Invesco Mortgage Capital Inc. Reports Third Quarter 2014 Financial Results

ATLANTA, Nov. 4, 2014 /PRNewswire/ -- Invesco Mortgage Capital Inc. IVR (the "Company") today announced financial results for the quarter ended September 30, 2014, including core earnings of $0.44 per share.

"We believe accumulation of an attractive dividend and long-term stability of book value will reward long-term investors," said Richard King, President and CEO. "Year-to-date, IVR has declared $1.50 per common share of dividends and has grown book value from $17.97 to $19.16 per share."

Management of the Company's portfolio reflects initiatives designed to take advantage of opportunities and mitigate risks resulting from structural changes in the financing of real estate in the United States. Additional descriptions of initiatives and rationale are included in the financial results below.

 

 

* Core earnings, effective interest expense (and by calculation, effective cost of funds) and effective net interest income (and by calculation, effective interest rate margin) are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" below for important disclosures and a reconciliation to the most comparable U.S. GAAP measures of net income, total interest expense (and by calculation, cost of funds) and net interest income (and by calculation, net interest rate margin).

Financial Summary

During the third quarter of 2014, the Company generated $54.3 million in core earnings. This was accomplished while continuing to reposition the investment portfolio to be less interest rate sensitive. Net income after preferred dividends for the third quarter of 2014 was $31.1 million, compared to net loss after preferred dividends of $95.1 million for the second quarter of 2014. The increase in net income after preferred dividends was primarily due to lower losses on derivative instruments in the third versus second quarter of 2014. Book value declined 3.2% to $19.16 reflecting lower asset prices and wider credit spreads.

The Company made progress on its key initiatives during the quarter by adding two residential loan securitizations, two commercial loans, and additional credit risk transfer securities issued by government-sponsored enterprises ("GSE CRT") to its investment portfolio. As of September 30, 2014, the Company increased its portfolio of residential and commercial loans held for investment to $3.2 billion, an increase of $841.9 million from June 30, 2014. The Company's mortgage-backed securities ("MBS") portfolio totaled $17.3 billion, a decrease of $950.8 million from June 30, 2014. For the quarter ended September 30, 2014, average earning assets were $19.6 billion, representing a decrease of $426.6 million from June 30, 2014. The portfolio generated interest income of $169.4 million during the three months ended September 30, 2014, which reflects a decrease of $5.0 million from the three months ended June 30, 2014. The decrease in interest income was the result of lower average assets during the quarter and faster prepayment speeds on Agency residential mortgage-backed securities ("RMBS").

For the quarter ended September 30, 2014, the Company had average borrowings of approximately $17.4 billion and effective interest expense of $99.5 million, compared to $17.5 billion and $100.1 million, respectively, for the second quarter of 2014. The Company's effective cost of funds was 2.29% and 2.28% for the third quarter and second quarter of 2014, respectively.

Operating expenses for the third quarter of 2014 totaled $13.3 million, compared to $13.1 million for the second quarter of 2014. The ratio of operating expenses to average equity for the third quarter was 2.17%, which was an increase of 5 basis points from the second quarter of 2014. The increase in operating expenses was primarily due to new investments in commercial loans and residential loan securitizations.

The Company declared a common stock dividend of $0.50 per share for the third quarter of 2014. The dividend was paid on October 28, 2014. The Company declared a Series A preferred stock dividend of $0.4844 per share in the third quarter of 2014. The dividend was paid on October 27, 2014. 

In September 2014, the Company completed a public offering of 6,200,000 shares of 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock") at the price of $25.00 per share. On November 4, 2014, the Company's Board of Directors declared a cash dividend on its Series B Preferred Stock of $0.57049 per share. The dividend will be paid on December 27, 2014 to shareholders of record on December 5, 2014. The first dividend on the Series B Preferred Stock is more than a full quarter and covers the period from, and including, the date of issuance through but excluding December 27, 2014.

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. IVZ, 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 Wednesday, November 5, 2014, 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 November 19, 2014 by calling:

866-346-7114 (North America) or 203-369-0015 (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 statements with respect to the Company's beliefs, plans, objectives, goals, targets, expectations, anticipations, assumptions, estimates, intentions and future performance. In addition, words such as "will," "anticipates," "expects" and "plans," 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 the Company's expectations. The Company cautions investors not to rely unduly on any forward-looking statements and urges investors 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 the Company's 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 the Company makes, or that are attributable to the Company, are expressly qualified by this cautionary notice. The Company expressly disclaims any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

 

 

(1)     The consolidated balance sheets include assets of consolidated variable interest entities ("VIEs") that can only be used to settle obligations and liabilities of the VIEs for which creditors do not have recourse to the Company. As of September 30, 2014 and December 31, 2013, total assets of the consolidated VIEs were $3,118,222 and $1,819,295, respectively, and total liabilities of the consolidated VIEs were $2,754,169 and $1,648,400, respectively.

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," "effective interest expense" (and by calculation, "effective cost of funds") and "effective net interest income (and by calculation, "effective interest rate margin"). 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 shareholders, total interest expense (and by calculation, cost of funds) and net interest income (and by calculation, net interest rate margin).

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 to the non-GAAP measures if deemed appropriate.

The Company calculates core earnings as U.S. GAAP net income attributable to common shareholders adjusted for gain (loss) on sale of investments, net, realized gain on interest rate derivative instruments (excluding contractual net interest on interest rate swaps), unrealized loss on interest rate derivative instruments, amortization of deferred swap losses from de-designation and adjustments attributable to non-controlling interest.

