Market Overview

Invesco Mortgage Capital Inc. Reports Second Quarter 2018 Financial Results

Share:

Invesco Mortgage Capital Inc. Reports Second Quarter 2018 Financial Results

Diversified investment strategy and duration hedge discipline support book value stability

Basic EPS of $0.72, Core EPS* of $0.41

PR Newswire

ATLANTA, Aug. 7, 2018 /PRNewswire/ -- Invesco Mortgage Capital Inc. (NYSE:IVR) (the "Company") today announced financial results for the quarter ended June 30, 2018.

(PRNewsfoto/Invesco Mortgage Capital Inc.)

Financial Summary:

  • Q2 2018 net income attributable to common stockholders of $80.0 million or $0.72 basic earnings per common share ("EPS") compared to $41.5 million or $0.37 basic EPS in Q1 2018
  • Q2 2018 core earnings* of $46.1 million or core EPS of $0.41 compared to $50.4 million or core EPS of $0.45 in Q1 2018
  • Q2 2018 book value per diluted common share** of $17.06 compared to $17.16 at Q1 2018
  • Economic return*** of 1.9% for the quarter, (2.5%) year to date
  • Q2 2018 debt-to-equity ratio of 6.1x compared to 6.2x at Q1 2018
  • Q2 2018 common stock dividend maintained at $0.42 per share

"We are pleased to announce core earnings of $0.41 per share for the second quarter, an economic return of 1.9% for the quarter, and continued book value stability. Despite the rise in interest rates, a flattening yield curve and further Federal Reserve balance sheet reduction in the quarter, we continued to benefit from our diversified investment strategy. Credit spreads have remained in a relatively narrow range in the current market environment, even as Agency RMBS spreads weakened. While our decline in core earnings was substantially attributable to a higher cost of funds, our disciplined approach to actively maintaining our equity duration target helped mitigate the pressure from headwinds during the second quarter," said John Anzalone, Chief Executive Officer.  "We remain confident about our ability to capture attractive returns in Agency RMBS and CMBS."

*

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.

**

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).

***

Economic return for the quarter ended June 30, 2018 is defined as the change in book value per diluted common share from March 31, 2018 to June 30, 2018 of ($0.10); plus dividends declared of $0.42 per common share; divided by the March 31, 2018 book value per diluted common share of $17.16. Economic return for the six months ended June 30, 2018 is defined as the change in book value per diluted common share from December 31, 2017 to June 30, 2018 of ($1.29); plus dividends declared of $0.84 per common share; divided by the December 31, 2017 book value per diluted common share of $18.35.

Key performance indicators for the quarters ended June 30, 2018 and March 31, 2018 are summarized in the table below.

($ in millions, except share amounts)

Q2 '18

Q1 '18

Variance

Average Balances

(unaudited)

(unaudited)


Average earning assets (at amortized costs)

$17,731.5


$18,131.0


-$399.5


Average borrowings

$15,276.0


$15,652.3


-$376.3


Average equity

$2,093.4


$2,119.0


-$25.6






U.S. GAAP Financial Measures




Total interest income

$151.6


$153.2


-$1.6


Total interest expense

$77.9


$68.1


$9.8


Net interest income

$73.7


$85.1


-$11.4


Total expenses

$11.6


$12.0


-$0.4


Net income (loss) attributable to common stockholders

$80.0


$41.5


$38.5






Average earning asset yields

3.42

%

3.38

%

0.04

%

Cost of funds

2.04

%

1.74

%

0.30

%

Net interest rate margin

1.38

%

1.64

%

-0.26

%





Book value per diluted common share*

$17.06


$17.16


-$0.10


Earnings (loss) per common share (basic)

$0.72


$0.37


$0.35


Earnings (loss) per common share (diluted)

$0.72


$0.37


$0.35


Debt-to-equity ratio

6.1

x

6.2

x

-0.1

x

Comprehensive income (loss) attributable to common stockholders per common share (basic)

$0.32


($0.77)


