Invesco Mortgage Capital Inc. Reports First Quarter 2016 Financial Results

ATLANTA, May 9, 2016 /PRNewswire/ -- 

Highlights

• Q1 2016 core earnings* of $49.9 million, core earnings per common share* of $0.44, and a common stock dividend of $0.40 per share
• Q1 2016 book value per diluted common share** of $16.53 vs. $17.14 at Q4 2015
• Economic return*** for the three months ended March 31, 2016 of (1.2%)
• Q1 2016 comprehensive loss attributable to common stockholders was $33.9 million or ($0.30) per common share vs. $40.6 million or ($0.35) per common share for Q4 2015
• Q1 2016 net loss attributable to common stockholders of $157.3 million or ($1.39) basic and diluted earnings per common share reflecting a $238.5 million net loss on interest rate hedges
• Funded four commercial loans totaling $70 million, and bought back 2.1 million shares of common stock for $25 million in Q1 2016

Invesco Mortgage Capital Inc. IVR (the "Company") today announced financial results for the quarter ended March 31, 2016, reporting core earnings* of $0.44 per common share and book value per diluted common share** of $16.53.

Significant market volatility driven by global growth concerns caused credit spreads to widen and interest rates to fall during the first quarter of 2016. The Company was well served to be diversified in the environment.  "Our equity is allocated 36% to commercial credit, 34% to Agency RMBS and 30% to residential credit as of March 31, 2016.  We believe the Company is positioned well by owning a collection of high quality assets with attractive yields.  We used available cash flow during the quarter to fund four commercial real estate loans totaling $70 million and to repurchase 2.1 million shares of common stock," said Richard King, President and CEO.

"Our asset quality continues to improve as the loans underlying our assets continue to season and benefit from growing borrower equity due to property price appreciation," said Mr. King. Management remains committed to employing capital in strategies that seek to optimize risk-adjusted returns to our shareholders. "The combination of improving asset quality, shortening maturities, and lower leverage should continue to reduce book value volatility and improve economic return***," added Mr. King.  

 

Key performance indicators for the quarters ended March 31, 2016 and December 31, 2015 are summarized in the table below.

 

 

Financial Summary

During the first quarter of 2016, the Company generated $49.9 million in core earnings, an increase of $0.6 million or 1.2% from the fourth quarter of 2015. Net loss attributable to common stockholders for the first quarter of 2016 was $157.3 million, compared to net income attributable to common stockholders of $103.2 million for the fourth quarter of 2015.  The first quarter of 2016 net loss attributable to common stockholders was primarily due to a $238.5 million net loss on derivative instruments versus a $68.3 million net gain on derivative instruments in the fourth quarter of 2015. During the first quarter of 2016, the Company incurred unrealized losses on derivative instruments of $166.5 million due to the fall in rates, which was the primary driver of the net loss. Also contributing to the net loss, the Company realized losses on derivative instruments of $43.0 million as it repositioned its hedging portfolio in response to lower market expectations of an increase in the Federal funds interest rate later this year. Book value per diluted common share for the first quarter of 2016 decreased to $16.53 primarily due to realized and unrealized losses associated with derivative instruments.  

During the fourth quarter of 2015, the Company completed the sale of certain beneficial interests issued by its consolidated residential loan securitizations and deconsolidated the residential securitizations. Average assets, average borrowings, interest income and interest expense were significantly lower in the first quarter of 2016 relative to the fourth quarter of 2015 due to the Company's sale in residential securitizations in the fourth quarter of 2015. Average earning assets decreased to $15.4 billion for the quarter ended March 31, 2016 compared to $19.0 billion for the quarter ended December 31, 2015, and interest income decreased to $126.0 million compared to $154.5 million during the quarter ended December 31, 2015.  The decrease in average earning assets and interest income was primarily due to the deconsolidation of the residential securitizations which held $2.6 billion of average earning residential loan assets with an average yield of 3.52% and earned $22.9 million of interest income in the fourth quarter of 2015.  In addition, the Company's average mortgage-backed and credit risk transfer securities balance decreased $1.0 billion from the fourth quarter of 2015 primarily due to continued paydowns and sales of securities. During the first quarter of 2016, the Company utilized a portion of the proceeds from paydowns and sales of investments to invest $70 million in four new commercial real estate loans and buy back $25 million of common stock.

