. The new guidance specifically excludes available-for-sale securities and loans measured at fair value, with changes in fair value recognized through net income. Accordingly, the impact of the new guidance on accounting for the Company's debt securities and loans is limited to recognition of effective yield which was historically impacted by other than temporary impairment recorded under current standards. As the new guidance eliminates the accounting for other than temporary impairment, this guidance has impacted the Company's unrealized and realized gain/(loss) amounts. As the Company measures its debt securities and loans at fair value with any changes recognized through net income and updates its estimate of the cash flows expected to be collected on these asset classes on at least a quarterly basis recognizing changes in cash flows in interest income prospectively through an adjustment of an asset’s yield over its remaining life, the adoption of the standard did not have a material impact to the Company’s consolidated financial statements.

Prior to the adoption of ASU 2016-13, the Company accounted for its securities under ASC 310 and ASC 325 and evaluated securities for other-than-temporary impairment ("OTTI") on at least a quarterly basis. The determination of whether a security was other-than-temporarily impaired involved judgments and assumptions based on subjective and objective factors. When the fair value of a real estate security was less than its amortized cost at the balance sheet date, the security was considered impaired, and the impairment was designated as either "temporary" or "other-than-temporary."
 
When a real estate security was impaired, an OTTI was considered to have occurred if (i) the Company intended to sell the security (i.e., a decision has been made as of the reporting date) or (ii) it was more likely than not that the Company was required to sell the security before recovery of its amortized cost basis. If the Company intended to sell the security or if it was more likely than not that the Company was required to sell the real estate security before recovery of its amortized cost basis, the entire amount of the impairment loss, if any, was recognized in earnings as a realized loss and the cost basis of the security was adjusted to its fair value. Additionally, for securities accounted for under ASC 325-40 an OTTI was deemed to have occurred when there was an adverse change in the expected cash flows to be received and the fair value of the security was less than its carrying amount. In determining whether an adverse change in cash flows occurred, the present value of the remaining cash flows, as estimated at the initial transaction date (or the last date previously revised), was compared to the present value of the expected cash flows at the current reporting date. The estimated cash flows reflected those a "market participant" would use and included observations of current information and events, and assumptions related to fluctuations in interest rates, prepayment speeds and the timing and amount of potential credit losses. Cash flows were discounted at a rate equal to the current yield used to accrete interest income. Any resulting OTTI adjustments were reflected in the "Net realized gain/(loss)" line item on the consolidated statement of operations.
 
The determination as to whether an OTTI existed was subjective, given that such determination was based on information available at the time of assessment as well as the Company’s estimate of the future performance and cash flow projections for the individual security. As a result, the timing and amount of an OTTI constituted an accounting estimate that could change materially over time. Increases in interest income could have been recognized on a security on which the Company previously recorded an OTTI charge if the performance of such security subsequently improved.

Sales of securities are driven by the Manager’s portfolio management process. The Manager seeks to mitigate risks including those associated with prepayments, defaults, severities, amongst others and will opportunistically rotate the portfolio into securities with more favorable attributes. Strategies may also be employed to manage net capital gains, which need to be distributed for tax purposes.
 
Realized gains or losses on sales of securities, loans and derivatives are included in the "Net realized gain/(loss)" line item on the consolidated statement of operations. The cost of positions sold is calculated using a first in, first out ("FIFO") basis. Realized gains and losses are recorded in earnings at the time of disposition.
 
Accounting for residential and commercial mortgage loans
 
Investments in mortgage loans are recorded in accordance with ASC 310-10, "Receivables." At purchase, the Company may aggregate its mortgage loans into pools based on common risk characteristics. Once a pool of loans is assembled, its composition is maintained. The Company has chosen to make a fair value election pursuant to ASC 825 for its mortgage loan portfolio. Electing the fair value option allows the Company to record changes in fair value in the Consolidated Statement of Operations, which, in management's view, more appropriately reflects the results of operations for a particular reporting period as all loan activities will be recorded in a similar manner. As such, loans are recorded at fair value on the consolidated balance
14

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
sheets and any periodic change in fair value is recorded in current period earnings on the consolidated statement of operations as a component of "Unrealized gain/(loss) on real estate securities and loans, net." The Company recognizes certain upfront costs and fees relating to loans for which the fair value option has been elected in current period earnings as incurred and does not defer those costs, which is in accordance with ASC 825-10-25. Purchases and sales of mortgage loans are recorded on the settlement date, concurrent with the completion of due diligence and the removal of any contingencies. Prior to the settlement date, the Company will include commitments to purchase loans within the Commitments and Contingencies footnote to the financial statements.

The Company amortizes or accretes any premium or discount over the life of the loans utilizing the effective interest method. On at least a quarterly basis, the Company evaluates the collectability of both interest and principal on its loans to determine whether they are impaired. A loan or pool of loans is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the existing contractual terms. Income recognition is suspended for loans at the earlier of the date at which payments become 90-days past due or when, in the opinion of the Manager, a full recovery of income and principal becomes doubtful. When the ultimate collectability of the principal of an impaired loan or pool of loans is in doubt, all payments are applied to principal under the cost recovery method. When the ultimate collectability of the principal of an impaired loan is not in doubt, contractual interest is recorded as interest income when received, under the cash basis method until an accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. A loan is written off when it is no longer realizable and/or legally discharged.
 
When the Company purchases mortgage loans with evidence of credit deterioration since origination and it determines that it is probable it will not collect all contractual cash flows on those loans, it will apply the guidance found in ASC 310-30. Mortgage loans that are delinquent 60 or more days are considered non-performing.
 
The Company updates its estimate of the cash flows expected to be collected on at least a quarterly basis for loans accounted for under ASC 310-30. In estimating these cash flows, there are a number of assumptions that will be subject to uncertainties and contingencies including both the rate and timing of principal and interest receipts, and assumptions of prepayments, repurchases, defaults and liquidations. If based on the most current information and events it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, the Company will recognize these changes prospectively through an adjustment of the loan’s yield over its remaining life. The Company will adjust the amount of accretable yield by reclassification from the nonaccretable difference. The adjustment is accounted for as a change in estimate in conformity with ASC 250, "Accounting Changes and Error Corrections" with the amount of periodic accretion adjusted over the remaining life of the loan. Prior to the adoption of ASU 2016-13, decreases in cash flows expected to be collected from previously projected cash flows, which included all cash flows originally expected to be collected by the investor plus any additional cash flows expected to be collected arising from changes in estimate after acquisition, could have been recognized as impairment. Increases in interest income could have been recognized on a loan on which the Company previously recorded an OTTI charge if the performance of such loan subsequently improved.

As previously stated, the Company adopted ASU 2016-13 as of January 1, 2020. The new guidance specifically excludes available-for-sale securities and loans measured at fair value with changes in fair value recognized through net income. Accordingly, the impact of the new guidance on accounting for the Company's debt securities and loans is limited to recognition of effective yield which was previously impacted by other than temporary impairment recorded under previous standards. As the new guidance eliminates the accounting for other than temporary impairment, this guidance has impacted the Company's recorded unrealized and realized gain/(loss) amounts. As the Company measures its debt securities and loans at fair value with any changes recognized through net income and updates its estimate of the cash flows expected to be collected on these asset classes on at least a quarterly basis recognizing changes in cash flows in interest income prospectively through an adjustment of an asset’s yield over its remaining life, the adoption of the standard did not have a material impact to the Company’s consolidated financial statements.

Investments in debt and equity of affiliates
 
The Company’s unconsolidated ownership interests in affiliates are accounted for using the equity method. A majority of the Company’s investments held through affiliated entities are comprised of real estate securities, Excess MSRs, loans, and certain derivatives. These types of investments may also be held directly by the Company. These entities have chosen to make a fair value election on their financial instruments and certain financing arrangements pursuant to ASC 825; as such, the Company will treat these financial instruments and financing arrangements consistently with this election.
 
15

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
On December 9, 2015, the Company, alongside private funds managed by Angelo Gordon, through AG Arc LLC, one of the Company’s indirect subsidiaries ("AG Arc"), formed Arc Home LLC ("Arc Home"). In June 2016, Arc Home closed on the acquisition of a Fannie Mae, Freddie Mac, FHA, VA and Ginnie Mae seller/servicer of residential mortgages. Through this subsidiary, Arc Home originates conforming, Government, Jumbo, Non-QM, and other non-conforming residential mortgage loans, retains the mortgage servicing rights associated with the loans it originates, and purchases additional mortgage servicing rights from third-party sellers. The Company has chosen to make a fair value election with respect to its investment in AG Arc pursuant to ASC 825.
 
On August 29, 2017, the Company, alongside private funds managed by Angelo Gordon, formed Mortgage Acquisition Holding I LLC ("MATH") to conduct a residential mortgage investment strategy. MATH in turn sponsored the formation of an entity called Mortgage Acquisition Trust I LLC ("MATT") to purchase predominantly "Non-QM" loans, which are residential mortgage loans that are not deemed "qualified mortgage," or "QM," loans under the rules of the Consumer Finance Protection Bureau. Non-QM loans are not eligible for delivery to Fannie Mae, Freddie Mac, or Ginnie Mae. MATT has made an election to be treated as a real estate investment trust beginning with the 2018 tax year.

On April 3, 2020, the Company, alongside private funds under the management of Angelo Gordon, restructured its financing arrangements in MATT ("Restructured Financing Arrangement"). The Restructured Financing Arrangement requires all principal and interest on the underlying assets in MATT be used to pay down principal and interest on the outstanding financing arrangement. As of April 3, 2020, the Restructured Financing Arrangement is no longer a mark-to-market facility with respect to margin calls and is non-recourse to the Company. The Restructured Financing Arrangement provides for a termination date of October 1, 2021. At the earlier of the termination date or the securitization or sale by the Company of the remaining assets subject to the Restructured Financing Arrangement, the financing counterparty (which is a non-affiliate) will be entitled to 35% of the remaining equity in the assets. The Company evaluated this restructuring and concluded it was an extinguishment of debt. MATT has chosen to make a fair value election on this financing arrangement, and the Company will treat this arrangement consistently with this election.

On May 15, 2019 and November 14, 2019, the Company, alongside private funds managed by Angelo Gordon, formed LOT SP I LLC and LOT SP II LLC, respectively, (collectively, "LOTS"). LOTS were formed to originate first mortgage loans to third party land developers and home builders for the acquisition and horizontal development of land ("Land Related Financing").

The below table reconciles the fair value of investments to the "Investments in debt and equity of affiliates" line item on the Company's consolidated balance sheet (in thousands).
September 30, 2020December 31, 2019
AssetsLiabilitiesEquityAssetsLiabilitiesEquity
Real Estate Securities, Excess MSRs and Loans, at fair value (1)(2)$217,643 $(123,861)$93,782 $373,126 $(257,068)$116,058 
AG Arc, at fair value41,436 41,436 28,546 28,546 
Cash and Other assets/(liabilities)4,925 (1,454)3,471 12,953 (1,246)11,707 
Investments in debt and equity of affiliates$264,004 $(125,315)$138,689 $414,625 $(258,314)$156,311 
(1)Certain loans held in securitized form are presented net of non-recourse securitized debt.
(2)Within Real Estate Securities, Excess MSRs and Loans is $152.5 million and $254.3 million of fair value of Non-QM loans held in MATT at September 30, 2020 and December 31, 2019, respectively. The related financing on the Non-QM loans was $117.0 million and $200.3 million at September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, Non-QM Loans excluded loans with an unpaid principal balance of $24.5 million whereby an affiliate of MATT has the right, but not the obligation, to repurchase loans from a trust that are 90 days or more delinquent at its discretion. These loans, which are eligible to be repurchased, would be recorded on the balance sheet of MATT, an unconsolidated equity method investee of the Company, with a corresponding and offsetting liability. Additionally, there is $25.5 million and $17.0 million of fair value of Land Related Financing held in LOTS at September 30, 2020 and December 31, 2019, respectively.
 
The Company’s investments in debt and equity of affiliates are recorded at fair value on the consolidated balance sheets in the "Investments in debt and equity of affiliates" line item and periodic changes in fair value are recorded in current period earnings on the consolidated statement of operations as a component of "Equity in earnings/(loss) from affiliates." Capital contributions, distributions and profits and losses of such entities are allocated in accordance with the terms of the applicable agreements.

16

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
Accounting for excess mortgage servicing rights
 
The Company has acquired the right to receive the excess servicing spread related to Excess MSRs. The Company has chosen to make a fair value election pursuant to ASC 825 for Excess MSRs. Excess MSRs are recorded at fair value on the consolidated balance sheets and any periodic change in fair value is recorded in current period earnings on the consolidated statement of operations as a component of "Unrealized gain/(loss) on derivative and other instruments, net."
 
The Company amortizes or accretes any premium or discount over the life of the related Excess MSRs utilizing the effective interest method. On at least a quarterly basis, the Company evaluates the collectability of interest of its Excess MSRs to determine whether they are impaired.
 
The Company updates its estimate of the cash flows expected to be collected on at least a quarterly basis for Excess MSRs. In estimating these cash flows, there are a number of assumptions that will be subject to uncertainties and contingencies including both the rate and timing of interest receipts, and assumptions of prepayments, repurchases, defaults and liquidations. If there is a significant increase in expected cash flows over what was previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected, the Company will recognize these changes prospectively through an adjustment of the Excess MSR’s yield over its remaining life. Prior to the adoption of ASU 2016-13, decreases in cash flows expected to be collected from previously projected cash flows, which included all cash flows originally expected to be collected by the investor plus any additional cash flows expected to be collected arising from changes in estimate after acquisition, could have been recognized as impairment. Increases in interest income could have been recognized on an Excess MSR on which the Company previously recorded an OTTI charge if the performance of such Excess MSR subsequently improved.

As previously stated, the Company adopted ASU 2016-13 as of January 1, 2020. The new guidance specifically excludes available-for-sale securities, loans and Excess MSRs measured at fair value with changes in fair value recognized through net income. Accordingly, the impact of the new guidance on accounting for the Company's debt securities and loans is limited to recognition of effective yield which was previously impacted by other than temporary impairment recorded under current standards. As the new guidance eliminates the accounting for other than temporary impairment, this guidance has impacted the Company's recorded unrealized and realized gain/(loss) amounts. As the Company measures its Excess MSRs at fair value with any changes recognized through net income and updates its estimate of the cash flows expected to be collected on this asset class on at least a quarterly basis recognizing changes in cash flows in interest income prospectively through an adjustment of an asset’s yield over its remaining life, the adoption of the standard did not have a material impact to the Company’s consolidated financial statements.

Investment consolidation and transfers of financial assets

For each investment made, the Company evaluates the underlying entity that issued the securities acquired or to which the Company makes a loan to determine the appropriate accounting. A similar analysis is performed for each entity with which the Company enters into an agreement for management, servicing or related services. In performing the analysis, the Company refers to guidance in ASC 810-10, "Consolidation." In situations where the Company is the transferor of financial assets, the Company refers to the guidance in ASC 860-10 "Transfers and Servicing."
 
In variable interest entities ("VIEs"), an entity is subject to consolidation under ASC 810-10 if the equity investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’s activities or are not exposed to the entity’s losses or entitled to its residual returns. VIEs within the scope of ASC 810-10 are required to be consolidated by their 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 of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. This determination can sometimes involve complex and subjective analyses. Further, ASC 810-10 also requires ongoing assessments of whether an enterprise is the primary beneficiary of a VIE. In accordance with ASC 810-10, all transferees, including variable interest entities, must be evaluated for consolidation. If the Company determines that consolidation is not required, it will then assess whether the transfer of the underlying assets would qualify as a sale, should be accounted for as secured financings under GAAP, or should be accounted for as an equity method investment, depending on the circumstances. See Note 3 and Note 4 for more detail.

A Special Purpose Entity ("SPE") is an entity designed to fulfill a specific limited need of the company that organized it. SPEs are often used to facilitate transactions that involve securitizing financial assets or resecuritizing previously securitized financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying securitized financial assets on improved terms. Securitization involves transferring assets to an SPE to convert all or
17

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
a portion of those assets into cash before they would have been realized in the normal course of business through the SPE’s issuance of debt or equity instruments. Investors in an SPE usually have recourse only to the assets in the SPE and depending on the overall structure of the transaction, may benefit from various forms of credit enhancement, such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement.

The Company entered into a resecuritization transaction in 2014 (the "December 2014 VIE") which resulted in the Company consolidating the VIE that was created to facilitate the transaction and to which the underlying assets in connection with the resecuritization were transferred. The transferred assets were recorded as a secured borrowing. The Company has chosen to make a fair value election pursuant to ASC 825 for its secured borrowings. As of September 30, 2020, the Company did not hold any interest in the December 2014 VIE. In connection with the deconsolidation, the Company recorded a realized gain of $2.1 million. See Note 3 below for more detail.

The Company transferred certain of its CMBS in Q3 2018 from certain of its non-wholly owned subsidiaries into a newly formed wholly owned entity so the Company could obtain financing on these real estate securities (the "August 2018 VIE"). The Company determined that the August 2018 VIE should be consolidated. As of September 30, 2020, the Company did not hold any interest in the August 2018 VIE. In connection with the deconsolidation, the Company recorded a loss of $8.3 million. See Note 3 below as well as the "Investments in debt and equity of affiliates" section above for more detail.

The Company entered into securitization transactions of certain of its re-performing residential mortgage loans, which resulted in the Company consolidating the respective VIEs that were created to facilitate these transactions and to which the underlying assets in connection with these securitizations were transferred (the "August 2019 VIE" and the "September 2020 VIE"). Based on the evaluations of each VIE, the Company concluded that the VIEs should be consolidated and, as a result, transferred assets of these VIEs were determined to be secured borrowings. Upon consolidation, the Company elected the fair value option pursuant to ASC 825 for the assets and liabilities of the August 2019 VIE and September 2020 VIE. Electing the fair value option allows the Company to record changes in fair value in the Consolidated Statement of Operations, which, in management's view, more appropriately reflects the results of operations for a particular reporting period as all activities will be recorded in a similar manner. See Note 4 for more detail regarding these VIEs. Refer to Note 6 related to the Company's determination of fair value for the assets and liabilities included within these VIEs.

From time to time the Company purchases residual positions where it consolidates the securitization and the positions are recorded on the Company's books as residential mortgage loans. There may be limited data available regarding the underlying collateral of such securitizations.

The Company may periodically enter into transactions in which it transfers assets to a third party. Upon a transfer of financial assets, the Company will sometimes retain or acquire senior or subordinated interests in the related assets. Pursuant to ASC 860-10, a determination must be made as to whether a transferor has surrendered control over transferred financial assets. That determination must consider the transferor’s continuing involvement in the transferred financial asset, including all arrangements or agreements made contemporaneously with, or in contemplation of, the transfer, even if they were not entered into at the time of the transfer. The financial components approach under ASC 860-10 limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. It defines the term "participating interest" to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale.
 
Under ASC 860-10, after a transfer of financial assets that meets the criteria for treatment as a sale—legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint and transferred control—an entity recognizes the financial and servicing assets it acquired or retained and the liabilities it has incurred, derecognizes financial assets it has sold and derecognizes liabilities when extinguished. The transferor would then determine the gain or loss on sale of financial assets by allocating the carrying value of the underlying mortgage between securities or loans sold and the interests retained based on their fair values. The gain or loss on sale is the difference between the cash proceeds from the sale and the amount allocated to the securities or loans sold. When a transfer of financial assets does not qualify for sale accounting, ASC 860-10 requires the transfer to be accounted for as a secured borrowing with a pledge of collateral.
 
From time to time, the Company may securitize mortgage loans it holds if such financing is available. These transactions will be recorded in accordance with ASC 860-10 and will be accounted for as either a "sale" and the loans will be removed from the
18

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
consolidated balance sheets or as a "financing" and will be classified as "residential mortgage loans" on the consolidated balance sheets, depending upon the structure of the securitization transaction. ASC 860-10 is a standard that may require the Company to exercise significant judgment in determining whether a transaction should be recorded as a "sale" or a "financing."

Interest income recognition
 
Interest income on the Company’s real estate securities portfolio is accrued based on the actual coupon rate and the outstanding principal balance of such securities. The Company has elected to record interest in accordance with ASC 835-30-35-2, "Imputation of Interest," using the effective interest method for all securities accounted for under the fair value option (ASC 825). As such, premiums and discounts are amortized or accreted into interest income over the lives of the securities in accordance with ASC 310-20, "Nonrefundable Fees and Other Costs," ASC 320-10 or ASC 325-40, as applicable. Total interest income is recorded in the "Interest income" line item on the consolidated statement of operations.
 
On at least a quarterly basis for securities accounted for under ASC 320-10 and ASC 310-20 (generally Agency RMBS, exclusive of interest-only securities), prepayments of the underlying collateral must be estimated, which directly affect the speed at which the Company amortizes premiums on its securities. If actual and anticipated cash flows differ from previous estimates, the Company records an adjustment in the current period to the amortization of premiums for the impact of the cumulative change in the effective yield retrospectively through the reporting date.
  
Similarly, the Company also reassesses the cash flows on at least a quarterly basis for securities accounted for under ASC 325-40 (generally Non-Agency RMBS, ABS, CMBS, interest-only securities and Excess MSRs). In estimating these cash flows, there are a number of assumptions made that are uncertain and subject to judgments and assumptions based on subjective and objective factors and contingencies. These include the rate and timing of principal and interest receipts (including assumptions of prepayments, repurchases, defaults and liquidations), the pass-through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans have to be estimated. Differences between previously estimated cash flows and current actual and anticipated cash flows are recognized prospectively through an adjustment of the yield over the remaining life of the security based on the current amortized cost of the investment as adjusted for credit impairment, if any.
 
Interest income on the Company’s loan portfolio is accrued based on the actual coupon rate and the outstanding principal balance of such loans. The Company has elected to record interest in accordance with ASC 835-30-35-2 using the effective interest method for all loans accounted for under the fair value option (ASC 825). Any amortization or accretion is reflected as an adjustment to interest income in the consolidated statement of operations.
 
For security and loan investments purchased with evidence of deterioration of credit quality for which it is probable, at acquisition, that the Company will be unable to collect all contractually required payments receivable, the Company will apply the provisions of ASC 310-30. For purposes of income recognition, the Company may aggregate loans that have common risk characteristics into pools and uses a composite interest rate and expectation of cash flows expected to be collected for the pool. ASC 310-30 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. ASC 310-30 limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. ASC 310-30 requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual or valuation allowance. Subsequent changes in cash flows expected to be collected generally should be recognized prospectively through an adjustment of the loan’s yield over its remaining life.

Financing arrangements
 
The Company finances the acquisition of certain assets within its portfolio through the use of financing arrangements. Financing arrangements include repurchase agreements and financing facilities. The Company's financing facilities include revolving facilities. Repurchase agreements and financing facilities are treated as collateralized financing transactions and carried at their contractual amounts, including accrued interest, as specified in the respective agreements. The carrying amount of the Company’s repurchase agreements and revolving facilities approximates fair value.
 
The Company pledges certain securities, loans or properties as collateral under financing arrangements with financial institutions, the terms and conditions of which are negotiated on a transaction-by-transaction basis. The amounts available to be
19

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
borrowed under repurchase agreements and revolving facilities are dependent upon the fair value of the securities, or loans pledged as collateral, which can fluctuate with changes in interest rates, type of security and liquidity conditions within the banking, mortgage finance and real estate industries. In response to declines in fair value of assets pledged under repurchase agreements and revolving facilities, lenders may require the Company to post additional collateral or pay down borrowings to re-establish agreed upon collateral requirements, referred to as margin calls. As of September 30, 2020, the Company had met all margin call requirements. 

