Invesco Mortgage Capital Inc. Reports Third Quarter 2017 Financial Results

ATLANTA, Nov. 6, 2017 /PRNewswire/ -- Invesco Mortgage Capital Inc. IVR (the "Company") today announced financial results for the quarter ended September 30, 2017.

Highlights:

• Q3 2017 net income attributable to common stockholders of $49.1 million or $0.44 basic earnings per common share ("EPS") compared to $46.8 million or $0.42 basic EPS in Q2 2017
• Q3 2017 core earnings* of $49.1 million or core EPS of $0.44 compared to $46.1 million or core EPS of $0.41 in Q2 2017
• Q3 2017 book value per diluted common share*** of $18.34 compared to $18.27 at Q2 2017 and $17.48 at Q4 2016
• Q3 2017 common stock dividend increased to $0.41 per share
• Issued $287.5 million of preferred equity

Core earnings per share* improved to $0.44 for the quarter, an increase of $.03 or 7.3% over the previous quarter, primarily due to higher effective net interest income and the deployment of proceeds from the $287.5 million preferred equity offering in August. Substantially all the preferred equity offering proceeds were deployed in Agency RMBS and CMBS by the end of the quarter which should result in the Company realizing the full impact of its accretive benefits to core earnings in the fourth quarter.  Given the improvement in earnings, the common stock dividend paid on October 26, 2017 was raised to $0.41 per share, an increase of 2.5%.  As of September 30, 2017, 59% of the Company's equity was allocated to residential and commercial credit assets and 41% was allocated to Agency RMBS.  "Our portfolio performed well during the third quarter, and we continue to be very encouraged by the Company's dividend paying potential as demonstrated by our Board's declaration to increase the common stock dividend to $0.41 per share," said John Anzalone, Chief Executive Officer.  "In addition to our favorable economic return and continued book value stability, we are also pleased with our preferred equity raise in August and expect to see the full quarter of its accretive benefits to core earnings in the fourth quarter.  Importantly, we continue to believe the economic outlook is supportive of our strategy and attractive investment opportunities remain that may result in further earnings and dividend improvements."

* Core earnings (and by calculation, core earnings per common share) are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" for important disclosures and a reconciliation to the most comparable U.S. GAAP measures.
** Economic return for the quarter ended September 30, 2017 is defined as the change in book value per diluted common share from June 30, 2017 to September 30, 2017 of $0.07; plus dividends declared of $0.41 per common share; divided by the June 30, 2017 book value per diluted common share of $18.27. Economic return for the nine months ended September 30, 2017 is defined as the change in book value per diluted common share from December 31, 2016 to September 30, 2017 of $0.86; plus dividends declared of $1.21 per common share; divided by the December 31, 2016 book value per diluted common share of $17.48.
*** Book value per diluted common share is calculated as total equity less the liquidation preference of our Series A Preferred Stock ($140.0 million), Series B Preferred Stock ($155.0 million) and Series C Preferred Stock ($287.5 million); divided by total common shares outstanding plus Operating Partnership Units convertible into shares of common stock (1,425,000 shares).

Key performance indicators for the quarters ended September 30, 2017 and June 30, 2017 are summarized in the table below.

Financial Summary

Net income attributable to common stockholders for the third quarter of 2017 was $49.1 million compared to $46.8 million for the second quarter.  Higher net income attributable to common stockholders was driven by an increase in net interest income and a decrease in total other losses during the quarter that were partially offset by dividends on preferred stock issued during the quarter.  During the third quarter of 2017, the Company completed a public offering of 11,500,000 shares of 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") at the price of $25.00 per share. Total proceeds were $287.5 million before issuance costs of $9.4 million.

Book value per diluted common share for the third quarter of 2017 increased by 0.4% to $18.34 reflecting the continued low volatility environment.  

During the third quarter of 2017, the Company generated $49.1 million in core earnings, an increase of $3.0 million or 6.5% over the second quarter.  Core earnings increased in the third quarter primarily due to higher effective net interest income that was partially offset by the Series C Preferred Stock dividends.

Total interest income increased to $140.4 million for the third quarter of 2017 compared to $127.0 million for the second quarter primarily due to higher average earning assets.  Average earning assets rose to $17.4 billion during the third quarter, up $1.4 billion (8.8%) from $16.0 billion during the second quarter.  The increase in average earning assets was primarily due to investing Series C Preferred Stock proceeds.  The Company leveraged Series C Preferred Stock proceeds and paydowns on securities to purchase $2.5 billion of 30 year fixed- rate Agency RMBS and $375.8 million of CMBS during the third quarter.