Average portfolio yield rose to 3.26% for the first quarter of 2016 from 3.25% during the fourth quarter of 2015.  Average portfolio yield in the fourth quarter of 2015 included average yield from residential loans of 3.52%. During the first quarter of 2016, the Company sold lower yielding assets and reinvested proceeds primarily into commercial real estate loans and stock repurchases.

For the quarter ended March 31, 2016, the Company had average borrowed funds of $13.5 billion compared to $17.0 billion for the fourth quarter of 2015 and interest expense of $50.1 million compared to $66.0 million during the quarter ended December 31, 2015. Average borrowed funds and interest expense decreased primarily due to the deconsolidation of the residential securitizations which held $2.3 billion of average asset-backed securities with an average borrowing rate of 3.03% and incurred $17.1 million of interest expense in the fourth quarter of 2015. In addition, average borrowings for the Company's mortgage-backed and credit risk transfer securities portfolio decreased $1.1 billion from the fourth quarter of 2015 primarily due to continued paydowns, and sales of securities.

The Company's cost of funds was 1.48% and 1.56% for the first quarter of 2016 and fourth quarter of 2015, respectively.  Cost of funds would have been lower in the fourth quarter of 2015 excluding the consolidated residential loan securitizations.  The Company's cost of funds for borrowings to finance its mortgage-backed and credit risk transfer securities rose during the quarter due to the impact of the December increase in the federal funds interest rate. 

In the first quarter, the Company's leverage decreased approximately 0.2 times due to a reduction in repurchase agreement balances as the Company used cash from sales of securities, principal prepayments and maturities to reduce borrowings as well as repurchase stock rather than reinvest in target assets.

Total expenses for the first quarter of 2016 were approximately $11.5 million, compared to $13.1 million for the fourth quarter of 2015. The fourth quarter of 2015 included $1.7 million of securitization trust expenses associated with direct operating costs of the Company's residential securitizations.  Management fees totaled $9.5 million in the first quarter, down from $9.8 million in the fourth quarter of 2015 primarily due to the repurchase of $75.6 million of common stock in the fourth quarter of 2015. General and administrative expenses were $2.0 million in the first quarter of 2016, an increase of $0.5 million from the fourth quarter of 2015.  General and administrative expenses increased primarily due to costs associated with repositioning the Company's hedging portfolio and closing new commercial loan investments.

The ratio of annualized operating expenses to average equity* for the first quarter of 2016 was 2.38%, an increase of 24 basis points from the fourth quarter of 2015 reflecting the aforementioned increase in first quarter expenses and lower average equity.

In the first quarter of 2016, the Company bought back 2.1 million shares of common stock for $25.0 million.  Over the past year, the Company has repurchased 9.42% of its outstanding shares as of March 31, 2015. 

The Company declared the following dividends: a common stock dividend of $0.40 per share paid on April 26, 2016; a Series A preferred stock dividend of $0.4844 per share paid on April 25, 2016; and a Series B preferred stock dividend of $0.4844 per share that will be paid on June 27, 2016.

 

About Invesco Mortgage Capital Inc.

Invesco Mortgage Capital Inc. is a real estate investment trust that focuses on financing and managing residential and commercial mortgage-backed securities and mortgage loans. Invesco Mortgage Capital Inc. is externally managed and advised by Invesco Advisers, Inc., a subsidiary of Invesco Ltd., a leading independent global investment management firm.

Earnings Call

Members of the investment community and the general public are invited to listen to the Company's earnings conference call on Tuesday, May 10, 2016, at 9:00 a.m. ET, by calling one of the following numbers:

 

An audio replay will be available until 5:00 pm ET on May 24, 2016 by calling:

800-925-1940 (North America) or 1-402-998-1654 (International)

The presentation slides that will be reviewed during the call will be available on the Company's website at www.invescomortgagecapital.com.

Cautionary Notice Regarding Forward-Looking Statements

This press release, the related presentation and comments made in the associated conference call, may include statements and information that constitute "forward-looking statements" within the meaning of the U.S. securities laws as defined in the Private Securities Litigation Reform Act of 1995, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements include our views on the risk positioning of our portfolio, domestic and global market conditions (including the residential and commercial real estate market), the market for our target assets, mortgage reform programs, our financial performance, including our core earnings, economic return, comprehensive income and changes in our book value, our ability to continue performance trends, the stability of portfolio yields, interest rates, credit spreads, prepayment trends, financing sources, cost of funds, our leverage and equity allocation. In addition, words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "projects," "forecasts," and future or conditional verbs such as "will," "may," "could," "should," and "would" as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions "Risk Factors," "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission's website at www.sec.gov.