On March 20, 2020, the Company notified its financing counterparties that it did not expect to be in a position to fund the anticipated volume of future margin calls under its financing arrangements in the near term as a result of market disruptions created by the COVID-19 pandemic. Subsequent to March 23, 2020, the Company received notifications of alleged events of default and deficiency notices from several of its financing counterparties. Subject to the terms of the applicable financing arrangement, if the Company had failed to deliver additional collateral or otherwise meet margin calls when due, the financing counterparties may have been able to demand immediate payment by the Company of the aggregate outstanding financing obligations owed to such counterparties, and if such financing obligations were not paid, may have been permitted to sell the financed assets and apply the proceeds to the Company's financing obligations and/or take ownership of the assets securing the Company's financing obligations. During this period of market upheaval, the Company engaged in discussions with its financing counterparties with regard to entering into forbearance agreements pursuant to which each counterparty would agree to forbear from exercising its rights and remedies with respect to an event of default under the applicable financing arrangement for an agreed-upon period. On April 10, 2020, the Company entered into a forbearance agreement for an initial 15 day period, on April 27, 2020, a second forbearance agreement for an extended period ending on June 1, 2020, and a third forbearance agreement on June 1, 2020 for an additional period ending June 15, 2020 (collectively, the "Forbearance Agreement") with certain of its financing counterparties (the "Participating Counterparties"). Pursuant to the terms of the Forbearance Agreement, the Participating Counterparties agreed to forbear from exercising any of their rights and remedies in respect of events of default and any and all other defaults under the applicable financing arrangement with the Company for the duration of the forbearance period specified in the Forbearance Agreement (the "Forbearance Period").

On June 10, 2020, the Company and the Participating Counterparties entered into a Reinstatement Agreement, pursuant to which the parties agreed to terminate the Forbearance Agreement and each Participating Counterparty agreed to permanently waive all existing and prior events of default under its financing agreements with the Company (each, a “Bilateral Agreement”) and to reinstate each Bilateral Agreement, as it may be amended by agreement between the Participating Counterparty and the Company. As a result of the termination of the Forbearance Agreement and entry into the Reinstatement Agreement, default interest on the Company’s outstanding borrowings under each Bilateral Agreements has ceased to accrue as of June 10, 2020 and the interest rate was the non-default rate of interest or pricing rate, as set forth in the applicable Bilateral Agreements, all cash margin has been applied to outstanding balances owed by the Company, and the DTC repo tracker coding for each Bilateral Agreement has been reinstated, thereby allowing principal and interest payments on the underlying collateral to flow to and be used by the Company, just as it was before the prior forbearance agreements were put in place. In addition, pursuant to the terms of the Reinstatement Agreement, the security interests granted to Participating Counterparties as additional collateral under the various forbearance agreements have been terminated and released. The Company also agreed to pay the reasonable fees and out-of-pocket expenses of counsel and other professional advisors for the Participating Counterparties and the collateral agent. Additionally, the Reinstatement Agreement provided a set of financial covenants that override and replace the financial covenants in each Bilateral Agreement and sets forth various reporting requirements from the Company to the Participating Counterparties, releases, certain netting obligations and cross-default provisions. In connection with the negotiation and execution of the Reinstatement Agreement, the Company entered into certain amendments to the Bilateral Agreements with certain of the Participating Counterparties to reflect current market terms. In general, the amendments reflect increased haircuts and higher coupons.

On June 10, 2020, the Company also entered a separate reinstatement agreement with JPMorgan Chase Bank (the "JPM Reinstatement Agreement") on substantially the same terms as those set forth in the Reinstatement Agreement. The Reinstatement Agreement and the JPM Reinstatement Agreement collectively cover all of the Company’s existing financing arrangements as of the date of this report.

Refer to Note 13 for more information on deficiencies, all of which have been settled.

Dividends on Preferred Stock

Holders of the Company’s Series A, Series B and Series C Preferred Stock are entitled to receive cumulative cash dividends at a rate of 8.25%, 8.00% and 8.000% per annum, respectively, of the $25.00 per share liquidation preference for each series. On and after September 17, 2024, dividends on the Series C Preferred Stock will accumulate at a percentage of the $25.00
20

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
liquidation preference equal to an annual floating rate of the then three-month LIBOR plus a spread of 6.476% per annum. If the Company’s Board of Directors does not declare a dividend in a given period, an accrual is not recorded on the balance sheet. However, undeclared preferred stock dividends are reflected in earnings per share as discussed in ASC 260-10-45-11. Preferred stock dividends that are not declared accumulate and are added to the liquidation preference as of the scheduled payment date for the respective series of the preferred stock. The undeclared and unpaid dividends on the Company’s preferred stock accrue without interest, and if dividends on the Company's preferred stock are in arrears, the Company cannot pay cash dividends with respect to its Common Stock. See Note 9 for aggregate amounts of arrearages in cumulative preferred dividends and Note 12 for further detail on the Company’s Preferred Stock.
 
Recent accounting pronouncements

In June 2016, FASB issued ASU 2016-13, "Financial Instruments – Credit Losses" ("ASU 2016-13"). This new guidance significantly changes how entities will measure credit losses for most financial assets, including loans, that are not measured at fair value with changes in fair value recognized through net income. The guidance replaces the existing “incurred loss” model with an “expected loss” model for instruments measured at amortized cost. It requires entities to record credit allowances for available-for-sale debt securities rather than reduce the carrying amount, as it currently is under the other-than temporary impairment model. The new guidance also simplifies the accounting model for purchased credit-impaired debt securities and loans. The Company adopted the new guidance as of January 1, 2020. The new guidance specifically excludes available-for-sale securities and loans measured at fair value with changes in fair value recognized through net income. Accordingly, the impact of the new guidance on accounting for the Company's debt securities and loans is limited to recognition of effective yield which was historically impacted by other than temporary impairment recorded under previously existing standards. As the new guidance eliminates the accounting for other than temporary impairment, this guidance had an impact on the Company's unrealized and realized gain/(loss) amounts. As the Company measures its debt securities and loans at fair value with any changes recognized through net income and updates its estimate of the cash flows expected to be collected on these asset classes on at least a quarterly basis recognizing changes in cash flows in interest income prospectively through an adjustment of an asset’s yield over its remaining life, the adoption of the standard did not have a material impact to the Company’s consolidated financial statements. See the "Accounting for real estate securities," "Accounting for residential and commercial mortgage loans," "Accounting for excess mortgage servicing rights," and "Interest income recognition" sections above for more detail.
 
3. Real Estate Securities
 
The following tables detail the Company’s real estate securities portfolio as of September 30, 2020 and December 31, 2019 ($ in thousands). The gross unrealized gains/(losses) stated in the tables below represent inception to date unrealized gains/(losses). 
21

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020

September 30, 2020   Gross Unrealized Weighted Average
 Current Face
Premium /
(Discount)
Amortized CostGainsLossesFair ValueCoupon (1)Yield
Agency RMBS:        
30 Year Fixed Rate$237,142 $12,760 $249,902 $258 $(37)$250,123 2.21 %1.17 %
Credit Investments:
Residential Investments
Prime14,104 (6,356)7,748 660 (46)8,362 3.69 %7.64 %
Alt-A/Subprime16,471(9,676)6,795 2,951 9,746 4.25 %5.25 %
Credit Risk Transfer15,52315,523 (3,489)12,034 4.70 %4.60 %
Non-U.S. RMBS2,869811 3,680 40 (276)3,444 6.16 %6.08 %
Non-Agency RMBS Interest Only171,444(171,365)79 281 (48)312 0.55 %14.42 %
Re/Non-Performing Securities2,758(539)2,219 128 (33)2,314 5.25 %9.99 %
Land Related Financing6,989(176)6,813 246 7,059 7.75 %8.33 %
Total Residential Investments:230,158 (187,301)42,857 4,306 (3,892)43,271 2.34 %6.42 %
Commercial Investments
Conduit4,925 (1,081)3,844 (781)3,063 4.78 %11.88 %
Single-Asset/Single-Borrower50,480 (1,543)48,937 829 (11,588)38,178 4.17 %4.84 %
Freddie Mac K-Series CMBS22,572 (12,221)10,351 48 (1,763)8,636 3.84 %8.98 %
CMBS Interest Only (2)687,293 (683,075)4,218 205 (72)4,351 0.10 %7.51 %
Total Commercial Investments:765,270 (697,920)67,350 1,082 (14,204)54,228 0.44 %6.11 %
Total Credit Investments:995,428 (885,221)110,207 5,388 (18,096)97,499 0.72 %6.25 %
Total$1,232,570 $(872,461)$360,109 $5,646 $(18,133)$347,622 1.04 %2.60 %

(1)Equity residual investments and principal only securities with a zero coupon rate are excluded from this calculation.
(2)Comprised of Freddie Mac K-Series interest-only bonds.

22

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020

December 31, 2019   Gross Unrealized Weighted Average
 Current Face
Premium /
(Discount)
Amortized CostGainsLossesFair ValueCoupon (1)Yield
Agency RMBS:        
30 Year Fixed Rate$2,125,067 $59,123 $2,184,190 $57,404 $(296)$2,241,298 3.73 %3.17 %
Interest Only476,192 (403,248)72,944 2,330 (1,133)74,141 3.93 %5.87 %
Total Agency RMBS:2,601,259 (344,125)2,257,134 59,734 (1,429)2,315,439 3.77 %3.26 %
Credit Investments:
Residential Investments
Prime297,932 (84,876)213,056 29,052 (221)241,887 4.92 %7.44 %
Alt-A/Subprime141,464 (30,859)110,605 12,234 (127)122,712 4.40 %6.89 %
Credit Risk Transfer270,397 591 270,988 8,972 (5)279,955 5.17 %5.27 %
Non-U.S. RMBS44,867 9,473 54,340 3,391 57,731 3.21 %3.58 %
Non-Agency RMBS Interest Only209,362 (207,948)1,414 (340)1,074 0.77 %5.96 %
Re/Non-Performing Securities5,966 (1,965)4,001 1,180 5,181 5.18 %19.20 %
Land Related Financing8,628 (212)8,416 514 8,930 7.75 %8.26 %
Total Residential Investments:978,616 (315,796)662,820 55,343 (693)717,470 4.40 %6.28 %
Commercial Investments
Conduit72,318 (9,181)63,137 811 (602)63,346 4.24 %5.57 %
Single-Asset/Single-Borrower204,702 (5,606)199,096 879 (304)199,671 5.09 %5.57 %
Freddie Mac K-Series CMBS208,693 (119,809)88,884 17,030 105,914 5.70 %11.54 %
CMBS Interest Only (2)3,427,025 (3,382,273)44,752 3,486 (246)47,992 0.24 %6.68 %
Total Commercial Investments:3,912,738 (3,516,869)395,869 22,206 (1,152)416,923 0.60 %7.21 %
Total Credit Investments:4,891,354 (3,832,665)1,058,689 77,549 (1,845)1,134,393 1.31 %6.62 %
Total$7,492,613 $(4,176,790)$3,315,823 $137,283 $(3,274)$3,449,832 2.20 %4.37 %

(1)Equity residual investments and principal only securities with a zero coupon rate are excluded from this calculation.
(2)Comprised of Freddie Mac K-Series interest-only bonds.
  
As described in Note 2, prior to the adoption of ASU 2016-13, the Company evaluated securities for OTTI on at least a quarterly basis. The determination of whether a security was other-than-temporarily impaired involved judgments and assumptions based on subjective and objective factors. When the fair value of a real estate security was less than its amortized cost at the balance sheet date, the security was considered impaired, and the impairment was designated as either "temporary" or "other-than-temporary."
 
For the three months ended September 30, 2019, the Company recognized an OTTI charge of $3.1 million on its securities, which is included in the "Net realized gain/(loss)" line item on the consolidated statement of operations. The Company recorded $3.1 million of OTTI due to an adverse change in cash flows on certain securities where the fair values of the securities were less than their carrying amounts. Of the $3.1 million of OTTI recorded, $2.2 million related to securities where OTTI was not recognized in a prior year.

For the nine months ended September 30, 2019, the Company recognized an OTTI charge of $14.2 million on its securities, which is included in the "Net realized gain/(loss)" line item on the consolidated statement of operations. The Company recorded $14.2 million of OTTI due to an adverse change in cash flows on certain securities where the fair values of the securities were less than their carrying amounts. Of the $14.2 million of OTTI recorded, $3.4 million related to securities where OTTI was not recognized in a prior year.
 
23

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
The following tables detail the weighted average life of our real estate securities as of September 30, 2020 and December 31, 2019 ($ in thousands):

September 30, 2020Agency RMBSCredit Investments
Weighted Average Life (1)Fair ValueAmortized CostWeighted Average CouponFair ValueAmortized Cost
Weighted Average
Coupon (2)
Less than or equal to 1 year$$%$16,576 $21,741 1.33 %
Greater than one year and less than or equal to five years98,388 98,372 2.43 %25,931 32,723 0.45 %
Greater than five years and less than or equal to ten years151,735 151,530 2.08 %17,945 18,740 0.38 %
Greater than ten years37,047 37,003 4.31 %
Total$250,123 $249,902 2.21 %$97,499 $110,207 0.72 %

(1)This is based on projected life. Typically, actual maturities of mortgage-backed securities are shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal.
(2)Equity residual investments and principal only securities with a zero coupon rate are excluded from this calculation.

December 31, 2019Agency RMBSCredit Investments
Weighted Average Life (1)Fair ValueAmortized CostWeighted Average CouponFair ValueAmortized Cost
Weighted Average
Coupon (2)
Less than or equal to 1 year$$%$82,474 $82,273 0.56 %
Greater than one year and less than or equal to five years313,855 302,520 4.01 %525,192 508,038 1.29 %
Greater than five years and less than or equal to ten years2,001,584 1,954,614 3.71 %296,665 263,300 1.06 %
Greater than ten years230,062 205,078 5.46 %
Total$2,315,439 $2,257,134 3.77 %$1,134,393 $1,058,689 1.31 %

(1)This is based on projected life. Typically, actual maturities of mortgage-backed securities are shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal.
(2)Equity residual investments and principal only securities with a zero coupon rate are excluded from this calculation.
 
For the three months ended September 30, 2020, the Company sold 13 securities for total proceeds of $38.8 million, recording realized gains of $0.7 million and realized losses of $4.5 million. For the nine months ended September 30, 2020, the Company sold, directly or as a result of financing counterparty seizures, 341 securities for total proceeds of $2.7 billion, recording realized gains of $54.0 million and losses of $180.4 million.

For the three months ended September 30, 2019, the Company sold 25 securities for total proceeds of $231.5 million and entered into 3 unsettled security sales for additional proceeds of $4.5 million, recording realized gains of $7.1 million and realized losses of $2.5 million. For the nine months ended September 30, 2019, the Company sold 71 securities for total proceeds of $677.6 million and entered into 3 unsettled security sales for additional proceeds of $4.5 million, recording realized gains of $15.2 million and realized losses of $4.8 million.

24

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
The following table details certain information related to the December 2014 VIE and August 2018 VIE as further described in Note 2 as of December 31, 2019 (in thousands). As of September 30, 2020, the Company did not hold any interest in these VIEs.

December 31, 2019
Assets
Real estate securities, at fair value:
Non-Agency$13,838 
CMBS94,500 
Other assets808 
Total assets$109,146 
Liabilities
Financing arrangements$70,712 
Securitized debt, at fair value7,230 
Other liabilities3,553 
Total liabilities$81,495 

The holders of the consolidated tranche of the December 2014 VIE, shown within the Non-Agency line item above, have no recourse to the general credit of the Company and the Company has no obligation to provide any other explicit or implicit support to the December 2014 VIE. Except for restricted cash, shown within the Other assets line item above, assets held by the August 2018 VIE were not restricted and could have been used to settle any obligations of the Company as of December 31, 2019. The liabilities of the August 2018 VIE were recourse to the Company and could be satisfied with assets of the Company as of December 31, 2019. As the Company does not hold any interest in the August 2018 VIE as of September 30, 2020, the liabilities of the August 2018 VIE are no longer recourse to the Company.
 
The following table details certain information related to the December 2014 VIE as of December 31, 2019 ($ in thousands):
 
   Weighted Average
 Current FaceFair ValueCouponYieldLife (Years) (1)
Consolidated tranche (2)$7,204 $7,230 3.46 %4.11 %1.96
Retained tranche7,851 6,608 5.37 %18.14 %7.64
Total resecuritized asset (3)$15,055 $13,838 4.46 %10.81 %4.92
 
(1)This is based on projected life. Typically, actual maturities of investments and loans are shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal.
(2)As of December 31, 2019, the Company has recorded secured financing of $7.2 million on the consolidated balance sheets in the "Securitized debt, at fair value" line item. The Company recorded the proceeds from the issuance of the secured financing in the "Cash Flows from Financing Activities" section of the consolidated statement of cash flows at the time of securitization.
(3)As of December 31, 2019, the fair market value of the total resecuritized asset is included in the Company’s consolidated balance sheets as "Non-Agency."
 
4. Loans
 
Residential mortgage loans

In January 2020, the Company purchased a residential mortgage loan portfolio with a gross aggregate unpaid principal balance and a gross acquisition fair value of $481.7 million and $450.3 million, respectively.

25

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
In September 2020, the Company purchased a residential mortgage loan portfolio with a gross aggregate unpaid principal balance and a gross acquisition fair value of $71.7 million and $60.2 million, respectively. This loan portfolio was simultaneously securitized and is included within the September 2020 VIE.

For the three months ended September 30, 2020, the Company sold 52 loans for total proceeds of $6.2 million, recording realized gains of $0.3 million and realized losses of $0.6 million. For the nine months ended September 30, 2020, the Company sold 2,410 loans for total proceeds of $389.0 million, recording realized gains of $1.8 million and realized losses of $59.3 million.

No loans were sold for the three months ended September 30, 2019. For the nine months ended September 30, 2019, the Company sold 79 loans for total proceeds of $12.8 million, recording realized gains of $1.0 million and realized losses $0.2 million.

The Company has chosen to make a fair value election pursuant to ASC 825 for its residential mortgage loan portfolio. Unrealized gains and losses are recognized in current period earnings in the "Unrealized gain/(loss) on real estate securities and loans, net" line item. The gross unrealized gains/(losses) stated in the tables below represents inception to date unrealized gains/(losses).
 
The table below details information regarding the Company’s residential mortgage loan portfolio as of September 30, 2020 and December 31, 2019 ($ in thousands):
    Gross Unrealized Weighted Average
As of
Unpaid 
Principal Balance
Premium
(Discount)
Amortized CostGainsLossesFair ValueCouponYieldLife 
(Years) (1)
September 30, 2020$518,510 $(72,943)$445,567 $3,786 $(19,705)$429,648 3.64 %5.17 %6.76
December 31, 2019464,041 (55,219)408,822 9,065 (102)417,785 4.09 %5.72 %7.36
 
(1)This is based on projected life. Typically, actual maturities of residential mortgage loans are shorter than stated contractual maturities. Maturities are affected by the lives of the underlying mortgages, periodic payments of principal and prepayments of principal.
 
The table below details information regarding the Company’s residential mortgage loans as of September 30, 2020 and December 31, 2019 (in thousands):
 
 September 30, 2020December 31, 2019
 Fair ValueUnpaid Principal BalanceFair ValueUnpaid Principal Balance
Re-Performing$306,845 $359,230 $330,234 $357,678 
Non-Performing113,461 138,422 87,551 106,363 
Other (1)9,342 20,858 
 $429,648 $518,510 $417,785 $464,041 
(1)Represents residual positions where the Company consolidates a securitization and the positions are recorded on the Company's books as residential mortgage loans. There may be limited data available regarding the underlying collateral of such securitizations.

As described in Note 2, prior to the adoption of ASU 2016-13, the Company evaluated loans for OTTI on at least a quarterly basis. The determination of whether a loan was other-than-temporarily impaired involved judgments and assumptions based on subjective and objective factors. When the fair value of a loan was less than its amortized cost at the balance sheet date, the loan was considered impaired, and the impairment was designated as either "temporary" or "other-than-temporary."

For the three and nine months ended September 30, 2019, the Company recognized $0.1 million of OTTI on certain loan pools, which is included in the "Net realized gain/(loss)" line item on the consolidated statement of operations. The company recorded $0.1 million of OTTI where the fair values of the loan pools were less than their carrying amounts. The $0.1 million related to loan pools with an unpaid principal balance of $4.9 million, a fair value of $4.3 million and an average fair market value of $4.6 million for the three and nine months ended September 30, 2019. The Company recognized $0.1 million of interest income on the loan pools where OTTI was taken during the three and nine months ended September 30, 2019.
26

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
 
As of September 30, 2020 and December 31, 2019, the Company had residential mortgage loans with a fair value of $33.0 million and $35.6 million, respectively, that were in the process of foreclosure, excluding any loans classified as Other above.
 
The Company’s mortgage loan portfolio consisted of mortgage loans on residential real estate located throughout the United States. The following is a summary of the geographic concentration of credit risk within the Company’s mortgage loan portfolio as of September 30, 2020 and December 31, 2019, excluding any loans classified as Other above:
 
Geographic Concentration of Credit RiskSeptember 30, 2020December 31, 2019
Percentage of fair value of mortgage loans secured by properties in the following states representing 5% or more of fair value:  
California17 %19 %
Florida11 %11 %
New York10 %%
New Jersey%%
 
The Company records interest income on an effective interest basis. The accretable discount is determined by the excess of the
Company’s estimate of undiscounted principal, interest, and other cash flows expected to be collected over its initial investment
in the mortgage loan. The following is a summary of the changes in the accretable portion of discounts for the three and nine months ended September 30, 2020 and September 30, 2019, respectively (in thousands):
 
 Three Months EndedNine Months Ended
 September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Beginning Balance$138,161 $89,515 $168,877 $79,610 
Additions31,115 70,279 160,132 90,515 
Accretion(5,073)(4,286)(21,538)(10,987)
Reclassifications from/(to) non-accretable difference(1,064)(1,089)(25,741)515 
Disposals(2,298)(53)(120,889)(5,287)
Ending Balance$160,841 $154,366 $160,841 $154,366 
 
As of September 30, 2020, the Company’s residential mortgage loan portfolio was comprised of 3,394 conventional loans with individual original loan balances between $5.6 thousand and $3.4 million, excluding loans classified as Other above.
 
As of December 31, 2019, the Company’s residential mortgage loan portfolio was comprised of 3,413 conventional loans with individual original loan balances between $3.8 thousand and $3.4 million.
 
In August 2019 and September 2020, the Company entered into securitization transactions of certain of its residential mortgage loans. The Company concluded that the SPEs created to facilitate these transactions were VIEs and also determined that the August 2019 VIE and September 2020 VIE should be consolidated by the Company. The transferred assets were recorded as secured borrowings, based on the Company’s involvement in the August 2019 VIE and September 2020 VIE, including the design and purpose of the SPEs, and whether the Company’s involvement reflected controlling financial interests that resulted in the Company being deemed the primary beneficiaries of the August 2019 VIE and the September 2020 VIE.