$1.09






Non-GAAP Financial Measures**




Core earnings

$46.1


$50.4


-$4.3


Effective interest income

$157.2


$158.9


-$1.7


Effective interest expense

$89.3


$86.8


$2.5


Effective net interest income

$68.0


$72.1


-$4.1






Effective yield

3.55

%

3.50

%

0.05

%

Effective cost of funds

2.34

%

2.22

%

0.12

%

Effective interest rate margin

1.21

%

1.28

%

-0.07

%





Core earnings per common share

$0.41


$0.45


-$0.04


Repurchase agreement debt-to-equity ratio

6.5

x

6.8

x

-0.3

x



*

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).

**

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 are non-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 of net income attributable to common stockholders (and by calculation, basic earnings (loss) per common share), total interest income (and by calculation, average earning asset yields), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and debt-to-equity ratio.

Financial Summary

Net income attributable to common stockholders for the second quarter of 2018 was $80.0 million compared to $41.5 million for the first quarter of 2018.  Higher net income attributable to common stockholders was primarily driven by a $124.0 million decrease in losses on investments that was partially offset by a $66.2 million decrease in gains on derivative instruments.  Losses on investments primarily consist of unrealized losses on the Company's mortgage-backed securities accounted for under the fair value option.  Net income attributable to common stockholders was also impacted by an $11.4 million decrease in net interest income. Book value per diluted common share for the second quarter of 2018 decreased by 0.6% to $17.06.

During the second quarter of 2018, the Company generated $46.1 million in core earnings, a decrease of $4.3 million or 8.5% from the first quarter of 2018.  Core earnings decreased in the second quarter primarily due to a $2.5 million increase in effective interest expense and a $1.7 million decrease in effective interest income.  Effective interest expense rose due to a 12 basis point increase in effective cost of funds reflecting increases in the federal funds rate since December 2017.  Effective interest expense includes contractual interest expense on interest rate swaps and excludes amortization of net deferred gains on designated interest rate swaps.  Lower effective interest income was driven by a slight decrease in average earning assets  to $17.7 billion from $18.1 billion during the first quarter following repayment of the Company's exchangeable senior notes in March 2018.

Total interest income for the second quarter of 2018 was $151.6 million compared to $153.2 million for the first quarter of 2018.  Lower total interest income reflects a $0.4 billion decrease in average earnings assets that was partially offset by a 4 basis point increase in average earning asset yields from 3.38% to 3.42%.  Average earning asset yields benefited from higher index rates on floating and adjustable rate non-Agency RMBS and GSE CRT securities and commercial loans.

The Company decreased its average borrowings by $0.4 billion (2.4%) in the second quarter of 2018 to $15.3 billion compared to average borrowings of $15.7 billion in the first quarter.  Total interest expense was $77.9 million compared to total interest expense of $68.1 million during the first quarter of 2018.  Total interest expense rose during the second quarter due to a 30 basis point increase in cost of funds to 2.04% from 1.74% in the first quarter.

The Company's debt-to-equity ratio decreased to 6.1x as of June 30, 2018 from 6.2x as of March 31, 2018 and its repurchase agreement debt-to-equity ratio decreased to 6.5x as of June 30, 2018 from 6.8x as of March 31, 2018.

Total expenses include management fees and general and administrative expenses primarily consisting of directors and officers insurance, legal costs, accounting, auditing and tax services and miscellaneous general and administrative costs.  Total expenses for the second quarter of 2018 were approximately $11.6 million compared to $12.0 million for the first quarter of 2018.  The ratio of annualized total expenses to average equity (1) decreased to 2.22% compared to 2.26% for the first quarter due to lower total expenses.

As previously announced, the Company declared the following dividends on June 15, 2018: a common stock dividend of $0.42 per share paid on July 26, 2018 and a Series A preferred stock dividend of $0.4844 per share paid on July 25, 2018.  The Company declared the following dividends on its Series B and Series C Preferred Stock on August 2, 2018 to its stockholders of record as of September 5, 2018: a Series B Preferred Stock dividend of $0.4844 per share payable on September 27, 2018 and a Series C Preferred Stock dividend of $0.46875 per share payable on September 27, 2018.

