Invesco Mortgage Capital Inc. Reports Fourth Quarter 2019 Financial Results

ATLANTA, Feb. 19, 2020 /PRNewswire/ -- Invesco Mortgage Capital, Inc. IVR (the "Company") today announced financial results for the quarter ended December 31, 2019.

Update from John Anzalone, Chief Executive Officer

"We are pleased to announce core earnings of $0.52 per common share for the fourth quarter of 2019. Core earnings exceeded our dividend for the fifth consecutive quarter as IVR benefits from an active portfolio management and hedging strategy. The 11.1% increase in our quarterly dividend to $0.50 per share drove an economic return of 2.9% for the quarter as book value remained stable.

"2019 was a strong year for Invesco Mortgage Capital's stockholders, as we raised the dividend 19.0% and improved book value per common share by 6.7%. As such, stockholders enjoyed an economic return of 18.8% for the year. Additionally, we raised over $500 million in common equity during the year, which allowed us to gain scale while investing in accretive assets.

"As always, active portfolio management and our hedging strategy have been key to our success. This was evident in our investment portfolio, where we focused on allocating capital to strategies that generate attractive returns while minimizing our exposure to prepayment risk. This was also evident in our hedging strategy, where we actively managed our hedges to protect book value and improve our effective interest rate margin. We enter 2020 on a strong note, having raised an additional $347 million in common equity earlier this month as we continue to build upon the positive momentum achieved in 2019."

Key performance indicators for the quarters ended December 31, 2019 and September 30, 2019 are summarized in the table below.

Financial Summary

Net income attributable to common stockholders for the fourth quarter of 2019 was $106.9 million, up $29.0 million compared to $77.9 million for the third quarter of 2019. Higher net income attributable to common stockholders was primarily due to a $17.8 million increase in other income and a $13.0 million increase in net interest income. Other income was driven by net gains on derivatives that totaled $191.6 million compared to net losses on derivatives of $177.2 million in the third quarter and net losses on investments that totaled $148.5 million in the fourth quarter compared to net gains on investments of $202.4 million in the third quarter. Net gains on derivatives and net losses on investments were driven by an increase in interest rates as the benchmark 10 year U.S. Treasury note rose 24 basis points to 1.92% as of December 31, 2019.

Book value per common share for the fourth quarter of 2019 was $16.29 compared to $16.31 in the third quarter reflecting the success of our active portfolio management and hedging strategy during the quarter. Higher interest rates negatively impacted most asset valuations during the quarter but were significantly offset by increases in the value of our interest rate swaps. Strong investor demand given declining volatility and attractive valuations drove significant spread tightening in Agency RMBS, as the sector posted modest gains for the quarter.

During the fourth quarter of 2019, the Company generated $74.9 million in core earnings, an increase of $11.2 million (17.6%) over the third quarter of 2019. Higher core earnings were driven by a $13.1 million increase in effective net interest income primarily due to a lower effective cost of funds during the quarter. Effective cost of funds was 2.04%, 39 basis points lower than the third quarter, primarily due to lower average repurchase agreement borrowing costs following the decrease in the federal funds target rate in September 2019 and the Federal Reserve's infusion of liquidity into the repurchase agreement market in the fourth quarter.

Total interest income decreased $3.5 million (1.8%) to $192.8 million during the fourth quarter and average earning asset yield decreased 13 basis points to 3.62%. Premium amortization increased $2.8 million to $21.4 million during the fourth quarter reflecting the impact of declining interest rates on prepayments of higher coupon Agency RMBS investments. Average earning assets increased $355.0 million (1.7%) to $21.3 billion in the fourth quarter reflecting trade settlement of approximately $1.2 billion of Agency CMBS securities purchased in the third quarter and sales of approximately $850 million of Agency RMBS. We continue to favor the prepayment protection embedded in Agency CMBS over Agency RMBS with less favorable prepayment characteristics.

The Company increased its average borrowings by $349.3 million (1.8%) in the fourth quarter of 2019 to $19.7 billion to finance its higher asset base. However, total interest expense decreased to $106.8 million compared to $123.3 million during the third quarter due to a 38 basis point decrease in average cost of funds to 2.17% from 2.55% during the third quarter.

The Company's debt-to-equity ratio was 6.5x as of December 31, 2019 compared to 6.8x at September 30, 2019. The Company's repurchase agreement debt-to-equity ratio was 6.6x as of December 31, 2019 compared to 6.9x as of September 30, 2019. The Company decreased leverage as of year end given elevated uncertainty surrounding prepayment speeds on our Agency MBS holdings and repurchase agreement funding levels.

Total expenses for the fourth quarter of 2019 increased to approximately $12.4 million compared to $10.6 million for the third quarter of 2019 primarily due to higher management fees. Total expenses include management fees and general and administrative expenses. The ratio of annualized total expenses to average stockholders' equity^* increased to 1.91% compared to 1.63% for the third quarter of 2019.

As previously announced, the Company declared the following dividends on December 16, 2019: a common stock dividend of $0.50 per share paid on January 28, 2020 to its stockholders of record as of December 27, 2019 and a Series A preferred stock dividend of $0.4844 per share paid on January 27, 2020 to its stockholders of record as of January 1, 2020. The Company declared the following dividends on its Series B and Series C Preferred Stock on February 18, 2020 to its stockholders of record as of March 5, 2020: a Series B Preferred Stock dividend of $0.4844 per share payable on March 27, 2020 and a Series C Preferred Stock dividend of $0.46875 per share payable on March 27, 2020.

*The ratio of annualized total expenses to average stockholders' equity is calculated as the annualized sum of management fees plus general and administrative expenses divided by average stockholders' equity. Average stockholders' equity is calculated based on weighted month-end balance of total stockholders' equity excluding equity attributable to preferred stockholders.

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 Thursday, February 20, 2020, 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 March 5, 2020 by calling:

888-562-7251 (North America) or 1-402-530-7628 (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.

Investor Relations Contact: Brandon Burke, 800-241-5477

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 and has added additional reconciling items to its core earnings calculation as 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, a portion 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 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:

The components of core income for the three months and year ended December 31, 2019 are:

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 income (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 income (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 stockholders' equity to its target assets, the Company's debt-to-equity ratio, and the Company's repurchase agreement debt-to-equity ratio as of December 31, 2019 and September 30, 2019.  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 and secured loans) to total stockholders' 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 its 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.

December 31, 2019

September 30, 2019