Upon consolidation, the Company elected the fair value option for the assets and liabilities of the August 2019 VIE and the September 2020 VIE. Electing the fair value option allows the Company to record changes in fair value in the Consolidated Statement of Operations, which, in management's view, more appropriately reflects the results of operations for a particular reporting period as all activities will be recorded in a similar manner. The Company applied the guidance under ASU 2014-13, "Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity," whereby the Company determines whether the fair value of the assets or liabilities of the August 2019 VIE and September 2020 VIE are more observable as a basis for measuring the less observable financial instruments. The Company has determined that the fair value of the liabilities of the August 2019 VIE and September 2020 VIE are more observable since the prices for these liabilities are more easily determined as similar instruments trade more frequently on a relative basis than the individual assets of the VIEs.
27

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
 
The following table details certain information related to the assets and liabilities of the August 2019 VIE and September 2020 VIE as of September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020December 31, 2019
Assets
Residential mortgage loans, at fair value$420,200 $255,171 
Restricted cash1,976 
Other assets2,596 898 
Total assets$424,772 $256,069 
Liabilities
Financing arrangements$23,918 $24,584 
Securitized debt, at fair value358,986 217,118 
Other liabilities546 596 
Total liabilities$383,450 $242,298 

The following table details additional information regarding loans and securitized debt related to the August 2019 VIE and September 2020 VIE as of September 30, 2020 and December 31, 2019 ($ in thousands):

  Weighted Average
As of: Current Unpaid Principal BalanceFair ValueCouponYieldLife (Years) (1)
September 30, 2020
August 2019 VIEResidential mortgage loans$248,023 $220,590 3.71 %4.80 %6.97
Securitized debt (2)206,434 195,499 2.96 %2.97 %5.13
September 2020 VIEResidential mortgage loans249,071 199,610 3.58 %5.46 %6.72
Securitized debt (2)163,487 163,487 2.98 %3.00 %2.09
December 31, 2019
August 2019 VIEResidential mortgage loans263,956 255,171 3.96 %5.11 %7.66
Securitized debt (2)217,455 217,118 2.92 %2.86 %5.00

(1)This is based on projected life. Typically, actual maturities of investments and loans are shorter than stated contractual maturities. Maturities are affected by the contractual lives of the underlying mortgages, periodic payments of principal and prepayments of principal.
(2)As of September 30, 2020 and December 31, 2019, the Company has recorded secured financing of $359.0 million and $217.1 million, respectively, on the consolidated balance sheets in the "Securitized debt, at fair value" line item. The Company recorded the proceeds from the issuance of the secured financing in the "Cash Flows from Financing Activities" section of the consolidated statement of cash flows at the time of securitization.

The holders of the securitized debt have no recourse to the general credit of the Company. The Company has no obligation to provide any other explicit or implicit support to the August 2019 VIE and September 2020 VIE.

Commercial loans

The Company has chosen to make a fair value election pursuant to ASC 825 for its commercial loan portfolio. Unrealized gains and losses are recognized in current period earnings in the "Unrealized gain/(loss) on real estate securities and loans, net" line item. The gross unrealized gains/(losses) columns in the tables below represent inception to date unrealized gains/(losses).

28

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
For the three months ended September 30, 2020, the Company sold 1 commercial loan, for total proceeds of $2.7 million, recording realized losses of $4.7 million. For the nine months ended September 30, 2020, the Company sold 2 commercial loans for total proceeds of $36.9 million, recording realized losses of $6.5 million. For the three and nine months ended September 30, 2019, the Company did not sell any commercial loans.

The following tables present detail on the Company’s commercial loan portfolio as of September 30, 2020 and December 31, 2019 ($ in thousands). 

September 30, 2020  Weighted Average  
Loan 
(1)(2)
Current Face
Premium
(Discount)
Amortized CostGross Unrealized LossesFair Value (3)Coupon
(4)
Yield (5)Life 
(Years)
(6)
Extended
Maturity 
Date (7)
LocationCollateral Type
Loan G (8)(9)$56,697 $$56,697 $(3,941)$52,756 5.27 %5.27 %1.80July 9, 2022CACondo, Retail, Hotel
Loan I (10)(11)15,211 (173)15,038 (826)14,212 11.50 %12.00 %2.47February 9, 2023MNOffice, Retail
Loan K (12)14,173 14,173 (1,100)13,073 10.00 %11.00 %1.27February 22, 2024NYHotel, Retail
Loan L (12)(13)51,000 (338)50,662 (7,823)42,839 5.40 %5.67 %3.86July 22, 2024ILHotel, Retail
$137,081 $(511)$136,570 $(13,690)$122,880 6.50 %6.80 %2.59
 
(1)The Company has the contractual right to receive a balloon payment for each loan.
(2)Refer to Note 13 "Commitments and Contingencies" for details on the Company's commitments on its Commercial Loans as of September 30, 2020.
(3)Pricing is reflective of marks on unfunded commitments.
(4)Each commercial loan investment has a variable coupon rate.
(5)Yield includes any exit fees.
(6)Actual maturities of commercial mortgage loans may be shorter or longer than stated contractual maturities. Maturities are affected by prepayments of principal.
(7)Represents the maturity date of the last possible extension option.
(8)Loan G is a first mortgage loan.
(9)Loan G has been amended and has been extended to its extended maturity date upon reaching its initial maturity of July 9, 2020. See Note 13 for more details regarding commitments.
(10)Loan I is a mezzanine loan.
(11)Subsequent to quarter end, the Company and the borrower of Loan I entered into a modification agreement to, among other things, extend the term of the Loan, allow for a portion of the interest to be deferred and increase the capital commitment amount by $6.0 million. See Note 13 for more details regarding commitments.
(12)Loan K and Loan L are comprised of first mortgage and mezzanine loans.
(13)Subsequent to quarter end, the Company and the borrower of Loan L entered into a modification agreement to, among other things, require the borrower to pay previously deferred interest in full, defer interest for the following 12-month period and require funding of capital reserves by the borrower.

29

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
 
December 31, 2019  Weighted Average  
Loan (1)Current FacePremium
(Discount)
Amortized CostGross 
Unrealized
Gains
Fair ValueCoupon
(2)
Yield (3)Life 
(Years)
(4)
Extended
Maturity 
Date (5)
LocationCollateral Type
Loan G (6)$45,856 $$45,856 $$45,856 6.46 %6.46 %0.53July 9, 2022CACondo, Retail, Hotel
Loan H (6)36,000 36,000 36,000 5.49 %5.49 %0.19June 9, 2020AZOffice
Loan I (7)11,992 (184)11,808 184 11,992 12.21 %14.51 %1.04February 9, 2023MNOffice, Retail
Loan J (6)4,674 4,674 4,674 6.36 %6.36 %2.12January 1, 2024NYHotel, Retail
Loan K (8)9,164 9,164 9,164 10.71 %11.86 %1.72February 22, 2024NYHotel, Retail
Loan L (8)51,000 (502)50,498 502 51,000 6.16 %6.50 %4.63July 22, 2024ILHotel, Retail
 $158,686 $(686)$158,000 $686 $158,686 6.82 %7.17 %1.92
 
(1)The Company has the contractual right to receive a balloon payment for each loan.
(2)Each commercial loan investment has a variable coupon rate.
(3)Yield includes any exit fees.
(4)Actual maturities of commercial mortgage loans may be shorter or longer than stated contractual maturities. Maturities are affected by prepayments of principal.
(5)Represents the maturity date of the last possible extension option.
(6)Loan G, Loan H, and Loan J are first mortgage loans.
(7)Loan I is a mezzanine loan.
(8)Loan K and Loan L are comprised of first mortgage and mezzanine loans.

During the three and nine months ended September 30, 2020, the Company recorded $44.5 thousand and $0.2 million of discount accretion on its commercial loans, respectively. During the three and nine months ended September 30, 2019, the Company recorded a de minimis amount of discount accretion on its commercial loans.

5. Excess MSRs

On August 31, 2020, the Company, alongside private funds under the management of Angelo Gordon, sold its Ginnie Mae Excess MSR portfolio to Arc Home for total proceeds of $18.9 million. The portfolio had a total unpaid principal balance of $3.1 billion. The Company's share of the total proceeds approximated $8.5 million, representing its approximate 45% ownership interest. The Company recorded realized gains of $0.1 million and realized losses of $4.8 million. Arc Home subsequently sold its Ginnie Mae MSR portfolio to a third party.

The Company has chosen to make a fair value election pursuant to ASC 825 for its Excess MSR portfolio.  Unrealized gains and losses are recognized in current period earnings in the "Unrealized gain/(loss) on derivative and other instruments, net" line item.  The gross unrealized gains/(losses) columns below represent inception to date unrealized gains/(losses). 
 
The following table presents detail on the Company’s Excess MSR portfolio on September 30, 2020 ($ in thousands).
 
   Gross Unrealized Weighted Average
 Unpaid Principal
Balance
Amortized
Cost
LossesFair ValueYieldLife 
(Years) (1)
Agency Excess MSRs$652,756 $4,725 $(1,284)$3,441 3.97 %5.61
Credit Excess MSRs29,185 172 (87)85 23.56 %7.27
Total Excess MSRs$681,941 $4,897 $(1,371)$3,526 4.44 %5.68
 
(1)This is based on projected life. Actual maturities of Excess MSRs may be shorter than stated contractual maturities.  Maturities are affected by prepayments of principal.
 
30

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
The following table presents detail on the Company’s Excess MSR portfolio on December 31, 2019 ($ in thousands).
 
   Gross Unrealized Weighted Average
 Unpaid Principal
Balance
Amortized
Cost
GainsLossesFair ValueYieldLife 
(Years) (1)
Agency Excess MSRs$2,910,735 $19,570 $93 $(2,031)$17,632 8.32 %5.58
Credit Excess MSRs34,753 178 (37)143 21.38 %5.25
Total Excess MSRs$2,945,488 $19,748 $95 $(2,068)$17,775 8.42 %5.58

(1)This is based on projected life. Actual maturities of Excess MSRs may be shorter than stated contractual maturities.  Maturities are affected by prepayments of principal.
 
As described in Note 2, prior to the adoption of ASU 2016-13, the Company evaluated Excess MSRs for OTTI on at least a quarterly basis. For the three months ended September 30, 2019, the Company recognized an OTTI charge of $0.4 million on its Excess MSRs, which is included in the "Net realized gain/(loss)" line item on the consolidated statement of operations. None of the $0.4 million of OTTI recorded for the three months ended September 30, 2019 was related to Excess MSRs where OTTI was not recognized in a prior year. For the nine months ended September 30, 2019, the Company recognized an OTTI charge of $2.6 million on its Excess MSRs, which is included in the "Net realized gain/(loss)" line item on the consolidated statement of operations. Of the $2.6 million of OTTI recorded for the nine months ended September 30, 2019, $0.8 million was related to Excess MSRs where OTTI was not recognized in a prior year.

6. Fair value measurements
 
As described in Note 2, the fair value of financial instruments that are recorded at fair value is determined by the Manager, subject to oversight of the Company’s Board of Directors, and 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. 
 
Values for the Company’s securities, Excess MSRs, securitized debt of the December 2014 VIE, derivatives and U.S. Treasury securities are based upon prices obtained from third party pricing services, which are indicative of market activity. The evaluation methodology of the Company’s third-party pricing services incorporates commonly used market pricing methods, including a spread measurement to various indices such as the one-year constant maturity treasury and LIBOR, which are observable inputs. The evaluation also considers the underlying characteristics of each investment, which are also observable inputs, including: coupon; maturity date; loan age; reset date; collateral type; periodic and life cap; geography; and prepayment speeds. The Company collects and considers current market intelligence on all major markets, including benchmark security evaluations and bid-lists from various sources, when available. As part of the Company’s risk management process, the Company reviews and analyzes all prices obtained by comparing prices to recently completed transactions involving the same or similar investments on or near the reporting date. If, in the opinion of the Manager, one or more prices reported to the Company are not reliable or unavailable, the Manager reviews the fair value based on characteristics of the investment it receives from the issuer and available market information.

In valuing its derivatives, 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. All of the Company’s derivatives are either subject to bilateral collateral arrangements or clearing in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd Frank Act"). For swaps cleared under the Dodd Frank Act, a Central Counterparty Clearing House ("CCCH") now stands between the Company and the over-the-counter derivative counterparties. In order to access clearing, the Company has entered into clearing agreements with Futures Commissions Merchants ("FCMs").
 
The daily exchange of variation margin associated with a CCCH centrally cleared derivative instrument is legally characterized as the daily settlement of the derivative instrument itself. Accordingly, the Company accounts for the daily receipt or payment of variation margin associated with its centrally cleared interest rate swaps and futures as a direct reduction to the carrying value of the interest rate swap and future derivative asset or liability, respectively. The carrying amount of centrally cleared
31

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
interest rate swaps and futures reflected in the Company’s consolidated balance sheets is equal to the unsettled fair value of such instruments. See Note 8 for more information.
 
In determining the fair value of the Company's mortgage loans and securitized debt relating to the August 2019 VIE and the September 2020 VIE, the Company considers data such as loan origination information, additional updated borrower information, loan servicing data, as available, forward interest rates, general economic conditions, home price index forecasts and valuations of the underlying properties. The variables considered most significant to the determination of the fair value of the Company's mortgage loans include market-implied discount rates, projections of default rates, delinquency rates, prepayment rates and loss severity (considering mortgage insurance). Projections of default and prepayment rates are impacted by other variables such as reperformance 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 value of its mortgage loans. Because of the inherent uncertainty of such valuation, the fair values established for mortgage loans held by the Company may differ from the fair values that would have been established if a ready market existed for these mortgage loans.

The Manager may also engage specialized third party valuation service providers to assess and corroborate the valuation of a selection of investments in the Company’s loan portfolio and the Company's investment in Arc Home on a periodic basis. These specialized third party valuation service providers conduct independent valuation analyses based on a review of source documents, available market data, and comparable investments. The analyses provided by valuation service providers are reviewed and considered by the Manager.
 
TBA instruments are similar in form to the Company’s Agency RMBS portfolio, and the Company therefore estimates fair value based on similar methods.

Cash equivalents include investments in money market funds that invest primarily in short-term U.S. Treasury and Agency securities. These cash equivalent instruments are valued at their market quoted prices, which generally approximate cost plus accrued interest.

Refer to Note 2 for more information on changes regarding the Company's leveling policy.
32

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020

The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of September 30, 2020 (in thousands):
 
 Fair Value at September 30, 2020
 Level 1Level 2Level 3Total
Assets:    
Agency RMBS:    
30 Year Fixed Rate$$250,123 $$250,123 
Credit Investments:
Non-Agency RMBS (1)39,269 3,690 42,959 
Non-Agency RMBS Interest Only312 312 
CMBS (2)49,877 49,877 
CMBS Interest Only4,351 4,351 
Residential mortgage loans2,275 427,373 429,648 
Commercial loans122,880 122,880 
Excess mortgage servicing rights3,526 3,526 
AG Arc (3)41,436 41,436 
Total Assets Measured at Fair Value$$346,207 $598,905 $945,112 
Liabilities:
Securitized debt$$$(358,986)$(358,986)
Derivative liabilities(39)(39)
Total Liabilities Measured at Fair Value$$(39)$(358,986)$(359,025)
(1)Non-Agency RMBS is comprised of Prime, Alt-A/Subprime, Non-US RMBS, Re/Non-Performing Securities and Land Related Financing.
(2)CMBS is comprised of Conduit, Single-Asset/Single-Borrower and Freddie Mac K-Series CMBS.
(3)Refer to Note 2 for more information on the Company's accounting policies with regard to cash equivalents, if applicable, and AG Arc. The table above includes the Company's investment in AG Arc, which is included in its Investments in Debt and Equity of Affiliates line item on the consolidated balance sheets, as the Company has chosen to elect the fair value option with respect to its investment pursuant to ASC 825.

33

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
The following table presents the Company’s financial instruments measured at fair value on a recurring basis as of December 31, 2019 (in thousands):
 
 Fair value at December 31, 2019
 Level 1Level 2Level 3Total
Assets:    
Agency RMBS:    
30 Year Fixed Rate$$2,241,298 $$2,241,298 
Interest Only74,141 74,141 
Credit Investments:
Non-Agency RMBS (1)86,281 630,115 716,396 
Non-Agency RMBS Interest Only1,074 1,074 
CMBS (2)2,365 366,566 368,931 
CMBS Interest Only47,992 47,992 
Residential mortgage loans417,785 417,785 
Commercial loans158,686 158,686 
Excess mortgage servicing rights17,775 17,775 
Cash equivalents (3)53,243 53,243 
Derivative assets2,282 2,282 
AG Arc (3)28,546 28,546 
Total Assets Measured at Fair Value$53,243 $2,406,367 $1,668,539 $4,128,149 
Liabilities:
Securitized debt$$(151,933)$(72,415)$(224,348)
Derivative liabilities(122)(289)(411)
Total Liabilities Measured at Fair Value$(122)$(152,222)$(72,415)$(224,759)

(1)Non-Agency RMBS is comprised of Prime, Alt-A/Subprime, Non-US RMBS, Re/Non-Performing Securities and Land Related Financing.
(2)CMBS is comprised of Conduit, Single-Asset/Single-Borrower and Freddie Mac K-Series CMBS.
(3)Refer to Note 2 for more information on the Company's accounting policies with regard to cash equivalents, if applicable, and AG Arc. The table above includes the Company's investment in AG Arc, which is included in its Investments in Debt and Equity of Affiliates line item on the consolidated balance sheets, as the Company has chosen to elect the fair value option with respect to its investment pursuant to ASC 825.
 
The Company did not have any transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy during the three and nine months ended September 30, 2020 and September 30, 2019.

Refer to the tables below for details on transfers between the Level 3 and Level 2 categories under ASC 820. Transfers into the Level 3 category of the fair value hierarchy occur due to instruments exhibiting indications of reduced levels of market transparency. Transfers out of the Level 3 category of the fair value hierarchy occur due to instruments exhibiting indications of increased levels of market transparency and updates to the Company's leveling policy, which are detailed in Note 2. Indications of increases or decreases in levels of market transparency include a change in observable transactions or executable quotes involving these instruments or similar instruments. Changes in these indications could impact price transparency, and thereby cause a change in level designations in future periods.
34

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020

The following tables present additional information about the Company’s assets and liabilities which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

Three Months Ended September 30, 2020 (in thousands)
Non-Agency
RMBS
Residential
Mortgage Loans
Commercial
Loans
Excess Mortgage
Servicing Rights
AG Arc
Securitized
debt
Beginning balance$4,496 $379,822 $127,685 $12,294 $28,030 $(198,974)
Transfers (1):
Transfers out of level 3(2,225)
Purchases/Transfers60,100 8,308 
Issuances of Securitized Debt(163,487)
Proceeds from sales of assets(6,151)(2,724)(8,460)
Proceeds from settlement(954)(11,436)(5,710)6,798 
Total net gains/(losses) (2)
Included in net income148 7,263 (4,679)(308)13,406 (3,323)
Ending Balance$3,690 $427,373 $122,880 $3,526 $41,436 $(358,986)
Change in unrealized appreciation/(depreciation) for level 3 assets/liabilities still held as of September 30, 2020 (3)$221 $9,778 $$3,298 $13,406 $(3,323)
(1) Transfers are assumed to occur at the beginning of the period. During the three months ended September 30, 2020, the Company transferred 2 Residential Mortgage Loan positions into the Level 2 category from the Level 3 category under the fair value hierarchy of ASC 820.
(2) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:
Unrealized gain/(loss) on real estate securities and loans, net$13,206 
Unrealized gain/(loss) on derivative and other instruments, net(3,631)
Net realized gain/(loss)(8,377)
Equity in earnings/(loss) from affiliates13,406 
Total$14,604 
(3) Unrealized gains/(losses) are recorded in the following line items in the consolidated statement of operations:
Unrealized gain/(loss) on real estate securities and loans, net$9,999 
Unrealized gain/(loss) on derivative and other instruments, net(25)
Equity in earnings/(loss) from affiliates13,406 
Total$23,380 

Three Months Ended September 30, 2019 (in thousands)
 
Non-Agency
RMBS
Non-Agency
RMBS
Interest Only
ABSCMBS
CMBS Interest
Only
Residential
Mortgage
Loans
Commercial
Loans
Excess
Mortgage
Servicing
Rights
AG Arc
Securitized
debt
Beginning balance$561,145 $1,834 $20,571 $220,225 $46,836 $199,970 $118,005 $20,893 $18,717 $(8,630)
Transfers (1):
Transfers into level 355,311 
Purchases/Transfers72,933 473 39,095 181,053 60,803 
Issuances of Securitized Debt(65,171)
Capital Contributions11,148 
Proceeds from sales/redemptions(23,630)(917)
Proceeds from settlement(13,578)(8,263)(5,777)(6,364)(32,800)630 
Total net gains/(losses) (2)
Included in net income1,876 (412)(489)4,419 (976)4,718 510 (2,738)(2,594)(15)
Ending Balance$654,057 $1,422 $12,292 $257,962 $44,943 $379,377 $146,518 $18,155 $27,271 $(73,186)
Change in unrealized appreciation/(depreciation) for level 3 assets/liabilities still held as of September 30, 2019 (3)$106 $371 $(489)$4,356 $(925)$4,651 $510 $(2,328)$(2,594)$(15)
(1) Transfers are assumed to occur at the beginning of the period. During the three months ended September 30, 2019, the Company transferred 9 Non-Agency RMBS securities into the Level 3 category from the Level 2 category under the fair value hierarchy of ASC 820.
35

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
(2) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:
Unrealized gain/(loss) on real estate securities and loans, net$8,758       
Unrealized gain/(loss) on derivative and other instruments, net(2,753)      
Net realized gain/(loss)888       
Equity in earnings/(loss) from affiliates(2,594)      
Total$4,299       
(3) Unrealized gains/(losses) are recorded in the following line items in the consolidated statement of operations:
Unrealized gain/(loss) on real estate securities and loans, net$8,580       
Unrealized gain/(loss) on derivative and other instruments, net(2,343)      
Equity in earnings/(loss) from affiliates(2,594)      
Total$3,643       

Nine Months Ended September 30, 2020 (in thousands)
Non-Agency
RMBS
Non-Agency
RMBS Interest Only
CMBSCMBS Interest
Only
Residential
Mortgage
Loans
Commercial
Loans
Excess
Mortgage
Servicing
Rights
AG ArcSecuritized
debt
Beginning balance$630,115 $1,074 $366,566 $47,992 $417,785 $158,686 $17,775 $28,546 $(72,415)
Transfers (1):
Transfers into level 3(151,933)
Transfers out of level 3(210,709)(1,074)(170,816)(22,055)7,230 
Purchases/Transfers1,559 3,540 536,710 27,508 
Issuances of Securitized Debt(166,487)
Proceeds from sales of assets and seizures of assets(362,199)(148,111)(21,995)(393,559)(36,924)(8,460)
Proceeds from settlement(11,823)(9,367)(50,563)(5,710)16,021 
Total net gains/(losses) (2)
Included in net income(43,253)(41,812)(3,942)(83,000)(20,680)(5,789)12,890 8,598 
Ending Balance$3,690 $$$$427,373 $122,880 $3,526 $41,436 $(358,986)
Change in unrealized appreciation/(depreciation) for level 3 assets/liabilities still held as of September 30, 2020 (3)$(329)$$$$(25,443)$(14,210)$(2,183)$12,890 $8,598 
(1) Transfers are assumed to occur at the beginning of the period. During the nine months ended September 30, 2020, the Company transferred 50 Non-Agency RMBS securities, 2 Non-Agency RMBS Interest Only securities, 32 CMBS securities, 15 CMBS Interest Only securities and 1 securitized debt security into the Level 2 category from the Level 3 category under the fair value hierarchy of ASC 820. During the nine months ended September 30, 2020, the Company transferred 1 securitized debt security into the Level 3 category from the Level 2 category under the fair value hierarchy of ASC 820. Refer to Note 2 for more information on changes regarding the Company's leveling policy.
(2) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:
Unrealized gain/(loss) on real estate securities and loans, net$(74,309)
Unrealized gain/(loss) on derivative and other instruments, net2,809 
Net realized gain/(loss)(118,378)
Equity in earnings/(loss) from affiliates12,890 
Total$(176,988)
(3) Unrealized gains/(losses) are recorded in the following line items in the consolidated statement of operations:
Unrealized gain/(loss) on real estate securities and loans, net$(39,982)
Unrealized gain/(loss) on derivative and other instruments, net6,415 
Equity in earnings/(loss) from affiliates12,890 
Total$(20,677)

 
36

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
Nine Months Ended September 30, 2019 (in thousands)
 
Non-Agency
RMBS
Non-Agency
RMBS
Interest Only
ABSCMBS
CMBS Interest
Only
Residential
Mortgage
Loans
Commercial
Loans
Excess
Mortgage
Servicing
Rights
AG Arc
Securitized
debt
Beginning balance$491,554 $3,099 $21,160 $211,054 $50,331 $186,096 $98,574 $26,650 $20,360 $(10,858)
Transfers (1):
Transfers into level 388,511 
Transfers out of level 3(39,557)(5,279)
Purchases/Transfers213,495 1,632 82,540 207,048 90,451 
Issuances of Securitized Debt(65,171)
Capital Contributions17,837 
Proceeds from sales/redemptions(72,872)(1,284)(20,165)(2,631)(12,780)
Proceeds from settlement(41,451)(9,446)(28,711)(14,553)(43,217)2,845 
Total net gains/(losses) (2)
Included in net income14,377 (1,677)230 18,523 (2,757)13,566 710 (8,495)(10,926)(2)
Ending Balance$654,057 $1,422 $12,292 $257,962 $44,943 $379,377 $146,518 $18,155 $27,271 $(73,186)
Change in unrealized appreciation/(depreciation) for level 3 assets/liabilities still held as of September 30, 2019 (3)$10,193 $(613)$165 $15,089 $(2,631)$12,643 $710 $(5,867)$(10,926)$(2)
(1) Transfers are assumed to occur at the beginning of the period. During the nine months ended September 30, 2019, the Company transferred 14 Non-Agency RMBS securities into the Level 3 category from the Level 2 category and 4 Non-Agency RMBS and 2 CMBS securities into the Level 2 category from the Level 3 category under the fair value hierarchy of ASC 820.
(2) Gains/(losses) are recorded in the following line items in the consolidated statement of operations:
Unrealized gain/(loss) on real estate securities and loans, net$38,503       
Unrealized gain/(loss) on derivative and other instruments, net(8,497)      
Net realized gain/(loss)4,469       
Equity in earnings/(loss) from affiliates(10,926)      
Total$23,549       
(3) Unrealized gains/(losses) are recorded in the following line items in the consolidated statement of operations:
Unrealized gain/(loss) on real estate securities and loans, net$35,556       
Unrealized gain/(loss) on derivative and other instruments, net(5,869)      
Equity in earnings/(loss) from affiliates(10,926)      
Total$18,761       

37

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
The following tables present a summary of quantitative information about the significant unobservable inputs used in the fair value measurement of investments for which the Company has utilized Level 3 inputs to determine fair value.
 