(1)

The ratio of annualized total expenses to average equity is calculated as the annualized sum of management fees plus general and administrative expenses divided by average equity. Average equity is calculated based on the weighted month-end balance of total 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 Wednesday, August 8, 2018, at 9:00 a.m. ET, by calling one of the following numbers:

North America Toll Free: 800-857-7465
International: 1-312-470-0052
Passcode: Invesco

An audio replay will be available until 5:00 pm ET on August 22, 2018 by calling:

800-819-5739 (North America) or 1-203-369-3350 (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.

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



Three Months Ended


Six Months Ended

$ in thousands, except share amounts

June 30, 2018


March 31, 2018


June 30, 2017


June 30, 2018


June 30, 2017

Interest Income










Mortgage-backed and credit risk transfer securities (1)

147,548



149,003



121,027



296,551



239,900


Commercial loans

4,051



4,222



6,021



8,273



11,785


Total interest income

151,599



153,225



127,048



304,824



251,685


Interest Expense










Repurchase agreements

69,389



59,585



36,072



128,974



66,019


Secured loans

8,471



6,927



4,535



15,398



7,948


Exchangeable senior notes



1,621



3,504



1,621



8,512


Total interest expense

77,860



68,133



44,111



145,993



82,479


Net interest income

73,739



85,092



82,937



158,831



169,206


Other Income (loss)










Gain (loss) on investments, net

(36,377)



(160,370)



11,175



(196,747)



9,322


Equity in earnings (losses) of unconsolidated ventures

798



896



(154)



1,694



(1,688)


Gain (loss) on derivative instruments, net

67,169



133,367



(53,513)



200,536



(48,051)


Realized and unrealized credit derivative income (loss), net

735



3,165



21,403



3,900



41,358


Net loss on extinguishment of debt



(26)



(526)



(26)



(5,237)


Other investment income (loss), net

(2,160)



3,102



2,533



942



3,862


Total other income (loss)

30,165



(19,866)



(19,082)



10,299



(434)


Expenses










Management fee – related party

10,102



10,221



9,027



20,323



17,828


General and administrative

1,525



1,756



1,608



3,281



3,692


Total expenses

11,627



11,977



10,635



23,604



21,520


Net income

92,277



53,249



53,220



145,526



147,252


Net income attributable to non-controlling interest

1,163



671



670



1,834



1,856


Net income attributable to Invesco Mortgage Capital Inc.

91,114



52,578



52,550



143,692



145,396


Dividends to preferred stockholders

11,106



11,107



5,716



22,213



11,432


Net income attributable to common stockholders

80,008



41,471



46,834



121,479



133,964


Earnings per share:










Net income attributable to common stockholders










Basic

0.72



0.37



0.42



1.09



1.20


Diluted

0.72



0.37



0.41



1.08



1.15


Dividends declared per common share

0.42



0.42



0.40



0.84



0.80




(1)

The table below shows the components of mortgage-backed and credit risk transfer securities income for the periods presented.

 


Three Months Ended


Six Months Ended

$ in thousands

June 30, 2018


March 31, 2018


June 30, 2017


June 30, 2018


June 30, 2017

Coupon interest

164,165



166,319



147,267



330,484



293,336


Net premium amortization

(16,617)



(17,316)



(26,240)



(33,933)



(53,436)


Mortgage-backed and credit risk transfer securities interest income

147,548



149,003



121,027



296,551



239,900


 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



Three Months Ended


Six Months Ended

In thousands

June 30, 2018


March 31, 2018


June 30, 2017


June 30, 2018


June 30, 2017

Net income

92,277



53,249



53,220



145,526



147,252


Other comprehensive income (loss):










Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net

(47,929)



(132,317)



39,633



(180,246)



55,922


Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net

9,889



9,237



651



19,126



1,501


Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense

(6,898)



(6,539)



(6,369)



(13,437)