The Company increased its average borrowings by $1.2 billion (8.9%) in the third quarter, resulting in average borrowings of $15.2 billion and total interest expense of $54.2 million compared to average borrowings of $14.0 billion and total interest expense of $44.1 million during the second quarter.  The Company's total interest expense rose during the third quarter primarily due to higher interest rates and higher average borrowings leveraging MBS purchases during the quarter. The Company's cost of funds rose to 1.43% for the third quarter, up from 1.26% for the second quarter, reflecting the June 2017 increase in the federal funds rate and rising LIBOR rates throughout the third quarter.

The Company modestly increased leverage to 6.0x in the third quarter of 2017 from 5.9x in the second quarter. The Company retired $60.9 million of its Senior Exchangeable Notes (the "Notes") during the third quarter and has retired $242.2 million year-to-date. As of September 30, 2017, $157.8 million of Notes is outstanding. The Notes will mature in March 2018.

Total expenses for the third quarter of 2017 were approximately $11.3 million compared to $10.6 million for the second quarter. Management fees totaled $9.6 million in the third quarter, up from $9.0 million in the second quarter of 2017. Third quarter management fees rose primarily due to issuing the Series C Preferred Stock.  General and administrative expenses were $1.7 million in the third quarter of 2017, compared to $1.6 million in the second quarter. General and administrative expenses were higher during the third quarter primarily due to transaction fees related to new interest rate swaps added during the quarter and higher professional fees.

The ratio of annualized total expenses to average equity⁽¹⁾ increased to 2.04% for the third quarter of 2017 compared to 1.95% for the second quarter primarily due to higher management fees.

As previously announced, the Company declared the following dividends on September 14, 2017: a common stock dividend of $0.41 per share paid on October 26, 2017; a Series A preferred stock dividend of $0.4844 per share paid on October 25, 2017; and a Series B preferred stock dividend of $0.4844 per share that will be paid on December 27, 2017.  The Company also declared its first Series C Preferred Stock dividend of $0.6823 per share that will be paid on December 27, 2017 for the period from date of issuance to but not including December 27, 2017. The Company will declare its next dividend on Series B and Series C Preferred Stock following its regularly scheduled Board of Directors meeting in February 2018 for the period from December 27, 2017 through but not including March 27, 2018. The Company will continue to declare its quarterly dividends on common stock and Series A Preferred Stock in the third month of each quarter.

About Invesco Mortgage Capital Inc.

Invesco Mortgage Capital Inc. is a real estate investment trust that primarily focuses on investing in, 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 registered investment adviser and an indirect, wholly-owned 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, November 7, 2017, 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 21, 2017 by calling:

800-510-9771 (North America) or 1-402-344-6800 (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, 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

The Company uses the following non-GAAP financial measures to analyze its operating results and believes these financial measures are useful to investors in assessing the Company's performance as further discussed below:

• 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 most directly comparable U.S. GAAP measures are:

• net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share)
• total interest income (and by calculation, earning asset 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. 

The non-GAAP financial measures used by the Company's management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures.  In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of its peer companies.

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; unrealized (gain) loss on derivative instruments, net; realized and unrealized (gain) loss on GSE CRT embedded derivatives, net; (gain) loss on foreign currency transactions, net; amortization of net deferred (gain) loss on de-designated interest rate swaps; net loss on extinguishment of debt; and cumulative adjustments attributable to non-controlling interest. The Company may add additional reconciling items to its core earnings calculation in the future if appropriate.

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 excludes the impact of gains and losses because gains and losses are not accounted for consistently under U.S. GAAP.  Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income.  For example, the majority of the Company's mortgage-backed securities are classified as available-for-sale securities, and changes in the valuation of these securities are recorded in other comprehensive income on its condensed consolidated balance sheet.  The Company elected the fair value option for its mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in the condensed consolidated statement of operations.  In addition, certain gains and losses represent one-time events.

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 as realized and unrealized credit derivative income (loss), net.  The Company includes its GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest is not accounted for consistently under U.S. GAAP.  The Company accounts for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but has elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP, coupon interest on GSE CRTs accounted for using the fair value option is recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments is recorded as realized and unrealized credit derivative income (loss). 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 irrespective of whether the Company has elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.

The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest expense on its interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as 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 excludes the amortization of net deferred gains (losses) on de-designated interest rate swaps from its calculation of effective interest expense 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 contractual net interest expense on its interest rate swaps that is recorded as gain (loss) on derivative instruments, amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that is recorded as 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 tables reconcile 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 September 30, 2017 and June 30, 2017. The Company's debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) to total equity.  The Company presents a repurchase agreement debt-to-equity ratio, a non-GAAP financial measure of leverage, 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, when considered together with U.S. GAAP financial measure of debt-to-equity ratio, 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.

September 30, 2017

 

 

June 30, 2017

 

Average Asset Balances

The table below presents information related to the Company's average earning assets for the following periods.

 

Average Borrowings and Equity Balances

The table below presents information related to the Company's average borrowings and average equity for the following periods.

 

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SOURCE Invesco Mortgage Capital Inc.