Asset ClassFair Value at September 30, 2020 (in thousands)Valuation TechniqueUnobservable InputRange
(Weighted Average) (1)
Yield8.28% - 8.28% (8.28%)
Non-Agency RMBS$2,315 Discounted Cash FlowProjected Collateral Prepayments5.58% - 5.58% (5.58%)
Projected Collateral Losses5.79% - 5.79% (5.79%)
Projected Collateral Severities-5.73% - -5.73% (-5.73%)
$1,375 Consensus PricingOffered Quotes89.00 - 89.00 (89.00)
Yield5.50% - 10.00% (6.63%)
Residential Mortgage Loans$420,304 Discounted Cash FlowProjected Collateral Prepayments3.52% - 10.11% (7.74%)
Projected Collateral Losses1.84% - 9.33% (2.75%)
Projected Collateral Severities-8.56% - 46.07% (21.68%)
$7,069 Consensus PricingOffered Quotes67.30 - 105.84 (98.59)
Yield11.22% - 18.30% (12.82%)
Commercial Loans$122,880 Discounted Cash FlowCredit Spread1,026 bps - 1,647 bps (1,170 bps)
Recovery Percentage (2)100.00% - 100.00% (100.00%)
Excess Mortgage Servicing RightsDiscounted Cash FlowYield9.00% - 9.70% (9.08%)
$3,440 Projected Collateral Prepayments12.65% - 16.20% (14.21%)
$86 Consensus PricingOffered Quotes0.29 - 0.29 (0.29)
AG Arc$41,436 Comparable MultipleBook Value Multiple1.0x - 1.0x (1.0x)
Liability ClassFair Value at September 30, 2020 (in thousands)Valuation TechniqueUnobservable InputRange
(Weighted Average)
Yield3.02% - 6.50% (3.57%)
Securitized debt$(358,986)Discounted Cash FlowProjected Collateral Prepayments6.13% - 8.68% (7.52%)
Projected Collateral Losses2.17% - 3.18% (2.63%)
Projected Collateral Severities16.88% - 21.48% (19.39%)
(1) Amounts are weighted based on fair values.
(2) Represents the proportion of the principal expected to be collected relative to the loan balances as of September 30, 2020.

38

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
Asset ClassFair Value at December 31, 2019 (in thousands)Valuation TechniqueUnobservable InputRange
(Weighted Average) (1)
Yield1.71% - 100.00% (5.99%)
Non-Agency RMBS$625,537 Discounted Cash FlowProjected Collateral Prepayments0.00% - 100.00% (14.60%)
Projected Collateral Losses0.00% - 100.00% (2.93%)
Projected Collateral Severities0.00% - 100.00% (21.37%)
$4,578 Consensus PricingOffered Quotes100.00 - 100.00 (100.00)
Yield27.50% - 27.50% (27.50%)
Non-Agency RMBS Interest Only$1,074 Discounted Cash FlowProjected Collateral Prepayments18.00% - 18.00% (18.00%)
Projected Collateral Losses2.00% - 2.00% (2.00%)
Projected Collateral Severities35.00% - 35.00% (35.00%)
Yield0.00% - 13.89% (6.33%)
CMBS$366,566 Discounted Cash FlowProjected Collateral Prepayments0.00% - 0.00% (0.00%)
Projected Collateral Losses0.00% - 0.00% (0.00%)
Projected Collateral Severities0.00% - 0.00% (0.00%)
Yield-2.57% - 9.86% (4.19%)
CMBS Interest Only$47,992 Discounted Cash FlowProjected Collateral Prepayments99.00% - 100.00% (99.93%)
Projected Collateral Losses0.00% - 0.00% (0.00%)
Projected Collateral Severities0.00% - 0.00% (0.00%)
Yield4.00% - 8.25% (4.81%)
Residential Mortgage Loans$364,107 Discounted Cash FlowProjected Collateral Prepayments4.81% - 9.04% (7.78%)
Projected Collateral Losses1.64% - 4.94% (2.36%)
Projected Collateral Severities-7.32% - 36.91% (23.15%)
$53,678 Recent TransactionCostN/A
Yield6.16% - 10.76% (6.86%)
Commercial Loans$60,164 Discounted Cash FlowCredit Spread440 bps - 900 bps (510 bps)
Recovery Percentage (2)100.00% - 100.00% (100.00%)
$98,522 Consensus PricingOffered Quotes100.00 - 100.00 (100.00)
Excess Mortgage Servicing RightsYield8.50% - 11.60% (9.20%)
$17,633 Discounted Cash FlowProjected Collateral Prepayments9.35% - 16.90% (12.36%)
$142 Consensus PricingOffered Quotes0.01 - 0.40 (0.40)
AG Arc$28,546 Comparable MultipleBook Value Multiple1.0x - 1.0x (1.0x)
Liability ClassFair Value at December 31, 2019 (in thousands)Valuation TechniqueUnobservable InputRange
(Weighted Average)
Yield2.98% - 4.70% (3.54%)
Securitized debt$(72,415)Discounted Cash FlowProjected Collateral Prepayments10.00% - 10.04% (10.04%)
Projected Collateral Losses2.04% - 3.50% (2.19%)
Projected Collateral Severities20.13% - 45.00% (22.61%)
(1) Amounts are weighted based on fair values.
(2) Represents the proportion of the principal expected to be collected relative to the loan balances as of December 31, 2019.
 
As further described above, fair values for the Company’s securities portfolio are based upon prices obtained from third-party pricing services. Broker quotations may also be used. The significant unobservable inputs used in the fair value measurement of the Company’s securities are yields, prepayment rates, probability of default, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates.
 
Also, as described above, valuation of the Company’s loan portfolio is determined by the Manager using third-party pricing services where available, specialized third party valuation service providers, or model-based pricing. The evaluation considers the underlying characteristics of each loan, which are observable inputs, including: coupon, maturity date, loan age, reset date, collateral type, periodic and life cap, geography, and prepayment speeds. The valuations of commercial loans also require significant judgments, which include assumptions regarding capitalization rates, re-performance rates, leasing, creditworthiness
39

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by management. Changes in the market environment and other events that may occur over the life of our investments may cause the gains or losses ultimately realized on these investments to be different than the valuations currently estimated. If applicable, analyses provided by valuation service providers are reviewed and considered by the Manager.

7. Financing arrangements

The following table presents a summary of the Company's financing arrangements as of September 30, 2020 and December 31, 2019 (in thousands).

September 30, 2020December 31, 2019
Repurchase agreements$164,304 $3,121,966 
Revolving facilities (1)61,200 111,502 
Financing arrangements$225,504 $3,233,468 
(1)Increasing the Company's borrowing capacity under the Company's revolving facilities requires consent of the lenders.

In March 2020, the Company began engaging in discussions with its financing counterparties with regard to entering into forbearance agreements pursuant to which each participating counterparty would agree to forbear from exercising its rights and remedies with respect to an event of default under the applicable financing arrangement for an agreed-upon period. Pursuant to the terms of the Forbearance Agreement, the Participating Counterparties agreed to forbear from exercising any of their rights and remedies in respect of events of default and any and all other defaults under the applicable financing arrangement with the Company for the duration of the Forbearance Period.

As of March 31, 2020, the Company had received notifications from several of its financing counterparties of alleged events of default under their repurchase agreements, and of those counterparties' intentions to accelerate the Company's performance obligations under the relevant agreements due to the Company's inability to meet certain margin calls as a result of market disruptions created by the COVID-19 pandemic. As discussed above, until a formal agreement was reached, the Company negotiated with its financing counterparties regarding the lenders' forbearance from exercising their rights and remedies under their applicable repurchase agreements. While as of March 31, 2020 certain lenders had accelerated the Company's obligations under their applicable repurchase agreements, upon execution of the Reinstatement Agreement, the terms of the Bilateral Agreements were reinstated, including the maturity dates of the repurchase agreements.

As described above, on June 10, 2020, the Company and the Participating Counterparties entered into a Reinstatement Agreement, pursuant to which the parties agreed to terminate the Forbearance Agreement and each Participating Counterparty agreed to permanently waive all existing and prior events of default under its financing agreements with the Company and to reinstate each Bilateral Agreement, as it may be amended by agreement between the Participating Counterparty and the Company. As of September 30, 2020, the Company had met all margin calls related to its repurchase agreements. Refer to Note 13 for more information on deficiencies, all of which have been settled. For additional information related to the Forbearance Agreement and the Reinstatement Agreement, see Note 2 under "Financing Arrangements."

Repurchase agreements
 
A vast majority of the Company's financing arrangements have historically been effectuated through repurchase agreements. The Company pledges certain real estate securities and loans as collateral under repurchase agreements with financial institutions, the terms and conditions of which are negotiated on a transaction-by-transaction basis. Repurchase agreements involve the sale and a simultaneous agreement to repurchase the transferred assets or similar assets at a future date. The amount borrowed generally is equal to the fair value of the assets pledged less an agreed-upon discount, referred to as a "haircut." The Company calculates haircuts disclosed in the tables below by dividing the equity on each borrowing by the current fair value of each investment. Repurchase agreements are accounted for as financings and require the repurchase of the transferred assets at the end of each agreement’s term, typically 30 to 90 days. The carrying amount of the Company’s repurchase agreements approximates fair value due to their short-term maturities or floating rate coupons. If the Company maintains the beneficial interest in the specific assets pledged during the term of the borrowing, it receives the related principal and interest payments. If the Company does not maintain the beneficial interest in the specific assets pledged during the term of the borrowing, it will have the related principal and interest payments remitted to it by the lender. Interest rates on these borrowings are fixed based on prevailing rates corresponding to the terms of the borrowings, and interest is paid at the termination of the borrowing at
40

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
which time the Company may enter into a new borrowing arrangement at prevailing market rates with the same counterparty or repay that counterparty and negotiate financing with a different counterparty. If the fair value of pledged assets declines due to changes in market conditions or the publishing of monthly security paydown factors, lenders typically would require 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, referred to as margin calls. The fair value of financial instruments pledged as collateral on the Company’s repurchase agreements disclosed in the tables below represent the Company’s fair value of such instruments which may differ from the fair value assigned to the collateral by its counterparties. The Company maintains a level of liquidity in order to meet these obligations. Under the terms of the Company’s master repurchase agreements, the counterparties may, in certain cases, sell or re-hypothecate the pledged collateral. If the fair value of pledged assets increases due to changes in market conditions, counterparties may be required to return collateral to us in the form of securities or cash or post additional collateral to us.

The following table presents a summary of financial information regarding the Company’s repurchase agreements and corresponding real estate securities pledged as collateral as of September 30, 2020 ($ in thousands):
 
 Repurchase AgreementsReal Estate Securities Pledged
Repurchase Agreements Maturing Within:Balance
Weighted 
Average Rate
Weighted 
Average Haircut
Fair Value 
Pledged
Amortized 
Cost
Accrued 
Interest
30 days or less$140,386 0.94 %15.4 %$174,449 $182,292 $483 
 
The following table presents a summary of financial information regarding the Company’s repurchase agreements and corresponding real estate securities pledged as collateral as of December 31, 2019 ($ in thousands):
 
 Repurchase AgreementsReal Estate Securities Pledged
Repurchase Agreements Maturing Within:Balance
Weighted 
Average Rate
Weighted 
Average Haircut
Fair Value 
Pledged
Amortized 
Cost
Accrued 
Interest
30 days or less$1,550,508 2.33 %9.0 %$1,728,837 $1,660,649 $5,402 
31-60 days1,362,121 2.13 %7.0 %1,501,850 1,453,257 5,191 
61-90 days71,753 2.99 %23.5 %93,957 92,901 245 
Greater than 180 days2,973 3.79 %23.7 %4,039 3,690 
Total / Weighted Average$2,987,355 2.25 %8.5 %$3,328,683 $3,210,497 $10,841 
 
The following table presents a summary of financial information regarding the Company’s repurchase agreements and corresponding residential mortgage loans pledged as collateral as of September 30, 2020 ($ in thousands):

 Repurchase AgreementsResidential Mortgage Loans Pledged (1)
Repurchase Agreements Maturing Within:Balance
Weighted 
Average
Rate
Weighted Average
Funding Cost
Weighted 
Average
Haircut
Fair Value 
Pledged
Amortized 
Cost
Accrued 
Interest
61-90 days$23,918 4.10 %4.10 %42.7 %$45,019 $44,017 $704 
(1)These amounts represent certain of the Company's retained interests in securitizations. Refer to Note 4 for more information on the August 2019 VIE and September 2020 VIE.

The following table presents a summary of financial information regarding the Company’s repurchase agreements and corresponding residential mortgage loans pledged as collateral as of December 31, 2019 ($ in thousands):

 Repurchase AgreementsResidential Mortgage Loans Pledged (1)
Repurchase Agreements Maturing Within:Balance
Weighted 
Average
Rate
Weighted Average
Funding Cost
Weighted 
Average
Haircut
Fair Value 
Pledged
Amortized 
Cost
Accrued 
Interest
31-60 days$24,584 3.14 %3.14 %33.7 %$37,546 $25,192 $377 
Greater than 180 days107,010 3.61 %3.80 %19.3 %133,678 135,409 443 
Total / Weighted Average$131,594 3.53 %3.68 %22.0 %$171,224 $160,601 $820 
(1)Balances contain certain of the Company's retained interests in securitizations. Refer to Note 4 for more information on the Company's August 2019 VIE.
41

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
The Company did 0t have any repurchase agreements with any corresponding commercial loans pledged as collateral as of September 30, 2020.

The following table presents a summary of financial information regarding the Company’s repurchase agreements and corresponding commercial loans pledged as collateral as of December 31, 2019 ($ in thousands):

 Repurchase AgreementsCommercial Loans Pledged
Repurchase Agreements Maturing Within:Balance
Weighted 
Average
Rate
Weighted Average
Funding Cost
Weighted 
Average
Haircut
Fair Value 
Pledged
Amortized 
Cost
Accrued 
Interest
Greater than 180 days$3,017 4.46 %5.89 %35.4 %$4,674 $4,674 $26 

Although repurchase agreements are committed borrowings until maturity, the lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets resulting from changes in market conditions or factor changes would require the Company to provide additional collateral or cash to fund margin calls. See Note 8 for details on collateral posted/received against certain derivatives. As of September 30, 2020, the Company pledged cash of $0.4 million as collateral for clearing trades. The following table presents information with respect to the Company’s posting of collateral under repurchase agreements on September 30, 2020 and December 31, 2019, broken out by investment type (in thousands):
 
 September 30, 2020December 31, 2019
Fair Value of investments pledged as collateral under repurchase agreements  
Agency RMBS$107,252 $2,231,933 
Non-Agency RMBS26,711 682,828 
CMBS40,486 413,922 
Residential Mortgage Loans45,019 171,224 
Commercial Loans4,674 
Cash pledged (i.e., restricted cash) under repurchase agreements38 11,565 
Total collateral pledged under repurchase agreements$219,506 $3,516,146 
  
As of September 30, 2020, the Company had 0 investments posted to it under repurchase agreements. As of December 31, 2019, the Company had fair value of $1.1 million of U.S. Treasury Securities posted to it under repurchase agreements.
The following table presents information with respect to the Company’s total borrowings under repurchase agreements on September 30, 2020 and December 31, 2019, broken out by investment type (in thousands):
 
 September 30, 2020December 31, 2019
Repurchase agreements secured by investments:  
Agency RMBS$101,284 $2,109,278 
Non-Agency RMBS15,597 565,450 
CMBS23,505 312,627 
Residential Mortgage Loans23,918 131,594 
Commercial Loans3,017 
Gross Liability for repurchase agreements$164,304 $3,121,966 

Repurchase agreements eligible for offset are presented gross on the consolidated balance sheets as of September 30, 2020 and December 31, 2019. The Company has not offset or netted its repurchase agreements with any cash collateral posted for either period.
42

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
Revolving facilities

The following table presents information regarding the Company's revolving facilities, excluding facilities within investments in debt and equity of affiliates, as of September 30, 2020 and December 31, 2019 ($ in thousands).

September 30, 2020December 31, 2019
Facility (1)(2)(3)InvestmentMaturity DateRateFunding CostBalanceNet Carrying Value of Assets Pledged as CollateralMaximum Aggregate Borrowing CapacityRateFunding CostBalanceNet Carrying Value of Assets Pledged as Collateral
Revolving facility B (4)Residential mortgage loansJune 28, 2021%%$$$3.80 %3.80 %$21,546 $27,476 
Revolving facility CCommercial loansAugust 10, 20232.31 %2.79 %61,200 95,595 100,000 3.85 %4.01 %89,956 132,856 
Total revolving facilities$61,200 $95,595 $100,000 $111,502 $160,332 
(1)All revolving facilities listed above are interest only until maturity.
(2)Under the terms of the Company’s financing agreements, the Company's financial counterparties may, in certain cases, sell or re-hypothecate the pledged collateral.
(3)Increasing the Company's borrowing capacity under this facility requires consent of the lender.
(4)During the second quarter of 2020, Revolving facility B was paid off.

Financing arrangements

The Company has reduced its exposure to various counterparties, bringing the total number of counterparties with debt outstanding down from 30 as of December 31, 2019 to 6 as of September 30, 2020.

The following tables present information at September 30, 2020 and December 31, 2019 with respect to each counterparty that provides the Company with financing for which the Company had greater than 5% of its stockholders’ equity at risk, excluding stockholders’ equity at risk under financing through affiliated entities ($ in thousands).

September 30, 2020
CounterpartyStockholders’ Equity
at Risk
Weighted Average
Maturity (days)
Percentage of
Stockholders’ Equity
Credit Suisse AG, Cayman Islands Branch$38,385 439.8 %
 
December 31, 2019
CounterpartyStockholders’ Equity
at Risk
Weighted Average
Maturity (days)
Percentage of
Stockholders’ Equity
Barclays Capital Inc.$77,334 2779.1 %
Citigroup Global Markets Inc.50,263 225.9 %

The Company’s financing arrangements generally include customary representations, warranties, and covenants, but may also contain more restrictive supplemental terms and conditions. Although specific to each financing arrangement, typical supplemental terms include requirements of minimum equity, leverage ratios, performance triggers or other financial ratios. As of September 30, 2020, the Company is in compliance with all of its financial covenants.
   
43

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
8. Other assets and liabilities

The following table details certain information related to the Company's "Other assets" and "Other liabilities" line items on its consolidated balance sheet as of September 30, 2020 and December 31, 2019 (in thousands):

September 30, 2020December 31, 2019
Other assets
Interest receivable$3,265 $13,548 
Derivative assets, at fair value2,282 
Other assets5,382 4,378 
Due from broker512 1,697 
Total Other assets$9,159 $21,905 
Other liabilities
Interest payable$654 $10,941 
Derivative liabilities, at fair value39 411 
Due to affiliates (1)13,766 5,226 
Accrued expenses4,351 6,175 
Taxes payable815 
Due to broker2,134 1,107 
Total Other liabilities$20,944 $24,675 
(1)Refer to Note 11 for more information.

Derivative assets and liabilities
 
The Company’s derivatives may include interest rate swaps ("swaps"), TBAs, and swaption contracts. They may also include Eurodollar Futures, U.S. Treasury Futures, British Pound Futures, and Euro Futures (collectively, "Futures"). Derivatives have not been designated as hedging instruments. The Company uses these derivatives and may also utilize other instruments to manage interest rate risk, including long and short positions in U.S. Treasury securities. The Company uses foreign currency forward contracts to manage foreign currency risk and to protect the value or to fix the amount of certain investments or cash flows in terms of U.S. dollars.

The following table presents the fair value of the Company's derivatives and other instruments and their balance sheet location at September 30, 2020 and December 31, 2019 (in thousands).

Derivatives and Other Instruments (1)DesignationBalance Sheet 
Location
September 30, 2020December 31, 2019
Pay Fix/Receive Float Interest Rate Swap Agreements (2)Non-HedgeOther assets$$199 
Pay Fix/Receive Float Interest Rate Swap Agreements (2)Non-HedgeOther liabilities(39)(411)
Payer SwaptionsNon-HedgeOther assets2,083 
 
(1)As of September 30, 2020, the Company applied a fair value reduction of $27.3 thousand on its British Pound Futures liabilities related to variation margin. As of December 31, 2019, the Company applied a fair value reduction of $19.7 thousand and $0.1 million to its Euro Futures liabilities and British Pound Futures liabilities, respectively, related to variation margin.
(2)As of September 30, 2020, the Company applied a reduction in fair value of $0.2 million and $13.9 thousand to its interest rate swap assets and liabilities, respectively, related to variation margin. As of December 31, 2019, the Company applied a reduction in fair value of $10.8 million and $2.2 million to its interest rate swap assets and liabilities, respectively, related to variation margin. 
 
44

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
The following table summarizes information related to derivatives and other instruments (in thousands):
Notional amount of non-hedge derivatives and other instruments:Notional CurrencySeptember 30, 2020December 31, 2019
Pay Fix/Receive Float Interest Rate Swap AgreementsUSD$180,000 $1,848,750 
Payer SwaptionsUSD650,000 
Short positions on British Pound Futures (1)GBP3,000 6,563 
Short positions on Euro Futures (2)EUR1,500 
(1)Each British Pound Future contract embodies £62,500 of notional value.
(2)Each Euro Future contract embodies €125,000 of notional value.