(12,667)


Currency translation adjustments on investment in unconsolidated venture

486



312



139



798



(476)


Total other comprehensive income (loss)

(44,452)



(129,307)



34,054



(173,759)



44,280


Comprehensive income (loss)

47,825



(76,058)



87,274



(28,233)



191,532


Less: Comprehensive (income) loss attributable to non-controlling interest

(602)



959



(1,099)



357



(2,414)


Less: Dividends to preferred stockholders

(11,106)



(11,107)



(5,716)



(22,213)



(11,432)


Comprehensive income (loss) attributable to common stockholders

36,117



(86,206)



80,459



(50,089)



177,686


 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



As of

 $ in thousands except share amounts

June 30, 2018


December 31, 2017

ASSETS


Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $17,047,937 and $17,560,811, respectively)

17,583,187



18,190,754


Commercial loans, held-for-investment

127,607



191,808


Cash and cash equivalents

70,254



88,381


Restricted cash



620


Due from counterparties

7,255




Investment related receivable

70,839



73,217


Derivative assets, at fair value

47,509



6,896


Other assets

108,124



105,580


Total assets

18,014,775



18,657,256


LIABILITIES AND EQUITY




Liabilities:




Repurchase agreements

13,702,321



14,080,801


Secured loans

1,650,000



1,650,000


Exchangeable senior notes, net



143,231


Derivative liabilities, at fair value

6,071



32,765


Dividends and distributions payable

50,201



50,193


Investment related payable

23,562



5,191


Accrued interest payable

18,886



17,845


Collateral held payable

39,748



7,327


Accounts payable and accrued expenses

1,705



2,200


Due to affiliate

10,558



10,825


Total liabilities

15,503,052



16,000,378


Commitments and contingencies (See Note 16) (1):




Equity:




Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized:




7.75% Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding ($140,000 aggregate liquidation preference)

135,356



135,356


7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares issued and outstanding ($155,000 aggregate liquidation preference)

149,860



149,860


7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 11,500,000 shares issued and outstanding ($287,500 aggregate liquidation preference)

278,108



278,108


Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 111,643,188 and 111,624,159 shares issued and outstanding, respectively

1,116



1,116


Additional paid in capital

2,384,902



2,384,356


Accumulated other comprehensive income

89,461



261,029


Retained earnings (distributions in excess of earnings)

(551,632)



(579,334)


Total stockholders' equity

2,487,171



2,630,491


Non-controlling interest

24,552



26,387


Total equity

2,511,723



2,656,878


Total liabilities and equity

18,014,775



18,657,256




(1)

See Note 16 of the Company's condensed consolidated financial statements filed in Item 1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2018.

 

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 yields),
  • 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, 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:


Three Months Ended


Six Months Ended

$ in thousands, except per share data

June 30, 2018


March 31, 2018


June 30, 2017


June 30, 2018


June 30, 2017

Net income attributable to common stockholders

80,008



41,471



46,834



121,479



133,964


Adjustments:










(Gain) loss on investments, net

36,377



160,370



(11,175)



196,747



(9,322)


Realized (gain) loss on derivative instruments, net (1)

(36,274)



(113,578)



40,229



(149,852)



25,311


Unrealized (gain) loss on derivative instruments, net (1)

(35,406)



(31,901)



(6,682)



(67,307)



(20,120)


Realized and unrealized (gain) loss on GSE CRT embedded derivatives, net (2)

4,903



2,468



(15,559)



7,371



(29,707)


(Gain) loss on foreign currency transactions, net (3)

2,966



(1,814)



(1,731)



1,152



(2,244)


Amortization of net deferred (gain) loss on de-designated interest rate swaps (4)

(6,898)



(6,539)



(6,369)



(13,437)



(12,667)


Net loss on extinguishment of debt



26



526



26



5,237


Subtotal

(34,332)



9,032



(761)



(25,300)



(43,512)


Cumulative adjustments attributable to non-controlling interest

432



(114)