The Company believes the presentation of core earnings allows investors to evaluate and compare the performance of the Company to that of its peers because core earnings measures investment portfolio performance over multiple reporting periods by removing realized and unrealized gains and losses. The Company records changes in the valuation of its investment portfolio, and through December 31, 2013 certain interest rate swaps, in other comprehensive income. Effective December 31, 2013, the Company elected to discontinue hedge accounting for its interest rate swaps. As a result of its election, starting January 1, 2014, the change in market value of its interest rate swaps and the amortization of deferred swap losses remaining in other comprehensive income at December 31, 2013 are included in U.S. GAAP net income. In addition, the Company uses swaptions, invests in to-be-announced securities and U.S. Treasury futures that do not qualify under U.S. GAAP for inclusion in other comprehensive income, and, as such, the changes in valuation are recorded in earnings in the period in which they occur. For internal portfolio analysis, the Company's management deducts these gains and losses from U.S. GAAP net income to provide a consistent view of investment portfolio performance across reporting periods. As such, the Company believes that the disclosure of core earnings is useful and meaningful to its investors.

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 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.

Effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin include adjustments for the net interest component related to the Company's interest rate swaps and excludes amortization of deferred swap losses from de-designation. Although, as of January 1, 2014 the Company has elected to discontinue hedge accounting for its interest rate swaps, such derivative instruments are viewed by the Company as an economic hedge against increases in future market interest rates on its liabilities and therefore the effective cost of funds reflects interest expense adjusted to include the realized loss (i.e., the interest expense component) for all of its interest rate swaps and add back the unrealized loss from swap losses that were previously recorded in other comprehensive income and is being amortized into interest expense over the remaining swap lives. In addition, the Company views the cost of the associated repurchase agreements and secured loans, borrowing costs on its exchangeable senior notes, and borrowing costs on its asset-backed securities as a component of its effective cost of funds.

The Company believes the presentation of effective interest expense, effective costs 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, as viewed by the Company.

The table below provides a reconciliation of U.S. GAAP net income attributable to common shareholders to core earnings 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:

 

 

Mortgage-Backed Securities

The following table summarizes certain characteristics of the Company's MBS portfolio as of September 30, 2014:

*      Adjustable-rate mortgage ("ARM")

(1)     Net weighted average coupon ("WAC") as of September 30, 2014 is presented net of servicing and other fees.
(2)     Period-end weighted average yield is based on amortized cost as of September 30, 2014 and incorporates future prepayment and loss assumptions.
(3)     Quarterly weighted average portfolio yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the Company's average of the amortized cost of the investments. All yields are annualized.
(4)     Agency collateralized mortgage obligations ("Agency-CMO") include interest-only securities which represent 28.7% of the balance based on fair value.
(5)     Non-Agency RMBS held by the Company is 55.9% variable rate, 37.2% fixed rate, and 6.9% floating rate based on fair value.
(6)     Of the total discount in non-Agency RMBS, $387.2 million is non-accretable.
(7)     GSE CRT are general obligations of Fannie Mae or Freddie Mac that are structured to provide credit protection to the GSE issuer with respect to defaults and other credit events within reference pools of residential mortgage loans that collateralize MBS issued and guaranteed by such GSE.
(8)     Commercial mortgage-backed securities ("CMBS") include commercial real estate mezzanine loan pass-through certificates which represent 1.4% of the balance based on fair value.

Constant Prepayment Rates ("CPR")

The CPR of the Company's portfolio impacts the amount of premium and discount on the purchase of securities that is recognized into income. The Company's Agency, non-Agency RMBS and GSE CRT had a weighted average CPR of 12.1 and 10.0 for the three months ended September 30, 2014 and June 30, 2014, respectively. The table below shows the three month CPR for the Company's RMBS compared to bonds with similar characteristics ("Cohorts"):

 

Borrowings

The Company has entered into repurchase agreements, secured loans and issued exchangeable senior notes to finance the majority of its portfolio of investments. The following table summarizes certain characteristics of the Company's borrowings at September 30, 2014 and December 31, 2013:

 

The Company finances its residential loans held-for-investment through asset-backed securities issued by securitization trusts.

Interest Rate Swaps

As of September 30, 2014, the Company had the following interest rate swaps outstanding:

(1)     Forward start date of February 2015
(2)     Forward start date of March 2015
(3)     Forward start date of February 2016
(4)     Beginning June 10, 2013, regulations promulgated under The Dodd-Frank Wall Street Reform and Consumer Protection Act mandate that the Company clear new interest rate swap transactions through a central counterparty. Transactions that are centrally cleared result in the Company facing a clearing house, rather than a swap dealer, as counterparty. Central clearing requires the Company to post collateral in the form of initial and variation margin to the clearing house which reduces default risk.

Average Balances

The table below presents certain information for the Company's portfolio for the three and nine month periods ending September 30, 2014 and 2013.

*        Average amounts for each period are based on weighted month-end balances; all percentages are annualized. For the three and nine months ended September 30, 2014, the average balances are presented on an amortized cost basis.

(1)     Average portfolio yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the Company's average of the amortized cost of the investments. All yields are annualized.
(2)     Agency RMBS and CMBS average borrowing and cost of funds include borrowings under repurchase agreements and secured loans.
(3)     Amount represents the maximum borrowings at month-end during each of the respective periods.
(4)     Average cost of funds is calculated by dividing annualized interest expense by the Company's average borrowings.
(5)     Excludes amortization of deferred swap losses from de-designation.
(6)     Average equity is calculated based on a weighted balance basis.

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SOURCE Invesco Mortgage Capital Inc.