The following table summarizes gains/(losses) related to derivatives and other instruments (in thousands):
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Included within Unrealized gain/(loss) on derivative and other instruments, net
Interest Rate Swaps$170 $4,656 $(11,418)$(15,108)
Eurodollar Futures233 1,001 
Swaptions1,051 531 354 (243)
U.S. Treasury Futures(37)(181)
British Pound Futures(57)31 129 31 
Euro Futures20 
TBAs(1,307)(866)
U.S. Treasuries82 
1,164 4,107 (10,915)(15,284)
Included within Net realized gain/(loss)
Interest Rate Swaps(18,060)(65,368)(59,140)
Eurodollar Futures107 (1,122)
Swaptions(1,051)(2,437)(861)
U.S. Treasury Futures(510)(139)
British Pound Futures(108)(138)406 (138)
Euro Futures68 
TBAs1,152 4,610 2,753 
U.S. Treasuries231 (18)
(1,159)(17,218)(62,721)(58,665)
Total income/(loss)$$(13,111)$(73,636)$(73,949)
 
Derivative and other instruments eligible for offset are presented gross on the consolidated balance sheets as of September 30, 2020 and December 31, 2019. The Company has not offset or netted any derivatives or other instruments with any financial instruments or cash collateral posted or received.
 
The Company must post cash or securities as collateral on its derivative instruments when their fair value declines. This typically occurs when prevailing market rates change adversely, with the severity of the change also dependent on the term of the derivatives involved. The posting of collateral is generally bilateral, meaning that if the fair value of the Company’s derivatives increases, its counterparty will post collateral to it. As of September 30, 2020, the Company did not pledge any real estate securities as collateral against certain derivatives and pledged $3.1 million of cash as collateral against certain derivatives. Of the $3.1 million of cash pledged as collateral against certain derivatives, $0.2 million represents amounts related to variation margin. As of December 31, 2019, the Company pledged real estate securities with a fair value of $3.0 million and cash of $32.1 million as collateral against certain derivatives. Of the $32.1 million of cash pledged as collateral against certain
45

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
derivatives, $8.5 million represents amounts related to variation margin. The Company’s counterparties posted a de minimis amount of cash as collateral against certain derivatives as of September 30, 2020 and December 31, 2019.

Interest rate swaps
 
To help mitigate exposure to increases in interest rates, the Company may use currently-paying and forward-starting, one- or three-month LIBOR-indexed, pay-fixed, receive-variable, interest rate swap agreements. This arrangement hedges the Company's exposure to higher interest rates because the variable-rate payments received on the swap agreements largely offset additional interest accruing on the related borrowings due to the higher interest rate, leaving the fixed-rate payments to be paid on the swap agreements as the Company’s effective borrowing rate, subject to certain adjustments including changes in spreads between variable rates on the swap agreements and actual borrowing rates.

As of September 30, 2020, the Company’s interest rate swap positions consisted of pay-fixed interest rate swaps. The following table presents information about the Company’s interest rate swaps as of September 30, 2020 ($ in thousands):

MaturityNotional AmountWeighted Average
Pay-Fixed Rate
Weighted Average
Receive-Variable Rate
Weighted Average
Years to Maturity
2025$136,000 0.34 %0.13 %4.95
203044,000 0.68 %0.12 %9.96
Total/Wtd Avg$180,000 0.42 %0.13 %6.18

 
As of December 31, 2019, the Company’s interest rate swap positions consisted of pay-fixed interest rate swaps. The following table presents information about the Company’s interest rate swaps as of December 31, 2019 ($ in thousands):
  
MaturityNotional AmountWeighted Average
Pay-Fixed Rate
Weighted Average
Receive-Variable Rate
Weighted Average
Years to Maturity
2020$105,000 1.54 %1.91 %0.20
2022743,000 1.64 %1.91 %2.68
20235,750 3.19 %1.91 %3.85
2024650,000 1.52 %1.90 %4.80
2026180,000 1.50 %1.89 %6.70
2029165,000 1.77 %1.94 %9.85
Total/Wtd Avg$1,848,750 1.60 %1.91 %4.32
 
TBAs
 
The Company did not hold any TBA positions for the three months ended September 30, 2020. The following tables present information about the Company’s TBAs for the three months ended September 30, 2019 and nine months ended September 30, 2020 and September 30, 2019 (in thousands):
 
For the Three Months Ended:
Beginning
Notional
Amount
Buys or CoversSales or Shorts
Ending Net Notional
Amount
Net Fair Value as of
Period End
Net Receivable/(Payable)
from/to Broker
Derivative
Asset
Derivative
Liability
September 30, 2019TBAs - Long$125,000 $475,000 $(450,000)$150,000 $153,175 $(154,042)$386 $(1,253)
TBAs - Short$(100,000)$300,000 $(200,000)$$$$$

46

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
For the Nine Months Ended:
Beginning
Notional
Amount
Buys or CoversSales or Shorts
Ending Net Notional
Amount
Net Fair Value as of
Period End
Net Receivable/(Payable)
from/to Broker
Derivative
Asset
Derivative
Liability
September 30, 2020TBAs - Long$$728,000 $(728,000)$$$$$
September 30, 2019TBAs - Long$$1,869,500 $(1,719,500)$150,000 $153,175 $(154,042)$386 $(1,253)
TBAs - Short$$485,000 $(485,000)$$$$$

9. Earnings per share
 
Basic earnings per share ("EPS") is calculated by dividing net income/(loss) available to common stockholders for the period by the weighted average shares of the Company’s common stock outstanding for that period that participate in the Company’s common dividends. Diluted EPS takes into account the effect of dilutive instruments, such as stock options, warrants, unvested restricted stock and unvested restricted stock units but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted average number of shares outstanding.
 
The Company had 0 unvested restricted stock units as of September 30, 2020 and 20.0 thousand unvested restricted outstanding stock units as of September 30, 2019.
 
Restricted stock units granted to the Manager do not entitle the participant the rights of a shareholder of the Company’s common stock, such as dividend and voting rights, until shares are issued in settlement of the vested units. The restricted stock units are not considered to be participating shares. The dilutive effects of the restricted stock units are only included in diluted weighted average common shares outstanding.  
 
47

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted EPS for the three and nine months ended September 30, 2020 and September 30, 2019 (in thousands, except per share data):
 
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Numerator:    
Net Income/(Loss) from Continuing Operations$20,046 $11,106 $(462,271)$61,166 
Gain on Exchange Offer, net539 539 
Dividends on preferred stock(5,563)(3,720)(16,897)(10,455)
Net income/(loss) from continuing operations available to common stockholders$15,022 $7,386 $(478,629)$50,711 
Net Income/(Loss) from Discontinued Operations(1,057)361 (3,284)
Net income/(loss) available to common stockholders$15,022 $6,329 $(478,268)$47,427 
Denominator:
Basic weighted average common shares outstanding34,422 32,736 33,347 32,007 
Dilutive effect of restricted stock units12 
Diluted weighted average common shares outstanding34,422 32,748 33,347 32,016 
Earnings/(Loss) Per Share - Basic
Continuing Operations$0.44 $0.22 $(14.35)$1.58 
Discontinued Operations(0.03)0.01 (0.10)
Total Earnings/(Loss) Per Share of Common Stock$0.44 $0.19 $(14.34)$1.48 
Earnings/(Loss) Per Share - Diluted
Continuing Operations$0.44 $0.22 $(14.35)$1.58 
Discontinued Operations(0.03)0.01 (0.10)
Total Earnings/(Loss) Per Share of Common Stock$0.44 $0.19 $(14.34)$1.48 

On March 27, 2020, the Company announced that its Board of Directors approved a suspension of the Company's quarterly dividends on its common stock, 8.25% Series A Cumulative Redeemable Preferred Stock, 8.00% Series B Cumulative Redeemable Preferred Stock, and 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, beginning with the common stock dividend that normally would have been declared in March 2020 and the preferred stock dividend that would have been declared in May 2020, in order to conserve capital and improve its liquidity position during the market volatility due to the COVID-19 pandemic. As a result, the Company did not declare or accrue quarterly dividends on its Common or Preferred Stock during the three months ended June 30, 2020 and the three months ended September 30, 2020. If the Company’s Board of Directors does not declare a dividend in a given period, an accrual is not recorded on the balance sheet. However, undeclared preferred stock dividends are reflected in earnings per share as discussed in ASC 260-10-45-11. Pursuant to their terms, all unpaid dividends on the Company’s preferred stock accrue without interest, and if dividends on the Company's preferred stock are in arrears, the Company cannot pay cash dividends with respect to its Common Stock. Refer to Note 12 for more information on the Company's common and preferred stock. Refer to "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Book value per share" for a discussion of the treatment of accumulated, unpaid, or undeclared preferred dividends on the Company's book value.

Subsequent to quarter end, the Company announced that its Board of Directors has approved, and the Company has declared and set apart for payment on December 17, 2020, the next regular payment date, all accrued and unpaid cash dividends on its 8.25% Series A Cumulative Redeemable Preferred Stock, 8.00% Series B Cumulative Redeemable Preferred Stock, and 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock that were in arrears as well as the full dividends payable on the preferred stock for the fourth quarter of 2020 in the amount of $1.54689, $1.50 and $1.50 per share, respectively. The dividends will be paid on December 17, 2020 to holders of record on November 30, 2020. As of September 30, 2020, the Company's book value does not include any accrual of accumulated, unpaid, or undeclared dividends on its
48

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
Cumulative Redeemable Preferred Stock. As such, the Company's book value will decrease by the amount of the dividends declared during the fourth quarter. The Company's book value per share as of September 30, 2020 would be $0.31 lower after deducting the accumulated and unpaid preferred dividends outstanding as of September 30, 2020.

The following table details the aggregate and per-share amounts of arrearages in cumulative, unpaid, and undeclared preferred dividends as of September 30, 2020 (in thousands, except per share data):

Class of StockDividend Per Preferred Share in ArrearsAmount of Preferred Dividend in Arrears
8.25% Series A$1.03126 $2,091 
8.00% Series B1.00 4,569 
8.000% Series C1.00 4,571 
Total$11,231 

Preferred stock dividends that are not declared accumulate and are added to the liquidation preference as of the scheduled payment date for the respective series of the preferred stock.

The following tables detail the Company's common stock dividends declared during the nine months ended September 30, 2019:
 
2019   
Declaration DateRecord DatePayment DateDividend Per Share
3/15/20193/29/20194/30/2019$0.50 
6/14/20196/28/20197/31/20190.50 
9/6/20199/30/201910/31/20190.45 
Total$1.45 
 
The following tables detail the Company's preferred stock dividends during the nine months ended September 30, 2020 and September 30, 2019.
   Cash Dividend Per Share
Declaration DateRecord DatePayment Date8.25% Series A8.00% Series B8.000% Series C
2/14/20202/28/20203/17/2020$0.51563 $0.50 $0.50 
2/15/20192/28/20193/18/20190.51563 0.50 
5/17/20195/31/20196/17/20190.51563 0.50 
8/16/20198/30/20199/17/20190.51563 0.50 

10. 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 provided it satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. Most states follow U.S. federal income tax treatment of REITs.
 
For the three months ended September 30, 2020, the Company did 0t record any excise tax expense. For the nine months ended September 30, 2020, the Company recorded excise tax expense of $(0.8) million. The reversal of the previously accrued excise tax expense is a result of losses resulting from market conditions associated with the COVID-19 pandemic. For the three and nine months ended September 30, 2019, the Company recorded excise tax expense of $0.2 million and $0.5 million, respectively. Excise tax represents a four percent tax on the required amount of the Company’s ordinary income and net capital gains not distributed during the year. The expense is calculated in accordance with applicable tax regulations.
 
The Company files tax returns in several U.S jurisdictions. There are no ongoing U.S. federal, state or local tax examinations related to the Company.
49

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020

The Company elected to treat certain domestic subsidiaries as TRSs and may elect to treat other subsidiaries as TRSs. In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly, and generally may engage in any real estate or non-real estate-related business.
 
The Company elected to treat one of its foreign subsidiaries as a TRS and, accordingly, taxable income generated by this TRS may not be subject to local income taxation, but generally will be included in the Company’s income on a current basis as Subpart F income, whether or not distributed.
 
Cash distributions declared by the Company that do not exceed its current or accumulated earnings and profits will be considered ordinary income to stockholders for income tax purposes unless all or a portion of a distribution is designated by the Company as a capital gain dividend. Distributions in excess of the Company’s current and accumulated earnings and profits will be characterized as return of capital or capital gains.
 
Based on its analysis of any potential uncertain income tax positions, the Company concluded it did not have any uncertain tax positions that meet the recognition or measurement criteria of ASC 740 as of September 30, 2020 or September 30, 2019. The Company’s federal income tax returns for the last three tax years are open to examination by the Internal Revenue Service. In the event that the Company incurs income tax related interest and penalties, its policy is to classify them as a component of provision for income taxes.

11. Related party transactions
 
The Company has entered into a management agreement with the Manager, which provided for an initial term and will be deemed renewed automatically each year for an additional one-year period, subject to certain termination rights. As of September 30, 2020 and December 31, 2019, no event of termination had occurred. The Company is externally managed and advised by the Manager. Pursuant to the terms of the management agreement, which became effective July 6, 2011 (upon the consummation of the Company’s initial public offering (the "IPO")), the Manager provides the Company with its management team, including its officers, along with appropriate support personnel. Each of the Company’s officers is an employee of Angelo Gordon. The Company does not have any employees. The Manager, pursuant to a delegation agreement dated as of June 29, 2011, has delegated to Angelo Gordon the overall responsibility of its day-to-day duties and obligations arising under the Company’s management agreement.
 
Management fee
 
The Manager is entitled to a management fee equal to 1.50% per annum, calculated and paid quarterly, of the Company’s Stockholders’ Equity. For purposes of calculating the management fee, "Stockholders’ Equity" means the sum of the net proceeds from any issuances of equity securities (including preferred securities) since inception (allocated on a pro rata daily basis for such issuances during the fiscal quarter of any such issuance, and excluding any future equity issuance to the Manager), plus the Company’s retained earnings at the end of such quarter (without taking into account any non-cash equity compensation expense or other non-cash items described below incurred in current or prior periods), less any amount that the Company pays for repurchases of its common stock, excluding any unrealized gains, losses or other non-cash items that have impacted stockholders’ equity as reported in the Company’s 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. Stockholders’ Equity, for purposes of calculating the management fee, could be greater or less than the amount of stockholders’ equity shown on the Company’s financial statements.

For the three and nine months ended September 30, 2020, the Company incurred management fees of approximately $1.7 million and $5.5 million, respectively. For the three and nine months ended September 30, 2019, the Company incurred management fees of approximately $2.3 million and $7.1 million, respectively. As of September 30, 2020 and December 31, 2019, the Company recorded management fees payable of $1.2 million and $2.7 million, respectively.

On April 6, 2020, the Company and the Manager executed an amendment to the management agreement pursuant to which the Manager agreed to defer the Company's payment of the management fee effective Q1 2020 through September 30, 2020, or such other time as the Company and the Manager agree.

50

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
On September 24, 2020, the Company and the Manager executed another amendment (the "Second Management Agreement Amendment") to the management agreement, pursuant to which the Manager agreed to receive a portion of the accrued base management fee owed to it in shares of common stock. Pursuant to the Second Management Agreement Amendment, the Manager agreed to accept (i) 1,215,370 shares of common stock in full satisfaction of the deferred base management fee of $3.8 million payable by the Company in respect to the first and second quarters of 2020 and (ii) 154,500 shares of common stock in satisfaction of $0.5 million of the base management fee payable by the Company in respect to the third quarter of 2020. The shares of Common Stock issued to the Manager were valued at $3.15 per share based on the midpoint of the estimated range of the Company’s book value per share as of August 31, 2020. The remaining third quarter management fee will be paid in the normal course of business.

Termination fee
 
The termination fee, payable upon the occurrence of (i) the Company’s termination of the management agreement without cause or (ii) the Manager’s termination of the management agreement upon a breach by the Company of any material term of the management agreement, will be equal to three times the average annual management fee during the 24-month period prior to such termination, calculated as of the end of the most recently completed fiscal quarter. As of September 30, 2020 and December 31, 2019, no event of termination of the management agreement had occurred.
 
Expense reimbursement
 
The Company is required to reimburse the Manager or its affiliates for operating expenses which are incurred by the Manager or its affiliates on behalf of the Company, including expenses relating to legal, accounting, due diligence and other services. The Company’s reimbursement obligation is not subject to any dollar limitation; however, the reimbursement is subject to an annual budget process which combines guidelines from the Management Agreement with oversight by the Company’s Board of Directors.
 
The Company reimburses the Manager or its affiliates for the Company’s allocable share of the compensation, including, without limitation, annual base salary, bonus, any related withholding taxes and employee benefits paid to (i) the Company’s chief financial officer based on the percentage of time spent on Company affairs, (ii) the Company’s general counsel based on the percentage of time spent on the Company’s affairs, and (iii) other corporate finance, tax, accounting, internal audit, legal, risk management, operations, compliance and other non-investment personnel of the Manager and its affiliates who spend all or a portion of their time managing the Company’s affairs based upon the percentage of time devoted by such personnel to the Company’s affairs. In their capacities as officers or personnel of the Manager or its affiliates, they devote such portion of their time to the Company’s affairs as is necessary to enable the Company to operate its business.
 
Of the $5.9 million and $11.3 million of Other operating expenses for the three and nine months ended September 30, 2020, respectively, the Company has incurred $2.3 million and $6.2 million, respectively, representing a reimbursement of expenses. Of the $6.1 million and $13.7 million of Other operating expenses for the three and nine months ended September 30, 2019, respectively, the Company has incurred $1.6 million and $5.5 million, respectively, representing a reimbursement of expenses. As of September 30, 2020 and December 31, 2019, the Company recorded a reimbursement payable to the Manager of $2.2 million and $2.5 million, respectively.

On April 6, 2020, the Company and the Manager executed an amendment to the management agreement pursuant to which the Manager agreed to defer the Company's payment of the reimbursement of expenses effective Q1 2020 through September 30, 2020, or such other time as the Company and the Manager agree. As of September 30, 2020, the Company has reimbursed the Manager for expenses through the second quarter of 2020. Expenses related to the third quarter will be paid in the normal course of business.

Secured debt

On April 10, 2020, in connection with the first Forbearance Agreement, the Company issued a secured promissory note (the "Note") to the Manager evidencing a $10 million loan made by the Manager to the Company. Additionally, on April 27, 2020, in connection with the second Forbearance Agreement, the Company and the Manager entered into an amendment to the Note to reflect an additional $10 million loan by the Manager to the Company. The $10 million loan made by the Manager on April 10, 2020 is payable on March 31, 2021, and the $10 million loan made on April 27, 2020 was repaid in full with interest when it matured on July 27, 2020. The unpaid balance of the Note accrues interest at a rate of 6.0% per annum. Interest on the Note is
51

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
payable monthly in kind through the addition of such accrued monthly interest to the outstanding principal balance of the Note.
 
Restricted stock grants
 
Effective on April 15, 2020 upon the approval of the Company's stockholders at its Annual Meeting, the 2020 Equity Incentive Plan provides for 2,000,000 shares of common stock to be issued. The maximum number of shares of common stock granted during a single fiscal year to any non-employee director, taken together with any cash fees paid to such non-employee director during any fiscal year, shall not exceed $300,000 in total value (calculating the value of any such awards based on the grant date fair value). As of September 30, 2020, 1,901,106 shares of common stock were available to be awarded under the Equity Incentive Plan.
 
Since its IPO, the Company has granted an aggregate of 204,688 and 40,250 shares of restricted common stock to its independent directors and Manager, respectively, and 120,000 restricted stock units to its Manager under its equity incentive plans. As of September 30, 2020, all the shares of restricted common stock granted to the Company’s Manager and independent directors have vested and all the restricted stock units granted to the Company’s Manager have vested. The units do not entitle the participant the rights of a holder of the Company’s common stock, such as dividend and voting rights, until shares are issued in settlement of the vested units.

Director compensation

Beginning in 2018, the Company began paying a $160,000 annual base director’s fee to each independent director. Base director’s fees are paid 50% in cash and 50% in restricted common stock. The number of shares of restricted common stock to be issued each quarter to each independent director is determined based on the average of the high and low prices of the Company’s common stock on the New York Stock Exchange on the last trading day of each fiscal quarter. To the extent that any fractional shares would otherwise be issuable and payable to each independent director, a cash payment is made to each independent director in lieu of any fractional shares. All directors’ fees are paid pro rata (and restricted stock grants determined) on a quarterly basis in arrears, and shares issued are fully vested and non-forfeitable. These shares may not be sold or transferred by such director during the time of their service as an independent member of the Company’s board. Beginning in 2019, the Company increased the annual fee paid to the lead independent director from $15,000 to $25,000. On March 25, 2020, the Company's Board of Directors decreased from 5 independent directors to 4 independent directors. On June 19, 2020, the Company's Board of Directors decreased from 4 independent directors to 3 independent directors.

Pursuant to the Forbearance Agreement previously discussed, the Company, among other things, agreed to compensate its independent directors solely with common stock for the quarter ended March 31, 2020.
 
Investments in debt and equity of affiliates
 
The Company invests in credit sensitive residential and commercial real estate assets through affiliated entities which hold an ownership interest in the assets. The Company is one investor, amongst other investors managed by affiliates of Angelo Gordon, in such entities and has applied the equity method of accounting for such investments. See Note 2 for the gross fair value of the Company's share of these investments as of September 30, 2020 and December 31, 2019.

During Q3 2018, the Company transferred certain of its CMBS from certain of its non-wholly owned subsidiaries to a fully consolidated entity. See Note 2 for further detail.
 
The Company’s investment in AG Arc is reflected on the "Investments in debt and equity of affiliates" line item on its consolidated balance sheets. The Company has an approximate 44.6% interest in AG Arc. See Note 2 for the fair value of AG Arc as of September 30, 2020 and December 31, 2019.

In June 2016, Arc Home closed on the acquisition of a Fannie Mae, Freddie Mac, Federal Housing Administration ("FHA"), Veteran’s Administration ("VA") and Ginnie Mae seller/servicer of mortgages, currently with licenses to conduct business in 50 states, including Washington D.C. Through this subsidiary, Arc Home originates conforming, Government, Jumbo, Non-QM and other non-conforming residential mortgage loans, retains the mortgage servicing rights associated with the loans it originates, and purchases additional mortgage servicing rights from third-party sellers. Arc Home is led by an external management team.

52

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
Arc Home may sell loans to the Company, to third parties, or to affiliates of the Manager. Arc Home may also enter into agreements with third parties or affiliates of the Manager to sell rights to receive the excess servicing spread related to MSRs that it either purchases from third parties or originates. The Company, directly or through its subsidiaries, has entered into agreements with Arc Home to purchase rights to receive the excess servicing spread related to certain of Arc Home's MSRs. As of September 30, 2020 and December 31, 2019, these Excess MSRs had fair value of approximately $3.9 million and $18.2 million, respectively. See below "Transactions with affiliates" and Note 5 for details regarding the sale of a portion of the Company's Excess MSRs during the third quarter of 2020.

During the third quarter of 2020, Arc Home began selling Non-QM loans to a private fund under the management of Angelo Gordon. Arc Home sold $4.6 million of unpaid principal balance of Non-QM loans to this affiliate of the Manager in September 2020.

On August 29, 2017, the Company, alongside private funds under the management of Angelo Gordon, entered into the MATH LLC Agreement, which requires that MATH fund a capital commitment of $75.0 million to MATT. This commitment was increased by $25.0 million to $100.0 million on March 28, 2019 and by $5.0 million to $105.0 million on August 23, 2019 with amendments to the MATH LLC Agreement. On April 3, 2020, the financing arrangements within MATT were restructured and the previously mentioned commitment was removed. Refer to Note 2 for further detail on this restructuring. The Company has an approximate 44.6% interest in MATH.
 
On May 15, 2019 and November 14, 2019, the Company, alongside private funds under the management of Angelo Gordon and a third party, entered into the LOTS I and LOTS II Agreements, respectively (collectively, "LOTS"), which requires the Company to fund various commitments to LOTS in connection with the origination of Land Related Financing. Refer to Note 13 for additional information. The Company has an approximate 47.5% and 50% interest in LOTS I and LOTS II, respectively.