10



318



549


Core earnings attributable to common stockholders

46,108



50,389



46,083



96,497



91,001


Basic income (loss) per common share

0.72



0.37



0.42



1.09



1.20


Core earnings per share attributable to common stockholders (5)

0.41



0.45



0.41



0.86



0.82




(1)

U.S. GAAP  gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the following components:

 


Three Months Ended


Six Months Ended

$ in thousands

June 30, 2018


March 31, 2018


June 30, 2017


June 30, 2018


June 30, 2017

Realized gain (loss) on derivative instruments, net

36,274



113,578



(40,229)



149,852



(25,311)


Unrealized gain (loss) on derivative instruments, net

35,406



31,901



6,682



67,307



20,120


Contractual net interest expense on interest rate swaps

(4,511)



(12,112)



(19,966)



(16,623)



(42,860)


Gain (loss) on derivative instruments, net

67,169



133,367



(53,513)



200,536



(48,051)




(2)

U.S. GAAP realized and unrealized credit derivative income (loss), net on the condensed consolidated statements of operations includes the following components:

 


Three Months Ended


Six Months Ended

$ in thousands

June 30, 2018


March 31, 2018


June 30, 2017


June 30, 2018


June 30, 2017

Realized and unrealized gain (loss) on GSE CRT embedded derivatives, net

(4,903)



(2,468)



15,559



(7,371)



29,707


GSE CRT embedded derivative coupon interest

5,638



5,633



5,844



11,271



11,651


Realized and unrealized credit derivative income (loss), net

735



3,165



21,403



3,900



41,358




(3)

U.S. GAAP other investment income (loss), net on the condensed consolidated statements of operations includes the following components:

 


Three Months Ended


Six Months Ended

$ in thousands

June 30, 2018


March 31, 2018


June 30, 2017


June 30, 2018


June 30, 2017

Dividend income

807



1,288



802



2,094



1,618


Gain (loss) on foreign currency transactions, net

(2,966)



1,814



1,731



(1,152)



2,244


Other investment income (loss), net

(2,159)



3,102



2,533



942



3,862




(4)

U.S. GAAP repurchase agreements interest expense on the condensed consolidated statements of operations includes the following components:

 


Three Months Ended


Six Months Ended

$ in thousands

June 30, 2018


March 31, 2018


June 30, 2017


June 30, 2018


June 30, 2017

Interest expense on repurchase agreement borrowings

76,287



66,124



42,441



142,411



78,686


Amortization of net deferred (gain) loss on de-designated interest rate swaps

(6,898)



(6,539)



(6,369)



(13,437)



(12,667)


Repurchase agreements interest expense

69,389



59,585



36,072



128,974



66,019




(5)

Core earnings per share attributable to common stockholders is equal to core earnings divided by the basic weighted average number of common shares outstanding.

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:


Three Months Ended


June 30, 2018


March 31, 2018


June 30, 2017

$ in thousands

Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield

Total interest income

151,599



3.42

%


153,225



3.38

%


127,048



3.17

%

Add: GSE CRT embedded derivative
  coupon interest recorded as 
  realized and unrealized credit 
  derivative income (loss), net

5,638



0.13

%


5,633



0.12

%


5,844



0.15

%

Effective interest income

157,237



3.55

%


158,858



3.50

%


132,892



3.32

%

 


Six Months Ended June 30,


2018


2017

$ in thousands

Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield

Total interest income

304,824



3.40

%


251,685



3.11

%

Add: GSE CRT embedded derivative coupon interest
   recorded as realized and unrealized credit derivative
   income (loss), net

11,270



0.13

%


11,651



0.15

%

Effective interest income

316,094



3.53

%


263,336



3.26

%

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


Three Months Ended


June 30, 2018


March 31, 2018


June 30, 2017

$ in thousands

Reconciliation


Cost of Funds
/ Effective
Cost of Funds


Reconciliation


Cost of Funds
/ Effective
Cost of Funds


Reconciliation


Cost of Funds
/ Effective
Cost of Funds

Total interest expense

77,860



2.04

%


68,133



1.74

%


44,111



1.26

%

Add (Less): Amortization of net
   deferred gain (loss) on de-
   designated interest rate swaps