All written or oral forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

 

 

 

 

 

Non-GAAP Financial Measures

In addition to the results presented in accordance with U.S. GAAP, this release contains the non-GAAP financial measures of core earnings (and by calculation, core earnings per common share), effective interest income (and by calculation, effective yield), effective interest expense (and by calculation, effective cost of funds), effective net interest income (and by calculation, effective interest rate margin), and repurchase agreement debt-to-equity ratio. The Company's management uses these non-GAAP financial measures in its internal analysis of results and believes these measures are useful to investors for the reasons explained below. The most directly comparable U.S. GAAP measures are net income attributable to common stockholders (and by calculation basic earnings (loss) per common share), total interest income (and by calculation, yield), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and debt-to-equity ratio.

These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP and may not be comparable to other similarly titled measures of other companies. An analysis of any non-GAAP financial measure should be made in conjunction with results presented in accordance with U.S. GAAP. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate.

Core Earnings

The Company calculates core earnings as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net (excluding contractual net interest on interest rate swaps); unrealized (gain) loss on derivative instruments, net; realized and unrealized change in fair value of GSE CRT embedded derivatives, net; (gain) loss on foreign currency transactions, net; reclassification of amortization of net deferred swap losses on de-designated interest rate swaps to repurchase agreements interest expense; and an adjustment attributable to non-controlling interest. The Company records changes in the valuation of its mortgage-backed securities, excluding securities for which we elected the fair value option and the valuation assigned to the debt host contract associated with its GSE CRTs in other comprehensive income on its consolidated balance sheets. The Company believes the presentation of core earnings provides a consistent measure of operating performance by excluding the impact of gains and losses described above from operating results.

The Company believes that providing transparency into core earnings enables its investors to consistently measure, evaluate  and compare its operating performance to that of its peers over multiple reporting periods. However, the Company cautions that core earnings should not be considered as an alternative to net income (determined in accordance with U.S. GAAP), or as an indication of the Company's cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of the Company's liquidity, or an indication of amounts available to fund its cash needs, including its ability to make cash distributions.

The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to core earnings for the following periods:

 

Effective Interest Income/ Effective Yield/ Effective Interest Expense/Effective Cost of Funds/Effective Net Interest Income/Effective Interest Rate Margin

The Company calculates effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that is recorded in realized and unrealized credit derivative income (loss), net. The Company adds back GSE CRT embedded derivative coupon interest to its total interest income because the Company considers GSE CRT embedded derivative coupon interest a current component of its total interest income.

The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for net interest paid on its interest rate swaps that is recorded in gain (loss) on derivative instruments and the reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense. The Company views its interest rate swaps as an economic hedge against increases in future market interest rates on its floating rate borrowings. The Company adds back the net payments it makes on its interest rate swap agreements to its total U.S. GAAP interest expense because the Company uses interest rate swaps to add stability to interest expense. The Company subtracts amortization of net deferred losses on de-designated interest rate swaps because the Company does not consider the amortization a current component of its borrowing costs.

The Company calculates effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for net interest paid on its interest rate swaps that is recorded in gain (loss) on derivative instruments, the amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that is recorded in realized and unrealized credit derivative income (loss), net.

The Company believes the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provide information that is useful to investors in understanding the Company's borrowing costs and operating performance.

The following table reconciles total interest income to effective interest income and yield to effective yield for the following periods:

 

The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:

 

The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:

 

Repurchase Agreement Debt-to-Equity Ratio

The following tables show the allocation of the Company's equity to its target assets, the Company's debt-to-equity ratio, and the Company's repurchase agreement debt-to-equity ratio as of March 31, 2016 and December 31, 2015. The Company presents a repurchase agreement debt-to-equity ratio because the mortgage REIT industry primarily uses repurchase agreements, which typically mature within one year, to finance investments. The Company believes presenting the Company's repurchase agreement debt-to-equity ratio, a non-GAAP financial measure of leverage, when considered together with its U.S. GAAP financial measures, provides information that is useful to investors in understanding the Company's refinancing risks, and gives investors a comparable statistic to those other mortgage REITs who almost exclusively borrow using short-term repurchase agreements that are subject to refinancing risk.

March 31, 2016

 

 

December 31, 2015

 

 

Average Balances

The table below presents certain information for the Company's portfolio for the following periods.

 

 

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SOURCE Invesco Mortgage Capital Inc.