Transactions with affiliates
 
In connection with the Company’s investments in residential mortgage loans, residential mortgage loans in securitized form which are issued by an entity in which the Company holds an equity interest in and which are held alongside other private funds under the management of Angelo Gordon (the "Re/Non-Performing Loans") and non-QM loans, the Company may engage asset managers to provide advisory, consultation, asset management and other services. Beginning in November 2015, the Company also engaged Red Creek Asset Management LLC ("Asset Manager"), an affiliate of the Manager and direct subsidiary of Angelo Gordon, as the asset manager for certain of its Re/Non-Performing Loans. Beginning in September 2019, the Company engaged the Asset Manager as the asset manager for its non-QM loans. The Company pays the Asset Manager separate arm’s-length asset management fees as assessed and confirmed periodically by a third party valuation firm for its Re/Non-Performing Loans and non-QM loans. In the third quarter of 2019, the third party assessment of asset management fees resulted in the Company updating the fee amount for its Re/Non-Performing Loans. The Company also utilized the third party valuation firm to establish the fee level for non-QM loans in the third quarter of 2019. For the three and nine months ended September 30, 2020, the fees paid by the Company to the Asset Manager totaled $0.6 million and $2.1 million, respectively. For the three and nine months ended September 30, 2019, the fees paid by the Company to the Asset Manager totaled $0.1 million and $0.4 million, respectively. These fees include amounts paid directly by the Company and amounts paid by trustees in securitizations that the Company owns residual interests in.

In connection with the Company’s investments in Excess MSRs purchased through Arc Home, the Company pays an administrative fee to Arc Home. For the three and nine months ended September 30, 2020, the administrative fees paid by the Company to Arc Home totaled $42.0 thousand and $0.2 million, respectively. For the three and nine months ended September 30, 2019, the administrative fees paid by the Company to Arc Home totaled $0.1 million and $0.2 million, respectively.

In March 2019, in accordance with the Company’s Affiliated Transactions Policy, the Company executed one trade whereby the Company acquired a real estate security from an affiliate of the Manager (the "March 2019 Selling Affiliate"). As of the date of the trade, the security acquired from the March 2019 Selling Affiliate had a total fair value of $0.9 million. The March 2019 Selling Affiliate sold the real estate security through a BWIC (Bids Wanted in Competition). Prior to the submission of the BWIC by the March 2019 Selling Affiliate, the Company submitted its bid for the real estate security to the March 2019 Selling Affiliate. The pre-submission of the Company's bid allowed the Company to confirm third-party market pricing and best execution.

In June 2019, the Company, alongside private funds under the management of Angelo Gordon, participated, through its unconsolidated ownership interest in MATT, in a rated non-QM loan securitization, in which non-QM loans with a fair value of $408.0 million were securitized. Certain senior tranches in the securitization were sold to third parties with the Company and
53

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
private funds under the management of Angelo Gordon retaining the subordinate tranches, which had a fair value of $42.9 million as of June 30, 2019. The Company has a 44.6% interest in the retained subordinate tranches.

In July 2019, in accordance with the Company’s Affiliated Transactions Policy, the Company acquired certain real estate securities from an affiliate of the Manager (the "July 2019 Selling Affiliate"). As of the date of the trade, the real estate securities acquired from the July 2019 Selling Affiliate had a total fair value of $2.0 million. As procuring market bids for the real estate securities was determined to be impracticable in the Manager’s reasonable judgment, appropriate pricing was based on a valuation prepared by independent third-party pricing vendors. The third-party pricing vendors allowed the Company to confirm third-party market pricing and best execution.

In September 2019, the Company, alongside private funds under the management of Angelo Gordon, participated, through its unconsolidated ownership interest in MATT, in a rated non-QM loan securitization, in which non-QM loans with a fair market value of $415.1 million were securitized. Certain senior tranches in the securitization were sold to third parties with the Company and private funds under the management of Angelo Gordon retaining the subordinate tranches, which had a fair market value of $28.7 million as of September 30, 2019. The Company has a 44.6% interest in the retained subordinate tranches.

In October 2019, in accordance with the Company’s Affiliated Transactions Policy, the Company acquired certain real estate securities from an affiliate of the Manager (the "October 2019 Selling Affiliate"). As of the date of the trade, the real estate securities acquired from the October 2019 Selling Affiliate had a total fair value of $2.2 million. The October 2019 Selling Affiliate sold the real estate securities through a BWIC. Prior to the submission of the BWIC by the October 2019 Selling Affiliate, the Company submitted its bid for real estate securities to the October 2019 Selling Affiliate. The Company’s pre-submission of its bid allowed the Company to confirm third-party market pricing and best execution.

In November 2019, the Company, alongside private funds under the management of Angelo Gordon, participated through its unconsolidated ownership interest in MATT in a rated non-QM loan securitization, in which non-QM loans with a fair value of $322.1 million were securitized. Certain senior tranches in the securitization were sold to third parties with the Company and private funds under the management of Angelo Gordon retaining the subordinate tranches, which had a fair value of $21.4 million as of December 31, 2019. The Company has a 44.6% interest in the retained subordinate tranches.

In February 2020, the Company, alongside private funds under the management of Angelo Gordon, participated through its unconsolidated ownership interest in MATT in a rated non-QM loan securitization, in which non-QM loans with a fair value of $348.2 million were securitized. Certain senior tranches in the securitization were sold to third parties with the Company and private funds under the management of Angelo Gordon retaining the subordinate tranches, which had a fair value of $26.6 million as of March 31, 2020. The Company has a 44.6% interest in the retained subordinate tranches.

In July 2020, in accordance with the Company’s Affiliated Transactions Policy, the Company sold certain real estate securities to an affiliate of the Manager (the "July 2020 Acquiring Affiliate"). As of the date of the trade, the real estate securities sold to the July 2020 Acquiring Affiliate had a total fair value of $1.9 million. The July 2020 Acquiring Affiliate purchased the real estate securities through a BWIC. Prior to the submission of the BWIC by the Company, the July 2020 Acquiring Affiliate submitted its bid for real estate securities to the Company. The July 2020 Acquiring Affiliate’s pre-submission of its bid allowed the Company to confirm third-party market pricing and best execution.

In August 2020, the Company, alongside private funds under the management of Angelo Gordon, participated through its unconsolidated ownership interest in MATT in a rated non-QM loan securitization, in which non-QM loans with a fair value of $226.0 million were securitized. Certain senior tranches in the securitization were sold to third parties with the Company and private funds under the management of Angelo Gordon retaining the subordinate tranches, which had a fair value of $24.3 million as of September 30, 2020. The Company has a 44.6% interest in the retained subordinate tranches.

In August 2020, the Company, alongside private funds under the management of Angelo Gordon, sold its Ginnie Mae Excess MSR portfolio to Arc Home for total proceeds of $18.9 million. The portfolio had a total unpaid principal balance of $3.1 billion. The Company's share of the total proceeds approximated $8.5 million, representing its approximate 45% ownership interest. Arc Home subsequently sold its Ginnie Mae MSR portfolio to a third party.



54

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
12. Equity
  
On May 2, 2018, the Company filed a shelf registration statement registering up to $750.0 million of its securities, including capital stock (the "2018 Registration Statement"). As of September 30, 2020, $591.2 million of the Company’s securities, including capital stock, was available for issuance under the 2018 Registration Statement. The 2018 Registration Statement became effective on May 18, 2018 and will expire on May 18, 2021.
   
Concurrently with the IPO in 2011, the Company completed a private placement of 3,205,000 units at $20.00 per share to a limited number of investors qualifying as "accredited investors" under Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). Each unit consisted of one share of common stock ("private placement share") and a warrant ("private placement warrant") to purchase 0.50 of a share of common stock. Each private placement warrant had an exercise price of $20.50 per share (as adjusted for reorganizations, reclassifications, consolidations, mergers, sales, transfers or other dispositions) and expired on July 6, 2018. No warrants were exercised in 2018 through the expiration date on July 6, 2018.

In addition to the Company’s Series A and Series B Preferred Stock, the Company completed a public offering of 4,000,000 shares of 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock with a liquidation preference of $25.00 per share (the "Series C Preferred Stock") on September 17, 2019. The Company subsequently issued 600,000 shares of Series C Preferred Stock pursuant to the underwriters' exercise of their over-allotment option. The Company received total gross proceeds of $115.0 million and net proceeds of approximately $111.2 million, net of underwriting discounts, commissions and expenses. The Company’s Series A, Series B and Series C Preferred Stock have no stated maturity and are not subject to any sinking fund or mandatory redemption. Under certain circumstances upon a change of control, the Company’s Series A, Series B and Series C Preferred Stock are convertible to shares of the Company’s common stock. Holders of the Company’s Series A, Series B and Series C Preferred Stock have no voting rights, except under limited conditions, and holders are entitled to receive cumulative cash dividends at a the respective stated rate per annum before holders of the common stock are entitled to receive any cash dividends. The dividend rate of the Series A and Series B preferred stock is 8.25% and 8.00% per annum, respectively, of the $25.00 per share liquidation preference. The initial dividend rate for the Series C Preferred Stock, from and including the date of original issue to, but not including, September 17, 2024, is 8.000% per annum of the $25.00 per share liquidation preference. On and after September 17, 2024, dividends on the Series C Preferred Stock will accumulate at a percentage of the $25.00 liquidation preference equal to an annual floating rate of the then three-month LIBOR plus a spread of 6.476% per annum. Shares of the Company’s Series A and Series B Preferred Stock are currently redeemable at $25.00 per share plus accumulated and unpaid dividends (whether or not declared) exclusively at the Company’s option. Shares of the Company's Series C Preferred Stock are redeemable at $25.00 per share plus accumulated and unpaid dividends (whether or not declared) exclusively at the Company’s option commencing on September 17, 2024, or earlier under certain circumstances intended to preserve its qualification as a REIT for Federal income tax purposes. Dividends are payable quarterly in arrears on the 17th day of each March, June, September and December. The Company's Series A, Series B and Series C Preferred Stock generally do not have any voting rights, subject to an exception in the event the Company fails to pay dividends on such stock for 6 or more quarterly periods (whether or not consecutive). Under such circumstances, holders of the Company's Series A, Series B and Series C Preferred Stock voting together as a single class with the holders of all other classes or series of its preferred stock upon which like voting rights have been conferred and are exercisable and which are entitled to vote as a class with the Company's Series A, Series B and Series C Preferred Stock will be entitled to vote to elect two additional directors to the Company’s Board of Directors until all unpaid dividends have been paid or declared and set apart for payment. In addition, certain material and adverse changes to the terms of any series of the Company's Series A, Series B and Series C Preferred Stock cannot be made without the affirmative vote of holders of at least two-thirds of the outstanding shares of the series of the Company's Series A, Series B and Series C Preferred Stock whose terms are being changed. As of September 30, 2020, the Company had not declared all required quarterly dividends on the Company’s Series A, Series B and Series C Preferred Stock.

On March 27, 2020, the Company announced that its Board of Directors approved a suspension of the Company's quarterly dividends on its 8.25% Series A Cumulative Redeemable Preferred Stock, 8.00% Series B Cumulative Redeemable Preferred Stock and 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, beginning with the preferred dividend that would have been declared in May 2020, in order to conserve capital and improve its liquidity position during the market volatility due to the COVID-19 pandemic as well as a suspension of the quarterly dividend on the Common Stock, beginning with the dividend that normally would have been declared in March 2020. Refer to Note 9 for more information on the arrearages related to the Company's preferred stock. Under the terms of the Company's charter governing its series of preferred stock, the Company cannot pay cash dividends with respect to its common stock if dividends on its preferred stock are in arrears.
 
On November 3, 2015, the Company’s Board of Directors authorized a stock repurchase program ("Repurchase Program") to repurchase up to $25.0 million of the Company's outstanding common stock. Such authorization does not have an expiration
55

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
date. As part of the Repurchase Program, shares may be purchased in open market transactions, including through block purchases, through privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Exchange Act. Open market repurchases will be made in accordance with Exchange Act Rule 10b-18, which sets certain restrictions on the method, timing, price and volume of open market stock repurchases. Subject to applicable securities laws, the timing, manner, price and amount of any repurchases of common stock under the Repurchase Program may be determined by the Company in its discretion, using available cash resources. Shares of common stock repurchased by the Company under the Repurchase Program, if any, will be cancelled and, until reissued by the Company, will be deemed to be authorized but unissued shares of its common stock as required by Maryland law. The Repurchase Program may be suspended or discontinued by the Company at any time and without prior notice and the authorization does not obligate the Company to acquire any particular amount of common stock. The cost of the acquisition by the Company of shares of its own stock in excess of the aggregate par value of the shares first reduces additional paid-in capital, to the extent available, with any residual cost applied against retained earnings. NaN shares were repurchased under the Repurchase Program during the three and nine months ended September 30, 2020 and September 30, 2019, and approximately $14.6 million of common stock remained authorized for future share repurchases under the Repurchase Program.
 
On May 5, 2017, the Company entered into an equity distribution agreement with each of Credit Suisse Securities (USA) LLC and JMP Securities LLC (collectively, the "Sales Agents"), which the Company refers to as the "Equity Distribution Agreements," pursuant to which the Company may sell up to $100.0 million aggregate offering price of shares of its common stock from time to time through the Sales Agents under the Securities Act of 1933. The Equity Distribution Agreements were amended on May 22, 2018 in conjunction with the filing of the Company’s 2018 Registration Statement. For the three and nine months ended September 30, 2020, the Company sold 0.4 million and 1.4 million shares of common stock under the Equity Distribution Agreements for net proceeds of approximately $1.2 million and $4.7 million, respectively. For the three and nine months ended September 30, 2019, the Company sold 0.5 million shares of common stock under the Equity Distribution Agreements for net proceeds of approximately $8.6 million. As of September 30, 2020, the Company has sold approximately 2.8 million shares of common stock under the Equity Distribution Agreements for gross proceeds of $32.3 million, with 67.7 million available to be issued.

On February 14, 2019, the Company completed a public offering of 3,000,000 shares of its common stock and subsequently issued an additional 450,000 shares pursuant to the underwriters' exercise of their over-allotment option at a price of $16.70 per share. Net proceeds to the Company from the offering were approximately $57.4 million, after deducting estimated offering expenses.

On August 14, 2020, the Company announced the commencement of an offer to exchange (the "Exchange Offer") newly issued shares of common stock for up to 250,470 shares of its Series A Preferred Stock, up to 556,600 shares of its Series B Preferred Stock, and up to 556,600 shares of its Series C Preferred Stock. The Exchange Offer had an expiration date of September 11, 2020. Based on the final count provided by the Exchange Agent, American Stock Transfer & Trust Company, LLC, a total of 42,820 shares of Series A Preferred Stock, 31,085 Series B Preferred Stock and 29,355 Series C Preferred Stock were validly tendered and not properly withdrawn prior to the expiration of the Exchange Offer. The Company accepted all such 103,260 validly tendered shares of preferred stock, and issued in exchange a total of 516,300 shares of Common Stock in reliance upon the exemption from registration provided under Section 3(a)(9) of the Securities Act of 1933, as amended. After settlement, the Company had outstanding 2,027,180 shares of Series A Preferred Stock, 4,568,915 shares of Series B Preferred Stock and 4,570,645 shares of Series C Preferred Stock.

On September 24, 2020, the Company issued (i) 1,215,370 shares of common stock to the Manager in full satisfaction of the deferred base management fee of $3.8 million payable by the Company in respect to the first and second quarters of 2020 and (ii) 154,500 shares of common stock in satisfaction of $0.5 million of the base management fee payable by the Company in respect to the third quarter of 2020. The shares of Common Stock issued to the Manager were valued at $3.15 per share based on the midpoint of the estimated range of the Company’s book value per share as of August 31, 2020. The remaining third quarter management fee will be paid in the normal course of business. Refer to Note 11 for more information on this transaction.

Subsequent to quarter end, the Company announced that its Board of Directors has approved, and the Company has declared and set apart for payment on December 17, 2020, the next regular payment date, all accrued and unpaid cash dividends on its 8.25% Series A Cumulative Redeemable Preferred Stock, 8.00% Series B Cumulative Redeemable Preferred Stock, and 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock that were in arrears as well as the full dividends payable on the preferred stock for the fourth quarter of 2020 in the amount of $1.54689, $1.50 and $1.50 per share, respectively. The dividends will be paid on December 17, 2020 to holders of record on November 30, 2020. As of September 30, 2020, the Company's book value does not include any accrual of accumulated, unpaid, or undeclared dividends on its
56

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
Cumulative Redeemable Preferred Stock. As such, the Company's book value as of September 30, 2020 will decrease by the amount of the dividends declared during the fourth quarter. The Company's book value per share as of September 30, 2020 would be $0.31 lower after deducting the accumulated and unpaid preferred dividends outstanding as of September 30, 2020.

13. Commitments and Contingencies
 
From time to time, the Company may become involved in various claims and legal actions arising in the ordinary course of business. As of September 30, 2020, other than as set forth below, the Company was not involved in any material legal proceedings.

On March 25, 2020, certain of the Company's subsidiaries filed a suit in federal district court in New York seeking to enjoin Royal Bank of Canada and one of its affiliates ("RBC") from selling certain assets that the Company had on repo with RBC and seeking damages (AG MIT CMO et al. v. RBC (Barbados) Trading Corp. et al., 20-cv-2547, U.S. District Court, Southern District of New York). On March 31, 2020, the Company withdrew, as moot, its request for injunctive relief in the complaint based on the court's ruling on March 25, 2020 relating to the sale at issue. As previously disclosed in a Form 8-K filed with the SEC on June 2, 2020, the Company entered into a settlement agreement with RBC on May 28, 2020, pursuant to which the Company and RBC mutually released each other from further claims related to the repurchase agreements at issue. As part of the settlement, and to resolve all claims by either party under the repurchase agreements, the Company paid RBC $5.0 million in cash and issued to RBC a secured promissory note in the principal amount of $2.0 million. On June 11, 2020, the Company repaid the secured promissory note due to RBC in full. The Company has recognized this settlement in the "Net realized gain/(loss)" line item on the consolidated statement of operations. As a result, as of September 30, 2020, the Company has satisfied all of its payment obligations to RBC under the settlement agreement and promissory note, and, as previously reported, the federal lawsuit has been voluntarily dismissed with prejudice.

As of September 30, 2020, the Company has also recorded a loss of $11.6 million related to deficiencies asserted by other counterparties. The Company has recognized these losses in the "Net realized gain/(loss)" line item on the consolidated statement of operations. As of August 2020, MITT resolved and settled all deficiency claims with lenders.

The below table details the Company's outstanding commitments as of September 30, 2020 (in thousands):
Commitment typeDate of CommitmentTotal CommitmentFunded CommitmentRemaining Commitment
Commercial loan G (a)(b)July 26, 2018$78,806 $56,697 $22,109 
Commercial loan I (a)(c)January 23, 201920,000 15,211 4,789 
Commercial loan K (a)February 22, 201920,000 14,173 5,827 
LOTS (d)Various39,361 24,191 15,170 
Total$158,167 $110,272 $47,895 

(a)The Company entered into commitments on commercial loans relating to construction projects. See Note 4 for further details.
(b)Paydowns of $5.7 million on Commercial loan G during the quarter decreased the total commitment from $84.5 million to $78.8 million.
(c)Subsequent to quarter end, the Company and the borrower of Loan I entered into a modification agreement to, among other things, extend the term of the Loan, allow for a portion of the interest to be deferred and increase the capital commitment amount by $6.0 million.
(d)Refer to Note 11 "Investments in debt and equity of affiliates" for more information regarding LOTS.

14. Discontinued Operations and Assets and Liabilities Held for Sale

In November 2019, the Company signed a purchase and sale agreement whereby it agreed to sell its portfolio of single-family rental properties to a third party at a price of approximately $137 million as the portfolio was under-performing. The Company recognized a gain of $0.2 million as a result of the transaction. The Company reclassified the operating results of its single-family rental properties segment as discontinued operations and excluded it from continuing operations for all periods presented. As of September 30, 2020 and December 31, 2019, the Company has disposed of substantially all of its single-family rental properties segment.

57

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
The table below presents the Company's results of operations for the three and nine months ended September 30, 2020 and September 30, 2019, for the single-family rental properties segment's discontinued operations as reported separately as net income (loss) from discontinued operations, net of tax (in thousands). There was 0 net income or loss from discontinued operations for the three months ended September 30, 2020.

Three Months EndedNine Months Ended
September 30, 2019September 30, 2020September 30, 2019
Interest expense$(1,247)$$(3,741)
Other Income/(Loss)
Rental income3,309 9,868 
Net realized gain/(loss)(96)
Other income34 346 
Total Other Income/(Loss)3,343 10,118 
Expenses
Other operating expenses154 (80)246 
Property depreciation and amortization1,013 3,640 
Property operating expenses1,986 (281)5,775 
Total Expenses3,153 (361)9,661 
Net Income/(Loss) from Discontinued Operations$(1,057)$361 $(3,284)

In the second quarter of 2020, the Company reversed certain previously accrued expenses related to discontinued operations.

The table below presents the Company's statement of net positions for the years ended September 30, 2020 and December 31, 2019, respectively, for the single-family rental properties segment's discontinued operations as reported separately as assets and liabilities held for sale on our consolidated balance sheets (in thousands):

September 30, 2020December 31, 2019
Assets
Other assets$$154 
Liabilities
Other liabilities$305 $1,546 

15. Subsequent Events

On September 30, 2020, the Company agreed to issue an aggregate of 3,679,634 shares of its common stock and agreed to pay aggregate cash consideration of $6.3 million in exchange for 210,662 shares of Series A Preferred Stock, 404,187 shares of Series B Preferred Stock, and 427,467 shares of Series C Preferred Stock, pursuant to a privately negotiated exchange agreement entered into on September 30, 2020 with existing holders of the preferred stock. After the transaction closed, the preferred stock exchanged pursuant to the exchange agreement were reclassified as authorized but unissued shares of preferred stock without designation as to class or series.

On October 2, 2020, the Company agreed to issue an aggregate of 900,000 shares of its common stock and agreed to pay aggregate cash consideration of $1.7 million in exchange for 260,000 shares of Series C Preferred Stock, pursuant to a privately negotiated exchange agreement entered into on October 2, 2020 with existing holders of the Series C Preferred Stock. After the transaction closed, the Series C Preferred Stock exchanged pursuant to the exchange agreement were reclassified as authorized but unissued shares of preferred stock without designation as to class or series.

Subsequent to quarter end, the Company announced that its Board of Directors has approved, and the Company has declared and set apart for payment on December 17, 2020, the next regular payment date, all accrued and unpaid cash dividends on its
58

AG Mortgage Investment Trust Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2020
8.25% Series A Cumulative Redeemable Preferred Stock, 8.00% Series B Cumulative Redeemable Preferred Stock, and 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock that were in arrears as well as the full dividends payable on the preferred stock for the fourth quarter of 2020 in the amount of $1.54689, $1.50 and $1.50 per share, respectively. The dividends will be paid on December 17, 2020 to holders of record on November 30, 2020. As of September 30, 2020, the Company's book value does not include any accrual of accumulated, unpaid, or undeclared dividends on our Cumulative Redeemable Preferred Stock. As such, the Company's book value will decrease by the amount of the dividends declared during the fourth quarter. The Company's book value per share as of September 30, 2020 would be $0.31 lower deducting the accumulated and unpaid preferred dividends outstanding as of September 30, 2020.
59


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
In this quarterly report on Form 10-Q, or this "report," we refer to AG Mortgage Investment Trust, Inc. as "we," "us," the "Company," or "our," unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, AG REIT Management, LLC, as our "Manager," and we refer to the direct parent company of our Manager, Angelo, Gordon & Co., L.P., as "Angelo Gordon."
 
The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements, which are included in Item 1 of this report, as well as the information contained in our Annual Report on Form 10-K for the year ended December 31, 2019, and any subsequent filings.
 