6,898



0.18

%


6,539



0.17

%


6,369



0.18

%

Add: Contractual net interest expense
   on interest rate swaps recorded
   as gain (loss) on derivative
   instruments, net

4,511



0.12

%


12,112



0.31

%


19,966



0.57

%

Effective interest expense

89,269



2.34

%


86,784



2.22

%


70,446



2.01

%

 

 


Six Months Ended June 30,


2018


2017

$ in thousands

Reconciliation


Cost of Funds
/ Effective
Cost of Funds


Reconciliation


Cost of Funds
/ Effective
Cost of Funds

Total interest expense

145,993



1.89

%


82,479



1.17

%

Add (Less): Amortization of net deferred gain (loss) on de-
   designated interest rate swaps

13,437



0.17

%


12,667



0.18

%

Add: Contractual net interest expense on interest rate swaps
   recorded as gain (loss) on derivative instruments, net

16,624



0.22

%


42,860



0.61

%

Effective interest expense

176,054



2.28

%


138,006



1.96

%

 

The following table reconciles net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:


Three Months Ended


June 30, 2018


March 31, 2018


June 30, 2017

$ in thousands

Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin


Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin


Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin

Net interest income

73,739



1.38

%


85,092



1.64

%


82,937



1.91

%

Add (Less): Amortization of net
   deferred (gain) loss on de-
   designated interest rate swaps

(6,898)



(0.18)%



(6,539)



(0.17)%



(6,369)



(0.18)%


Add: GSE CRT embedded derivative
   coupon interest recorded as
   realized and unrealized credit
   derivative income (loss), net

5,638



0.13

%


5,633



0.12

%


5,844



0.15

%

Less: Contractual net interest expense
   on interest rate swaps recorded
   as gain (loss) on derivative
   instruments, net

(4,511)



(0.12)%



(12,112)



(0.31)%



(19,966)



(0.57)%


Effective net interest income

67,968



1.21

%


72,074



1.28

%


62,446



1.31

%

 


Six Months Ended June 30,


2018


2017

$ in thousands

Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin


Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin

Net interest income

158,831



1.51

%


169,206



1.94

%

Add (Less): Amortization of net deferred (gain) loss on de-
   designated interest rate swaps

(13,437)



(0.17)%



(12,667)



(0.18)%


Add: GSE CRT embedded derivative coupon interest recorded
   as realized and unrealized credit derivative income
   (loss), net

11,270



0.13

%


11,651



0.15

%

Less: Contractual net interest expense on interest rate swaps
   recorded as gain (loss) on derivative instruments, net

(16,623)



(0.22)%



(42,860)



(0.61)%


Effective net interest income

140,041



1.25

%


125,330



1.30

%

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 June 30, 2018 and March 31, 2018. 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 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.

June 30, 2018

$ in thousands

Agency

RMBS and CMBS

Commercial Credit (1)

Residential Credit (2)

Total

Investments

12,361,217


3,307,841


2,070,733


17,739,791


Cash and cash equivalents (3)

33,312


23,077


13,865


70,254


Derivative assets, at fair value (4)

44,122


3,387



47,509


Other assets

86,210


64,389


6,622


157,221


Total assets

12,524,861


3,398,694


2,091,220


18,014,775







Repurchase agreements

10,671,351


1,450,627


1,580,343


13,702,321


Secured loans (5)

555,099


1,094,901



1,650,000


Derivative liabilities, at fair value (4)

6,071




6,071


Other liabilities

94,556


29,017


21,037


144,610


Total liabilities

11,327,077


2,574,545


1,601,380


15,503,002







Total equity (allocated)

1,197,784


824,149


489,840


2,511,773


Adjustments to calculate repurchase agreement debt-to-equity ratio:





Net equity in unsecured assets (6)


(157,905)



(157,905)


Collateral pledged against secured loans

(642,808)


(1,267,901)



(1,910,709)


Secured loans

555,099


1,094,901



1,650,000


Equity related to repurchase agreement debt

1,110,075


493,244


489,840


2,093,159


Debt-to-equity ratio (7)

9.4


3.1


3.2


6.1


Repurchase agreement debt-to-equity ratio (8)

9.6


2.9


3.2


6.5




(1)

Investments in non-Agency CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.

(2)

Investments in non-Agency RMBS and GSE CRT are included in residential credit.

(3)

Cash and cash equivalents is allocated based on a percentage of equity for each asset class.

(4)

Derivative assets and liabilities are allocated based on the hedging strategy for each asset class.

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

Net equity in unsecured assets includes commercial loans, investments in unconsolidated joint ventures and other.

(7)

Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements and secured loans) to total equity.

(8)

Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt.

 

 

March 31, 2018

$ in thousands

Agency

RMBS

Commercial Credit (1)

Residential Credit (2)

Other

Total

Investments

12,376,747


3,401,704


2,056,206



17,834,657


Cash and cash equivalents (3)

51,820


41,645


23,659



117,124


Restricted cash

666


1,734




2,400


Derivative assets, at fair value (4)

26,280


105




26,385


Other assets

268,033


63,585


5,894


3,966


341,478


Total assets

12,723,546


3,508,773


2,085,759


3,966


18,322,044








Repurchase agreements

10,864,431


1,482,869


1,563,837



13,911,137


Secured loans (5)

549,325


1,100,675




1,650,000


Derivative liabilities, at fair value (4)

20,170


184




20,354


Other liabilities

177,439


25,392


15,366



218,197


Total liabilities

11,611,365


2,609,120


1,579,203



15,799,688








Total equity (allocated)

1,112,181


899,653


506,556


3,966


2,522,356


Adjustments to calculate repurchase agreement debt-to-equity ratio:






Net equity in unsecured assets (6)


(212,423)



(3,966)


(216,389)


Collateral pledged against secured loans

(638,847)


(1,280,048)




(1,918,895)


Secured loans

549,325


1,100,675




1,650,000


Equity related to repurchase agreement debt

1,022,659


507,857


506,556



2,037,072


Debt-to-equity ratio (7)

10.3


2.9


3.1


NA

6.2


Repurchase agreement debt-to-equity ratio (8)

10.6


2.9


3.1


NA

6.8




(1)

Investments in non-Agency CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.

(2)

Investments in non-Agency RMBS and GSE CRT are included in residential credit.

(3)

Cash and cash equivalents is allocated based on a percentage of equity for each asset class.

(4)

Derivative assets and liabilities are allocated based on the hedging strategy for each asset class.

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

Net equity in unsecured assets and exchangeable senior notes includes commercial loans, investments in unconsolidated joint ventures, exchangeable senior notes and other.

(7)

Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) to total equity.

(8)

Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt.

 

Average Asset Balances

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


Three Months Ended


Six Months Ended

$ in thousands

June 30, 2018


March 31, 2018


June 30, 2017


June 30, 2018


June 30, 2017

Average Balances (1):










Agency RMBS:










15 year fixed-rate, at amortized cost

2,648,396



2,879,696



3,374,039



2,763,406



3,444,975


30 year fixed-rate, at amortized cost

7,805,977



7,830,802



4,852,769



7,818,321



4,657,799


ARM, at amortized cost

220,960



231,303



276,272



226,103



283,502


Hybrid ARM, at amortized cost

1,595,131



1,666,890



1,996,026



1,630,813



2,143,014


Agency - CMO, at amortized cost

254,642



273,884



309,113



264,210



318,728


Agency CMBS, at amortized cost

50,179







25,228




Non-Agency CMBS, at amortized cost

3,177,398



3,193,575



2,663,808



3,185,442



2,620,014


Non-Agency RMBS, at amortized cost

1,030,949



1,084,584



1,483,354



1,057,619



1,637,336


GSE CRT, at amortized cost

769,821



776,742



796,050



773,263



780,954


Commercial loans, at amortized cost

178,080



193,540



278,052



185,767



276,524


Average earning assets

17,731,533



18,131,016



16,029,483



17,930,172



16,162,846






















Average Earning Asset Yields (2):