Forward-Looking Statements
 
We make forward-looking statements 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"), in this report that are subject to substantial known and unknown risks and uncertainties. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, returns, results of operations, plans, yields, objectives, the composition of our portfolio, actions by governmental entities, including the Federal Reserve, and the potential effects of actual and proposed legislation on us, our views on certain macroeconomic trends, and the impact of the novel coronavirus ("COVID-19"). When we use the words "believe," "expect," "anticipate," "estimate," "plan," "continue," "intend," "should," "may" or similar expressions, we intend to identify forward-looking statements.

These forward-looking statements are based upon information presently available to our management and are inherently subjective, uncertain and subject to change. There can be no assurance that actual results will not differ materially from our expectations. Some, but not all, of the factors that might cause such a difference include, without limitation:

the uncertainty and economic impact of the COVID-19 pandemic and of responsive measures implemented by various governmental authorities, businesses and other third parties;
changes in our business and investment strategy;
our ability to predict and control costs;
changes in interest rates and the fair value of our assets, including negative changes resulting in margin calls relating to the financing of our assets;
changes in the yield curve;
changes in prepayment rates on the loans we own or that underlie our investment securities;
increased rates of default or delinquencies and/or decreased recovery rates on our assets;
our ability to obtain and maintain financing arrangements on terms favorable to us or at all;
changes in general economic conditions, in our industry and in the finance and real estate markets, including the impact on the value of our assets;
conditions in the market for Agency RMBS, Residential Investments, including Non-Agency RMBS, CRTs, Non-U.S. RMBS, interest only securities, and residential mortgage loans, Commercial Investments, including CMBS, interest only securities, and commercial real estate loans, and Excess MSRs;
legislative and regulatory actions by the U.S. Congress, U.S. Department of the Treasury, the Federal Reserve and other agencies and instrumentalities in response to the economic effects of the COVID-19 pandemic;
how COVID-19, and regulatory and market responses thereto, may affect us, our operations and personnel;
the forbearance program included in the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act");
our ability to reinstate quarterly dividends on our common stock and to make distributions to our stockholders in the future;
our ability to maintain our qualification as a REIT for federal tax purposes; and
our ability to qualify for an exemption from registration under the Investment Company Act of 1940, as amended.

We caution investors not to rely unduly on any forward-looking statements, which speak only as of the date made, and urge you to carefully consider the risks noted above and identified under the captions "Risk Factors," and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019 and any subsequent filings. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice.

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Special Note Regarding COVID-19 Pandemic

As a result of the global COVID-19 pandemic and our disposition of assets to preserve liquidity, we incurred large realized losses during the nine months ended September 30, 2020 and a sharp decline in book value. Our Net Loss Available to Common Stockholders during this period was $478.3 million and our book value per share decreased by $14.27 per share from $17.61 as of December 31, 2019 to $3.34 as of September 30, 2020.

We recognized net realized losses of $194.6 million on the sale of real estate securities, loans and related collateral and realized losses of $62.6 million on the termination of the related derivatives. We also recognized $184.8 million in net unrealized losses for the period comprised of unrealized losses on securities and unrealized losses on loans of $145.1 million and $39.7 million, respectively. These realized and unrealized losses were due directly to the disruptions of the financial markets caused by the COVID-19 pandemic and the actions we took to maintain liquidity and preserve capital, including $3.2 billion in asset sales and a significant decrease in asset valuations during the period. Included in unrealized losses on both securities and loans are net unrealized gain reversals due to sales during 2020 totaling $132.0 million. The remaining unrealized losses of $52.8 million relate to mark to market losses on securities and loans still held.

In the nine month period ended September 30, 2020, we reduced the size of our GAAP investment portfolio from $4.0 billion to $903.7 million, and at September 30, 2020, our GAAP investment portfolio consisted of $253.6 million of Agency RMBS, or 28% of our GAAP investment portfolio, and $650.1 million of credit positions, or 72% of our GAAP investment portfolio. In an effort to prudently manage our portfolio through unprecedented market volatility and preserve long-term stockholder value, we completed the sale of our portfolio of 30 year fixed rate Agency securities during the nine months ended September 30, 2020. We believe the resulting capital allocation will impact our yield, cost of funds and leverage ratio as described more fully below. We believe the significant reduction in the size of our investment portfolio will also materially limit our earnings going forward.

We do not yet know the full extent of the effects of the COVID-19 pandemic on our business, operations, personnel, or the U.S. economy as a whole. We cannot predict future developments, including the scope and duration of the pandemic, the effectiveness of our work from home arrangements, third-party providers' ability to support our operations, the nature and effect of any actions taken by governmental authorities and other third parties in response to the pandemic, and the other factors discussed above and throughout this report as discussed more fully under "Risk Factors." Future developments with respect to the COVID-19 pandemic and the actions taken to reduce its spread could continue to materially and adversely affect our business, operations, operating results, financial condition, liquidity or capital levels.

Executive Summary

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. On March 13, 2020, the U.S. declared a national emergency concerning the COVID-19 pandemic, and several states and municipalities subsequently declared public health emergencies. These conditions have caused, and continue to cause, a significant disruption in the U.S. and world economies. To slow the spread of COVID-19, many countries, including the U.S., implemented social distancing measures, which have substantially prohibited large gatherings, including at sporting events, religious services and schools. Further, many regions, including the majority of U.S. states, have implemented additional measures, such as shelter-in-place and stay-at-home orders. Many businesses have moved to a remote working environment, temporarily suspended operations, laid off a significant percentage of their workforce and/or shut down completely. Moreover, the COVID-19 pandemic and certain of the actions taken to reduce its spread have resulted in lost business revenue, rapid and significant increases in unemployment, changes in consumer behavior and significant reductions in liquidity and the fair value of many assets, including those in which we invest. Although many of the government restrictions are in the process of being relaxed, these conditions, or some level thereof, and others are expected to continue over the near term and may prevail into 2021.

Beginning in mid-March, economic conditions caused financial and mortgage-related asset markets to come under extreme duress, resulting in credit spread widening, a sharp decrease in interest rates and unprecedented illiquidity in repurchase agreement financing and MBS markets. These events, in turn, resulted in falling prices of our assets and increased margin calls from our repurchase agreement counterparties. To conserve capital, protect assets and to pause the escalating negative impacts caused by the market dislocation and allow the markets for many of our assets to stabilize, on March 20, 2020, we notified our repurchase agreement counterparties that we did not expect to fund the existing and anticipated future margin calls under our repurchase agreements and commenced discussions with our counterparties with regard to entering into forbearance agreements. We entered into three consecutive forbearance agreements, pursuant to which the forbearing counterparties agreed not to exercise any of their rights or remedies under their applicable financing arrangement with us through June 15, 2020. On June 10, 2020, we exited forbearance, terminating the last remaining forbearance agreement, and entered into a reinstatement agreement, pursuant to which each Participating Counterparty agreed to permanently waive all existing and prior events of default under our financing agreements and reinstate our financing arrangements described in more detail below under the
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"Financing arrangements" heading of this Item 2. In an effort to manage our portfolio through this unprecedented turmoil in the financial markets, to improve liquidity, and preserve capital, we executed the following during the nine months ended September 30, 2020:

Reduced GAAP investment portfolio by $3.1 billion from $4.0 billion at December 31, 2019 to $903.7 million at September 30, 2020 and investment portfolio on a non-GAAP basis by $3.3 billion from $4.4 billion at December 31, 2019 to $1.1 billion at September 30, 2020 through sales, directly or as a result of financing counterparty seizures.
Reduced financing arrangement balance on a GAAP basis by $3.0 billion from $3.2 billion at December 31, 2019 to $225.5 million at September 30, 2020 and financing arrangements on a non-GAAP basis by $3.1 billion from $3.5 billion at December 31, 2019 to $349.5 million at September 30, 2020.
Reduced the aggregate number of our financing counterparties from 30 as of December 31, 2019 to 6 as of September 30, 2020.
Reduced mark-to-market recourse financing by $3.2 billion from $3.5 billion at December 31, 2019 to $242.8 million at September 30, 2020.
Increased non mark-to-market non-recourse financing by $251.7 million from $224.3 million at December 31, 2019 to $476.0 million at September 30, 2020.
Reduced our GAAP leverage ratio and Economic Leverage Ratio from 4.1x and 4.1x at December 31, 2019, respectively, to 1.8x and 0.9x at September 30, 2020, respectively.
Unwound entire portfolio of pay-fixed, receive-variable interest rate swaps held directly and through investments in debt and equity of affiliates, recording net realized losses of $(65.4) million on a GAAP basis and $(67.9) million on a non-GAAP basis for the nine months ended September 30, 2020.
Did not declare quarterly dividends on our common or preferred stock for the three months ended June 30, 2020 and September 30, 2020. Refer to the "Dividends" section of this Item 2 for more detail on arrearages.

We executed the following during the three months ended September 30, 2020:

We purchased $250.1 million of Agency RMBS and $60.2 million of Re/Non-Performing Loans.
We participated in a non-rated securitization, in which Re/Non-Performing Loans with a fair value of $199.6 million were securitized, converting financing from recourse financing that was mark-to-market with respect to margin calls to non-recourse financing that is no longer mark-to-market with respect to margin calls.
We sold real estate securities for proceeds of $38.8 million, Re/Non-Performing Loans for proceeds of $6.2 million, Commercial Real Estate Loans for proceeds of $2.7 million and Excess MSRs for proceeds of $8.5 million.
We, alongside private funds under the management of Angelo Gordon, participated through our unconsolidated ownership interest in MATT in a rated Non-QM loan securitization, in which Non-QM loans with a fair value of $226.0 million were securitized. Certain senior tranches in the securitization were sold to third parties with us and private funds under the management of Angelo Gordon retaining the subordinate tranches, which had a fair value of $24.3 million as of September 30, 2020. We have a 44.6% interest in the retained subordinate tranches.
On September 24, 2020, we issued (i) 1,215,370 shares of common stock to the Manager in full satisfaction of the deferred base management fee of $3.8 million payable by us in respect to the first and second quarters of 2020 and (ii) 154,500 shares of common stock in satisfaction of $0.5 million of the base management fee payable by us in respect to the third quarter of 2020. The shares of Common Stock issued to the Manager were valued at $3.15 per share based on the midpoint of the estimated range of our book value per share as of August 31, 2020. The remaining third quarter management fee will be paid in the normal course of business.

Reconciliations of GAAP and non-GAAP financial measures appear below.

Subsequent to quarter end, given the improvement in our liquidity and financial position among other improvements, the Board of Directors approved, and we have declared and set apart for payment, all dividends on the Preferred Stock that were in arrears as well as the full dividends payable on the Preferred Stock for the fourth quarter of 2020. These preferred dividends will be paid on December 17, 2020, the next regular payment date, to Preferred Stock holders of record on November 30, 2020. We may from time to time continue to seek to acquire additional shares of Preferred Stock in privately negotiated transactions, open market purchases or exchange offers.

As previously reported in our Current Reports on Form 8-K, dated October 1, 2020 and October 5, 2020, on September 30, 2020 and October 2, 2020, respectively, we entered into privately negotiated exchange agreements (the "Exchange Transactions") with existing holders of our 8.25% Series A Cumulative Preferred Stock, par value $0.01 per share ("Series A Preferred"); 8.00% Series B Cumulative Preferred Stock, par value $0.01 per share ("Series B Preferred"); and 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share ("Series C Preferred" and, collectively with the other series, "Preferred Stock"). Pursuant to the Exchange Transactions, we issued to the transacting holders a total of 4,579,634 shares of our Common Stock, par value $0.01 per share, and paid a total of $8.0 million cash in exchange for a total of 210,662 shares of Series A Preferred, 404,187 shares of Series B Preferred, and 687,467 shares of Series C Preferred.
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We subsequently determined that, pursuant to the Articles Supplementary establishing the terms of the Preferred Stock, we were not permitted to pay cash as partial consideration to acquire such Preferred Stock unless full cumulative dividends on the Preferred Stock had been declared and paid or declared and a sum sufficient for the payment thereof set apart for payment covering all past dividend periods. Upon review and consideration of the Exchange Transactions, certain provisions of our charter, and the declaration and setting apart for payment of the Preferred Stock dividends payable on December 17, 2020, the Board decided to ratify the Exchange Transactions. Including the Common Stock issued in connection with the Exchange Transactions, we had 40,721,831 shares of our Common Stock outstanding as of November 4, 2020.

Our company
 
We are a hybrid mortgage REIT that opportunistically invests in a diversified risk adjusted portfolio of Agency RMBS and Credit Investments. Our Credit Investments include Residential Investments and Commercial Investments. We are a Maryland corporation and are externally managed by our Manager, a wholly-owned subsidiary of Angelo Gordon, pursuant to a management agreement. Our Manager, pursuant to a delegation agreement dated as of June 29, 2011, has delegated to Angelo Gordon the overall responsibility of its day-to-day duties and obligations arising under the management agreement. We conduct our operations to qualify and be taxed as a real estate investment trust ("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. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol MITT. Our 8.25% Series A Cumulative Redeemable Preferred Stock, our 8.00% Series B Cumulative Redeemable Preferred Stock, and our 8.000% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock trade on the NYSE under the symbols MITT PrA, MITT PrB, and MITT PrC, respectively.

Prior to December 31, 2019, we conducted our business through the following segments; (i) Securities and Loans and (ii) Single-Family Rental Properties. On November 15, 2019, we sold our portfolio of single-family rental properties and no longer separate our business into segments. We reclassified the operating results of our Single-Family Rental Properties segment to discontinued operations and excluded the income associated with the portfolio from continuing operations for all periods presented. See Note 14 to the "Notes to Consolidated Financial Statements (unaudited)" for additional financial information regarding our discontinued operations.

Compliance with Investment Company Act and REIT Tests

We intend to conduct our business so as to maintain our exempt status under, and not to become regulated as an investment company for purposes, of the Investment Company Act. Under Section 3(a)(1)(A) of the Investment Company Act, a company is an investment company if it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities. Under Section 3(a)(1)(C) of the Investment Company Act, a company is deemed to be an investment company if it is engaged, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire "investment securities" having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis (the "40% Test"). "Investment securities" do not include, among other things, U.S. government securities, and securities issued by majority-owned subsidiaries that (i) are not investment companies and (ii) are not relying on the exceptions from the definition of investment company provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act (the so called "private investment company" exemptions).

If we failed to comply with the 40% Test or another exemption under the Investment Company Act and became regulated as an investment company, our ability to, among other things, use leverage would be substantially reduced and, as a result, we would be unable to conduct our business as described in this Report. Accordingly, in order to maintain our exempt status, we monitor our subsidiaries' compliance with Section 3(c)(5)(C) of the Investment Company Act, which exempts from the definition of "investment company" entities primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. The staff of the Securities and Exchange Commission, or the SEC, generally requires an entity relying on Section 3(c)(5)(C) to invest at least 55% of its portfolio in "qualifying assets" and at least another 25% in additional qualifying assets or in "real estate-related" assets (with no more than 20% comprised of miscellaneous assets). As of September 30, 2020 and December 31, 2019, we determined that our subsidiaries maintained compliance with both the 55% Test and the 80% Test requirements.
 
We calculate that at least 75% of our assets were real estate assets, cash and cash items and government securities for the year ended December 31, 2019. We also calculate that a sufficient portion of our revenue qualifies for the 75% gross income test and for the 95% gross income test rules for the year ended December 31, 2019. Overall, we believe that we met the REIT income
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and asset tests. We also believe that we met all other REIT requirements, including the ownership of our stock and the distribution of our taxable income. Therefore, for the year ended December 31, 2019, we believe that we qualified as a REIT under the Code. See Part II. Item 1A. "Risk Factors" for additional information regarding the risks associated with the failure to comply with the REIT rules.

Our target investments
 
Our investment portfolio is comprised of Agency RMBS, Residential Investments and Commercial Investments, each of which is described in more detail below. We intend to continue to focus on our core portfolio strengths of residential and commercial credit assets. In periods where we have working capital in excess of our short-term liquidity needs, we may invest the excess in more liquid assets until such time as we are able to re-invest that capital in credit assets that meet our underwriting requirements. Our investment and capital allocation decisions depend on prevailing market conditions and compliance with Investment Company Act and REIT tests, among other factors, and may change over time in response to opportunities available in different economic and capital market environments.

Agency RMBS
 
Our investment portfolio includes residential mortgage-backed securities ("RMBS"). Certain of the assets that were in our RMBS portfolio had a guarantee of principal and interest by a U.S. government agency such as the Government National Mortgage Association, or Ginnie Mae, or by a government-sponsored entity such as the Federal National Mortgage Association, or Fannie Mae, or the Federal Home Loan Mortgage Corporation, or Freddie Mac (each, a "GSE"). We referred to these securities as Agency RMBS. Our Agency RMBS portfolio has historically included:
 
Fixed rate securities (held as mortgage pass-through securities);
Sequential pay fixed rate collateralized mortgage obligations ("CMOs");
CMOs are structured debt instruments representing interests in specified pools of mortgage loans subdivided into multiple classes, or tranches, of securities, with each tranche having different maturities or risk profiles.
Inverse Interest Only securities (CMOs where the holder is entitled only to the interest payments made on the mortgages underlying certain mortgage backed securities ("MBS") whose coupon has an inverse relationship to its benchmark rate, such as LIBOR);
Interest Only securities (CMOs where the holder is entitled only to the interest payments made on the mortgages underlying certain MBS "interest-only strips");
Certain Agency RMBS for which the underlying collateral is not identified until shortly (generally two days) before the purchase or sale settlement date ("TBAs"); and
Excess mortgage servicing rights ("Excess MSRs") whose underlying collateral is securitized in a trust held by a U.S. government agency or GSE.
Excess MSRs are interests in an MSR, representing a portion of the interest payment collected from a pool of mortgage loans, net of a basic servicing fee paid to the mortgage servicer. An MSR provides a mortgage servicer with the right to service a mortgage loan or a pool of mortgages in exchange for a portion of the interest payments made on the mortgage or the underlying mortgages. An MSR is made up of two components: a basic servicing fee and an Excess MSR. The basic servicing fee is the compensation received by the mortgage servicer for the performance of its servicing duties.

Residential Investments
 
The Residential Investments that we own include RMBS that are not issued or guaranteed by Ginnie Mae or a GSE or that are collateralized by non-U.S. mortgages, which we collectively refer to as our Non-Agency RMBS. The mortgage loan collateral for residential Non-Agency RMBS consists of residential mortgage loans that do not generally conform to underwriting guidelines issued by U.S. government agencies or U.S. government-sponsored entities, or are non-U.S. mortgages. Our Non-Agency RMBS include investment grade and non-investment grade fixed and floating-rate securities.

We categorize certain of our Residential Investments by weighted average credit score at origination:
 
Prime (weighted average credit score above 700)
Alt-A/Subprime
Alt-A (weighted average credit score between 700 and 620); and
Subprime (weighted average credit score below 620).
 
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The Residential Investments that we do not categorize by weighted average credit score at origination include our:
 
CRTs (described below);
Non-U.S. RMBS;
Non-Agency RMBS which are collateralized by non-U.S. mortgages.
Interest Only securities (Non-Agency RMBS backed by interest-only strips);
Excess MSRs whose underlying collateral is securitized in a trust not held by a U.S. government agency or GSE;
Excess MSRs are grouped within "Interest Only and Excess MSR" throughout Part I, Item 2 of this Report and are grouped within Excess mortgage servicing rights or Excess MSRs in the Notes to the Consolidated Financial Statements (Unaudited) included in Part I, Item 1 of this Report;
Re/Non-Performing Loans (described below);
Non-QM Loans (described below); and
Land Related Financing (described below).

Credit Risk Transfer securities ("CRTs") include:
 
Unguaranteed and unsecured mezzanine, junior mezzanine and first loss securities issued either by GSEs or issued by other third-party institutions to transfer their exposure to mortgage default risk to private investors. These securities reference a specific pool of newly originated single family mortgages from a specified time period (typically around the time of origination). The risk of loss on the reference pool of mortgages is transferred to investors who may experience losses when adverse credit events such as defaults, liquidations or delinquencies occur in the underlying mortgages. Owners of these securities generally receive an uncapped floating interest rate equal to a predetermined spread over one-month LIBOR.

Re/Non-Performing Loans include:
 
RPLs or NPLs in securitized form that are issued by an entity in which we own an equity interest and that we hold alongside other private funds under the management of Angelo Gordon. The securitizations typically take the form of equity and various classes of notes. These investments are included in the "RMBS" and "Investments in debt and equity of affiliates" line items on our consolidated balance sheets.
RPLs or NPLs that we hold through interests in certain consolidated trusts. These investments are secured by residential real property, including prime, Alt-A, and subprime mortgage loans, and are included in the "Residential mortgage loans, at fair value" line item on our consolidated balance sheets.

Non-QM Loans include:

Residential mortgage loans that do not qualify for the Consumer Finance Protection Bureau's safe harbor provision for "qualifying mortgages," or "QM," that we hold alongside other private funds under the management of Angelo Gordon. These investments are held in one of our unconsolidated subsidiaries, Mortgage Acquisition Trust I LLC ("MATT") (see the "Contractual obligations" section of this Item 2 for more detail), and are included in the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets.
Non-QM loans in securitized form that are issued by MATT. The securitizations typically take the form of various classes of notes. These investments are included in the "Investments in debt and equity of affiliates" line item on our consolidated balance sheets.

Land Related Financing includes:

First mortgage loans we originate to third party land developers and home builders for the acquisition and horizontal development of land. These loans may be held through our unconsolidated subsidiaries or in securitized form. These loans are included either in the "Investments in debt and equity of affiliates" or in the "RMBS" line items on our consolidated balance sheets.

Commercial Investments
 
We also invest in Commercial Investments. Our Commercial Investments include:

Commercial mortgage-backed securities ("CMBS");
Interest Only securities (CMBS backed by interest-only strips);
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Commercial real estate loans secured by commercial real property, including first mortgages, mezzanine loans, preferred equity, first or second lien loans, subordinate interests in first mortgages, bridge loans to be used in the acquisition, construction or redevelopment of a property and mezzanine financing secured by interests in commercial real estate; and
Freddie Mac K-Series (described below).

CMBS include:

Fixed and floating-rate CMBS, including investment grade and non-investment grade classes. CMBS are secured by, or evidence ownership interest in, a single commercial mortgage loan or a pool of commercial mortgage loans.
Additionally, our CMBS include:
CMBS secured by multiple commercial mortgage loans or a pool of commercial loans to multiple borrowers ("Conduit"); and
CMBS secured by a single commercial mortgage loan which is backed by a single asset (usually a large commercial property) or by a pool of cross collateralized mortgage obligations to a single borrower or related borrowers ("Single-Asset/Single-Borrower").

Freddie Mac K-Series ("K-Series") include:
 
CMBS, Interest-Only securities and CMBS principal-only securities which are regularly-issued by Freddie Mac as structured pass-through securities backed by multifamily mortgage loans. These K-Series feature a wide range of investor options which include guaranteed senior and interest-only bonds as well as unguaranteed senior, mezzanine, subordinate and interest-only bonds. Our K-Series portfolio includes unguaranteed senior, mezzanine, subordinate and interest-only bonds. Throughout Item 2, we categorize our Freddie Mac K-Series interest-only bonds as part of our Interest-Only securities.
 
Investment classification
 
Throughout this Report, (1) we use the terms "credit portfolio" and "credit investments" to refer to our Residential Investments, Commercial Investments, and, if applicable, ABS, inclusive of investments held within affiliated entities but exclusive of AG Arc (discussed below); (2) we refer to our Re/Non-Performing Loans (exclusive of our RPLs or NPLs in securitized form that we purchase from an affiliate or affiliates of the Manager), Non-QM Loans (exclusive of those in securitized form), Land Related Financing (exclusive of loans in securitized form), and commercial real estate loans, collectively, as our "loans"; (3) we use the term "credit securities" to refer to our credit portfolio, excluding Excess MSRs and loans; and (4) we use the term "real estate securities" or "securities" to refer to our Agency RMBS portfolio, exclusive of Excess MSRs, and our credit securities. Our "investment portfolio" refers to our combined Agency RMBS portfolio and credit portfolio and encompasses all of the investments described above.
 
We also use the term "GAAP investment portfolio" which consists of (i) our Agency RMBS, exclusive of (x) TBAs and (y) any investments classified as "Other assets" on our consolidated balance sheets (our "GAAP Agency RMBS portfolio"), and (ii) our
credit portfolio, exclusive of (x) all investments held within affiliated entities and (y) any investments classified as "Other assets" on our consolidated balance sheets (our "GAAP credit portfolio"). See Note 2 to the "Notes to Consolidated Financial Statements (unaudited)" for a discussion of our investments held within affiliated entities. For a reconciliation of our investment portfolio to our GAAP investment portfolio, see the GAAP Investment Portfolio Reconciliation Table below.
 
This presentation of our investment portfolio is consistent with how our management team evaluates our business, and we believe this presentation, when considered with the GAAP presentation, provides supplemental information useful for investors in evaluating our investment portfolio and financial condition.
 
Arc Home LLC

We, alongside private funds under the management of Angelo Gordon, through AG Arc LLC, one of our indirect subsidiaries ("AG Arc"), formed Arc Home LLC ("Arc Home"). Arc Home, through its wholly-owned subsidiary, originates conforming, Government, Jumbo, Non-QM and other non-conforming residential mortgage loans, retains the mortgage servicing rights associated with the loans that it originates, and purchases additional mortgage servicing rights from third-party sellers.

Discontinued Operations

On November 15, 2019, we sold our portfolio of single-family rental properties to a third party. We reclassified the operating results of our single-family rental properties segment to discontinued operations and excluded the income associated with the
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portfolio from continuing operations for all periods presented. See Note 14 to the "Notes to Consolidated Financial Statements (unaudited)" for additional financial information regarding our discontinued operations.
 
Market conditions

During the third quarter of 2020, the financial markets continued their recovery from the significant dislocation caused by the COVID-19 outbreak and the resultant economic shutdown across much of the U.S. economy. We believe several factors have contributed to this recovery including support from the U.S. Federal Reserve, capital flows into fixed income assets and generally positive economic data. The Federal Reserve has expressed continued commitment to the broad array of programs it implemented in the immediate wake of the COVID-19 crisis, which are all designed to support the financial markets, including unlimited purchases of Agency RMBS and U.S. Treasuries, as well as purchases in certain segments of the corporate credit market. See "Recent government activity" below. The Federal Reserve has also continued to signal that it intends to maintain low interest rates for the foreseeable future. Additionally, bond fund inflows throughout the quarter have provided further technical support to the credit markets.

Spreads for the mortgage backed sectors extended their rebound from the second quarter. At the end of September, spreads had tightened further but nonetheless remain wide compared to pre-COVID levels, which we believe is due to the ongoing uncertainty regarding the sustainability of regional re-opening plans, fears regarding a potential second or third COVID-19 wave and the continued uncertainty regarding additional federal stimulus.

Agency MBS continued along its path to recovering from the spread widening experienced in the first quarter, with generic current coupon MBS spreads versus the 10-year Treasury rate ending the quarter 8 basis points tighter than pre-COVID-19 spread levels. Specified pools have also continued to perform well as demand for protection from refinancing-driven prepayments remain elevated given historically low mortgage rates. Federal Reserve buying, strong bank deposit growth, broad demand for yield and declining interest rate volatility continue to result in a supportive backdrop for valuations despite elevated gross issuance.

In the RMBS sectors, including CRT, the spread recovery continued up and down the capital structure as better-than-expected data, liquidity and relatively broad-based risk-on sentiment continued to support the rebound in spreads. Despite the continued recovery, spreads for most mortgage sub-sectors continue to remain wide of pre-COVID levels as uncertainty hangs over the market, reflecting a wide range of potential outcomes. While mortgage payment forbearances have been declining, uncertainty around additional consumer relief poses risks to the mortgage sector’s performance. Collateral fundamentals have largely been within or better than the market’s initial expectations, supporting the ongoing spread rally in the RMBS market. The housing market continues to appear to be heading toward a "V-Shaped" recovery, due to strong demand for homes across the U.S, and the home price outlook continues to be favorable into the foreseeable future.

For the third quarter, new-issue RMBS activity was sharply higher at $26.8 billion, nearly doubling the second quarter activity. This supply was met with strong demand with subscription levels often multiples of the offered amounts. However, RMBS issuance is still down about 17% compared to levels a year ago, in part due to the lull in Non-QM activity following COVID-19, but we expect it to rise in the coming quarters.

The CMBS markets generally followed a path similar to that observed in the RMBS market with spreads tightening quarter-over-quarter and investor demand providing support to the new issue market, AAA conduit CMBS spreads, which traded as wide as swap rates plus 3.25% in the first quarter, ending the quarter at approximately swap rates plus 0.95%, roughly in line with pre-COVID-19 levels. Further down in the capital structure, pricing remains wide of pre-COVID levels with a considerable amount of dispersion among deals. During the quarter seven private label conduit deals totaling $5.1 billion and 11 Single-Asset/Single-Borrower deals totaling $7.6 billion priced in the U.S., resulting in year-to-date volume of $42.7 billion, a 27% decline versus the first nine months of 2019.

During the third quarter the percentage of CMBS loans categorized as 30 days or more delinquent declined from 10.32% to 8.92%. Over that same period, the percentage of loans transferred to the special servicer shows a nearly opposite trend, growing from 8.28% up to 10.48%. The reason for this seeming anomaly is that borrowers who reach a forbearance agreement are typically reclassified as current even if the borrower has been granted temporary interest payment relief or is allowed to tap excess reserves to remain current on their mortgage payments. Unsurprisingly, loans secured by hotel properties are showing the most distress with 26.0% of those loans specially serviced at the end of September, followed by retail, with 18.3% of all CMBS loans secured by retail properties in special servicing at the end of the quarter.

In light of the pervasive uncertainties of the COVID-19 pandemic for the U.S. and global economy, there can be no assurance that the trends and conditions described above will not change in a manner materially adverse to the mortgage REIT industry.
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Recent government activity

The Federal Reserve has taken a number of actions to stabilize markets as a result of the impact of the COVID-19 pandemic. Since late 2019, the Federal Reserve has been conducting large scale overnight repo operations to address disruptions in the U.S. Treasury, Agency debt and Agency RMBS financing markets and has substantially increased these operations to address funding disruptions resulting from the economic crisis and market dislocations resulting from the COVID-19 pandemic. On March 15, 2020, the Federal Reserve announced a $700 billion asset purchase program to provide liquidity to the U.S. Treasury and Agency RMBS markets. Specifically, the Federal Reserve announced that it would purchase at least $500 billion of U.S. Treasuries and at least $200 billion of Agency RMBS. The Federal Reserve also lowered the federal funds rate by 100 basis points to a range of 0.0% - 0.25%, after having already lowered the federal funds rate by 50 basis points on March 3, 2020.

The markets for U.S. Treasuries, MBS and other mortgage and fixed income markets experienced severe dislocations in March as a result of the COVID-19 pandemic. To address these issues in the fixed income and funding markets, on March 23, 2020, the Federal Reserve announced a program to acquire U.S. Treasuries and Agency RMBS in the amounts needed to support smooth market functioning. Since that date, the Federal Reserve and the Federal Housing Finance Agency (“FHFA”) have taken various other steps to support certain other fixed income markets, to support mortgage servicers and to implement various portions of the CARES Act. The FHFA instructed the GSEs on how to handle servicer advances for loans that back Agency RMBS that enter into forbearance, which limits prepayments during the forbearance period that could have resulted otherwise. Further, the FHFA announced a loan payment deferment plan for Agency multi-family borrowers facing hardship from revenue losses caused by COVID-19, with the condition that these borrowers suspend all evictions for renters unable to pay rent due to the impact of COVID-19.

On March 27, 2020, the CARES Act was signed into law to provide many forms of direct support to individuals and small businesses in order to stem the steep decline in economic activity resulting from the COVID-19 pandemic. The over $2 trillion relief bill, among other things, provided for direct payments to each American making up to $75,000 a year, increased unemployment benefits for up to four months (on top of state benefits), funding to hospitals and health care providers, loans and investments to businesses, states and municipalities and grants to the airline industry. On April 24, 2020, President Trump signed an additional funding bill into law that provided an additional $484 billion of funding to individuals, small businesses, hospitals, health care providers and additional coronavirus testing efforts. In addition, in response to the economic impact of the COVID-19 pandemic, governors of several states issued executive orders prohibiting evictions and foreclosures for specified periods of time, and many courts enacted emergency rules delaying hearings related to evictions or foreclosures.

One additional provision of the CARES Act provides up to 360 days of forbearance relief from mortgage loan payments for borrowers with federally backed (e.g. Fannie Mae or Freddie Mac) mortgages who experience financial hardship related to the pandemic. Combined with expected widespread unemployment stemming from the economic slowdown caused by the pandemic, residential mortgage assets came under extreme spread pressure. The CARES Act also prohibits foreclosures for 60 days and evictions by landlords for 120 days after its enactment. On June 17, 2020, the FHFA announced that Fannie Mae and Freddie Mac will extend their single-family moratorium on foreclosure and evictions until at least August 31, 2020. On August 27, 2020, the FHFA announced an extension of the single-family moratorium on foreclosures and evictions until December 31, 2020. These legislative and agency actions have created uncertainty around the ultimate effects on delinquencies, defaults, prepayment speeds, low interest rates and home price appreciation.

The scope and nature of any future actions the Federal Reserve and other governmental authorities will ultimately undertake are unknown and will continue to evolve, especially in light of the COVID-19 pandemic and the result of the presidential and Congressional elections in the United States. We cannot predict how, in the long term, these and other actions, as well as the negative impacts from the ongoing COVID-19 pandemic, will affect the efficiency, liquidity and stability of the financial, credit and mortgage markets, and thus, our business. Greater uncertainty frequently leads to wider asset spreads or lower prices and higher hedging costs.

The current regulatory environment may be impacted by future legislative developments, such as changes to Fannie Mae and Freddie Mac, including their continued existence and their roles in the market. The impact of such potential reforms on our operations remains unclear.
 
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Results of operations
 
Our operating results can be affected by a number of factors and primarily depend on the size and composition of our investment portfolio, the level of our net interest income, the fair value of our assets and the supply of, and demand for, our target assets in the marketplace, among other things, which can be impacted by unanticipated credit events, such as defaults, liquidations or delinquencies, experienced by borrowers whose mortgage loans are included in our investment portfolio and other unanticipated events in our markets. Our primary source of net income or loss available to common stockholders is our net interest income, less our cost of hedging, which represents the difference between the interest earned on our investment portfolio and the costs of financing and hedging our investment portfolio, as well as any income or losses from our equity investments in affiliates. Prior to the sale of our 30 Year Fixed Rate Agency RMBS portfolio in March 2020, our net interest income varied primarily as a result of changes in market interest rates, prepayment speeds, as measured by the Constant Prepayment Rate ("CPR") on the Agency RMBS in our investment portfolio, and our funding and hedging costs. As a result of the global COVID-19 pandemic and our disposition of assets to preserve liquidity, we incurred large realized losses in 2020 and a sharp decline in book value. Additionally, we believe the significant reduction in the size of our investment portfolio will materially limit our earnings going forward.
 
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Three Months Ended September 30, 2020 compared to the Three Months Ended September 30, 2019

The table below presents certain information from our consolidated statements of operations for the three months ended September 30, 2020 and September 30, 2019 (in thousands):
 
Three Months Ended
September 30, 2020September 30, 2019Increase/(Decrease)
Statement of Operations Data:   
Net Interest Income   
Interest income$9,717 $40,735 $(31,018)
Interest expense4,357 21,887 (17,530)
Total Net Interest Income5,360 18,848 (13,488)
Other Income/(Loss)  
Net realized gain/(loss)(14,431)(16,132)1,701 
Net interest component of interest rate swaps(13)2,179 (2,192)
Unrealized gain/(loss) on real estate securities and loans, net19,495 11,726 7,769 
Unrealized gain/(loss) on derivative and other instruments, net1,970 3,258 (1,288)
Foreign currency gain/(loss), net(10)667 (677)
Other income— 210 (210)
Total Other Income/(Loss)7,011 1,908 5,103 
Expenses  
Management fee to affiliate1,698 2,346 (648)
Other operating expenses5,929 6,062 (133)
Restructuring related expenses1,345 — 1,345 
Equity based compensation to affiliate— 76 (76)
Excise tax— 186 (186)
Servicing fees540 416 124 
Total Expenses9,512 9,086 426 
Income/(loss) before equity in earnings/(loss) from affiliates2,859 11,670 (8,811)
Equity in earnings/(loss) from affiliates17,187 (564)17,751 
Net Income/(Loss) from Continuing Operations20,046 11,106 8,940 
Net Income/(Loss) from Discontinued Operations— (1,057)1,057 
Net Income/(Loss)20,046 10,049 9,997 
Gain on Exchange Offer, net539 — 539 
Dividends on preferred stock(5,563)(3,720)(1,843)
Net Income/(Loss) Available to Common Stockholders$15,022 $6,329 $8,693 

Interest income

Interest income is calculated using the effective interest method for our GAAP investment portfolio and calculated based on the actual coupon rate and the outstanding principal balance on our U.S. Treasury securities, if any.
 
Interest income decreased from September 30, 2019 to September 30, 2020 primarily due to the significant reduction in the size of our investment portfolio as a result of the global COVID-19 pandemic. The weighted average cost of our GAAP investment portfolio and U.S. Treasury securities, if any, decreased by $2.7 billion from $3.4 billion for the three months ended September
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30, 2019 to $744.7 million for the three months ended September 30, 2020. We expect our interest income going forward to be materially lower compared to comparable prior periods as a result of the changes in our investment portfolio as set forth in the tables of the "Investment activities" section below as a result of the COVID-19 pandemic.

Interest expense

Interest expense is calculated based on the actual financing rate and the outstanding financing balance of our GAAP investment portfolio and U.S. Treasury securities, if any. 

Interest expense decreased from September 30, 2019 to September 30, 2020 primarily due to the significant reduction in the size of our investment portfolio and related financing as a result of the global COVID-19 pandemic. The weighted average financing balance on our GAAP investment portfolio and U.S. Treasury securities, if any, during the period decreased by $2.6 billion from $2.9 billion for the three months ended September 30, 2019 to $255.2 million for the three months ended September 30, 2020. Refer to the "Financing activities" section below for a discussion of the material changes in our cost of funds. We do not expect our interest expense, set forth in the consolidated statements of operations table above, to be indicative of our future interest expense due to the changes in our financing arrangements described in the "Financing activities" section below.

Net realized gain/(loss)
 
Net realized gain/(loss) represents the net gain or loss recognized on any (i) sales and seizures, if any, of real estate securities out of our GAAP investment portfolio, including any associated deficiencies recognized, if any, (ii) sales of loans out of our GAAP investment portfolio, transfers of loans from our GAAP investment portfolio to real estate owned included in Other assets, and sales of Other assets, (iii) settlement of derivatives and other instruments, and (iv) prior to the adoption of ASU 2016-13, other-than-temporary-impairment ("OTTI") charges recorded during the period. See Note 2, Note 3, Note 4 and Note 5 to the "Notes to Consolidated Financial Statements (unaudited)" for further discussion on OTTI. The following table presents a summary of Net realized gain/(loss) for the three months ended September 30, 2020 and September 30, 2019 (in thousands):
 
Three Months Ended
 September 30, 2020September 30, 2019
Sale of real estate securities$(8,477)$4,589 
Sale of loans and loans transferred to or sold from Other assets(4,795)122 
Settlement of derivatives and other instruments(1,159)(17,218)
OTTI— (3,625)
Total Net realized gain/(loss)$(14,431)$(16,132)

Net interest component of interest rate swaps

Net interest component of interest rate swaps represents the net interest income received or expense paid on our interest rate swaps.
 
Net interest component of interest rate swaps decreased from September 30, 2019 to September 30, 2020, primarily due to the significant reduction in the size of our investment portfolio and related financing as a result of the global COVID-19 pandemic. For the three months ended September 30, 2020 and September 30, 2019, the net interest component of interest rate swaps was $(13.0) thousand and $2.2 million, respectively. Refer to the "Hedging activities" section below for a discussion of material changes in our interest rate swap portfolio.

Unrealized gain/(loss) on real estate securities and loans, net

During the third quarter of 2020, the Company recognized $19.5 million in net unrealized gains comprised of unrealized gains on securities and unrealized gains on loans of $9.3 million and $10.2 million, respectively.
 
Unrealized gain/(loss) on derivative and other instruments, net
 
For the three months ended September 30, 2020, the gains of $2.0 million were comprised of unrealized gains on Excess MSRs and derivatives as a result of the reversal of unrealized losses previously recorded on these assets in connection with the sale or expiration of these positions, offset by unrealized losses on securitized debt.
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Foreign currency gain/(loss), net

Foreign currency gain/(loss), net pertains to the effects of remeasuring the monetary assets and liabilities of our foreign investments into U.S. dollars using foreign currency exchange rates at the end of the reporting period. Refer to Note 2 of the "Notes to the Consolidated Financial Statements" for details on what specifically is included in the "Foreign currency gain/(loss), net" line item.

Other income
 
Other income currently includes certain fees we receive on our loans and CMBS portfolios. Other income decreased from September 30, 2019 to September 30, 2020 due to fees received on our commercial loans during the three months ended September 30, 2019 that we did not receive during the three months ended September 30, 2020.

Management fee to affiliate
 
Our management fee is based upon a percentage of our Stockholders’ Equity. See the "Contractual obligations" section of this Item 2 for further detail on the calculation of our management fee and for the definition of Stockholders’ Equity. Management fees decreased from September 30, 2019 to September 30, 2020 primarily due to a decrease in our Stockholders' Equity as calculated pursuant to our Management Agreement.

On April 6, 2020, we executed an amendment to our Management Agreement pursuant to which our Manager agreed to defer our payment of the management fee and reimbursement of expenses beginning with the first quarter of 2020 through September 30, 2020, or such other time as we and the Manager agree. As of September 30, 2020, we paid all deferred management fees related to prior quarters and settled a portion of management fees related to the third quarter through the issuance of common stock to the Manager. The remaining third quarter expense will be paid in the normal course of business. See Note 11 to the "Notes to Consolidated Financial Statements (unaudited)" and the "Liquidity and capital resources" section of this Item 2 below for a further discussion on management fees.

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Other operating expenses
 
These amounts are primarily comprised of professional fees, directors’ and officers’ ("D&O") insurance and directors’ fees, as well as certain expenses reimbursable to the Manager. We are required to reimburse our Manager or its affiliates for operating expenses which are incurred by our Manager or its affiliates on our behalf, including certain salary expenses and other expenses relating to legal, accounting, due diligence, and other services. Refer to the "Contractual obligations" section below for more detail on certain expenses reimbursable to the Manager. The following table presents a summary of expenses within Other operating expenses broken out between non-investment related expenses and investment related expenses for the three months ended September 30, 2020 and September 30, 2019 (in thousands):
Three Months Ended
 September 30, 2020September 30, 2019
Non Investment Related Expenses
Affiliate expense reimbursement - Operating expenses$1,697 $1,423 
Professional fees729 528 
D&O insurance321 174 
Directors' compensation138 222 
Other118 308 
Total Corporate Expenses3,003 2,655 
Investment Related Expenses
Affiliate expense reimbursement - Deal related expenses643 145 
Professional fees47 47 
Residential mortgage loan related expenses597 298 
Transaction related expenses and deal related performance fees (1)1,590 2,793 
Other49 124 
Total Investment Expenses2,926 3,407 
Total Other operating expenses$5,929 $6,062 

(1)For the three months ended September 30, 2020 and September 30, 2019, total transaction related expenses and deal related performance fees were $2.2 million and $2.8 million, respectively. For the three months ended September 30, 2020, the $2.2 million includes $0.6 million of deferred financing costs that are included within interest expense. For the three months ended September 30, 2019, the $2.8 million excludes $25.1 thousand deferred financing costs that are included within interest expense.
 
Restructuring related expenses

Restructuring related expenses relate to legal and consulting fees primarily incurred in connection with restructuring our debt and capital structure.

Equity based compensation to affiliate
 
Equity based compensation to affiliate represents the amortization of the fair value of our restricted stock units granted to our Manager, less the present value of dividends expected to be paid on the underlying shares through the requisite period.
 
For the three months ended September 30, 2020 and September 30, 2019, our equity based compensation to affiliate decreased as a result of the remaining restricted stock units vesting during 2020.

Excise tax
 
Excise tax represents a four percent tax on the required amount of any ordinary income and net capital gains not distributed during the year. The quarterly expense is calculated in accordance with applicable tax regulations. For the three months ended September 30, 2020, our excise tax decreased primarily due to losses associated with COVID-19.

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Servicing fees
 
We incur servicing fee expenses in connection with the servicing of our Residential mortgage loans. As of September 30, 2020 and September 30, 2019, we owned Residential mortgage loans with a fair value of $429.6 million and $379.4 million, respectively. This increase in the fair value of the Residential mortgage loans was a result of net purchases of Residential mortgage loan pools in 2019 and 2020.
 
For the three months ended September 30, 2020 and September 30, 2019, our servicing fees increased primarily due to our purchases of residential mortgage loans described above.

Equity in earnings/(loss) from affiliates
 
Equity in earnings/(loss) from affiliates represents our share of earnings and profits of investments held within affiliated entities. A majority of these investments are comprised of real estate securities, loans and our investment in AG Arc. The increase from the quarter ended September 30, 2019 to the quarter ended September 30, 2020 primarily pertains to our share of the income at Arc Home coupled with unrealized gains on investments held within affiliated entities. During the current quarter, we recognized $13.4 million of equity in earnings from affiliates related to our investment in AG Arc. The increase in earnings within AG Arc was the result of elevated origination volumes and the related lending revenues experienced at Arc Home.

Discontinued operations

On November 15, 2019, we sold our portfolio of single-family rental properties to a third party at a price of approximately $137 million. We recognized a gain of $0.2 million as a result of the transaction. We reclassified the operating results of the single-family rental properties segment to discontinued operations and excluded the income from continuing operations for all periods presented.

Gain on Exchange Offer, net

We completed an exchange offer (the "Exchange Offer") during the third quarter of 2020. As a result of the Exchange Offer, we exchanged a total of 42,820 shares of Series A Preferred Stock, 31,085 shares of Series B Preferred Stock and 29,355 shares of Series C Preferred Stock for a total of 516,300 shares of common stock. We recognized a gain of $0.5 million in connection with the Exchange Offer, which is net of related expenses. Refer to the "Liquidity and capital resources" section below for more information on the Exchange Offer.


 
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Nine Months Ended September 30, 2020 compared to the Nine Months Ended September 30, 2019

The table below presents certain information from our consolidated statements of operations for the nine months ended September 30, 2020 and September 30, 2019 (in thousands):
 
Nine Months Ended
September 30, 2020September 30, 2019Increase/(Decrease)
Statement of Operations Data:   
Net Interest Income   
Interest income$63,354 $123,126 $(59,772)
Interest expense32,941 67,011 (34,070)
Total Net Interest Income30,413 56,115 (25,702)
Other Income/(Loss)  
Net realized gain/(loss)(257,183)(64,225)(192,958)
Net interest component of interest rate swaps910 5,760 (4,850)
Unrealized gain/(loss) on real estate securities and loans, net(184,770)101,644 (286,414)
Unrealized gain/(loss) on derivative and other instruments, net(1,797)(17,667)15,870 
Foreign currency gain/(loss), net1,483 667 816 
Other income840 (836)
Total Other Income/(Loss)(441,353)27,019 (468,372)
Expenses  
Management fee to affiliate5,525 7,091 (1,566)