Agency RMBS:










15 year fixed-rate

1.99

%


2.04

%


1.97

%


2.02

%


2.00

%

30 year fixed-rate

2.95

%


2.96

%


2.83

%


2.96

%


2.74

%

ARM

2.43

%


2.32

%


2.27

%


2.37

%


2.29

%

Hybrid ARM

2.28

%


2.24

%


2.29

%


2.26

%


2.29

%

Agency - CMO

3.04

%


2.51

%


0.34

%


2.76

%


0.46

%

Agency CMBS

3.63

%


%


%


3.63

%


%

Non-Agency CMBS

4.95

%


4.85

%


4.45

%


4.90

%


4.33

%

Non-Agency RMBS

7.12

%


7.08

%


5.90

%


7.10

%


5.72

%

GSE CRT (3)

3.37

%


3.00

%


2.62

%


3.18

%


2.39

%

Commercial loans

9.12

%


8.85

%


8.69

%


8.98

%


8.59

%

Average earning asset yields

3.42

%


3.38

%


3.17

%


3.40

%


3.11

%



(1)

Average amounts for each period are based on weighted month-end balances; all percentages are annualized. Average balances are presented on an amortized cost basis.

(2)

Average earning asset yields for the period are calculated by dividing interest income, including amortization of premiums and discounts, by the average balance of the amortized cost of the investments. All yields are annualized.

(3)

GSE CRT average earning asset yields exclude coupon interest associated with embedded derivatives on securities not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net under U.S. GAAP.

Average Borrowings and Equity Balances

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


Three Months Ended


Six Months Ended

$ in thousands

June 30, 2018


March 31, 2018


June 30, 2017


June 30, 2018


June 30, 2017

Average Borrowings (1):










Agency RMBS (2)

11,146,252



11,427,614



9,665,651



11,286,117



9,691,612


Agency CMBS

43,984







22,114




Non-Agency CMBS (2)

2,556,166



2,542,722



2,239,854



2,549,519



2,205,758


Non-Agency RMBS

861,598



891,202



1,155,529



876,318



1,283,001


GSE CRT

667,972



674,555



655,715



671,245



628,122


Exchangeable senior notes



116,176



238,530



57,767



292,009


Total average borrowings

15,275,972



15,652,269



13,955,279



15,463,080



14,100,502


Maximum borrowings during the period (3)

15,352,321



15,674,202



13,986,752



15,674,202



14,484,038






















Average Cost of Funds (4):










Agency RMBS (2)

1.98

%


1.65

%


1.10

%


1.82

%


0.99

%

Agency CMBS

2.38

%


%


%


2.38

%


%

Non-Agency CMBS (2)

2.68

%


2.28

%


1.63

%


2.48

%


1.49

%

Non-Agency RMBS

3.19

%


2.91

%


2.47

%


3.05

%


2.32

%

GSE CRT

3.16

%


2.87

%


2.51

%


3.02

%


2.39

%

Exchangeable senior notes

%


5.58

%


5.88

%


5.58

%


5.83

%

Cost of funds

2.04

%


1.74

%


1.26

%


1.89

%


1.17

%

Interest rate swaps average fixed pay rate (5)

2.18

%


2.22

%


2.13

%


2.26

%


2.13

%

Interest rate swaps average floating receive rate (6)

(2.00)

%


(1.68)

%


(1.06)

%


(1.89)

%


(0.97)

%

Effective cost of funds (non-GAAP measure) (7)

2.34

%


2.22

%


2.01

%


2.28

%


1.96

%

Average Equity (8):

2,093,426



2,118,961



2,185,448



2,106,123



2,157,161


Average debt-to-equity ratio (average during period)

7.3

x


7.4

x


6.4

x


7.3

x


6.5

x

Debt-to-equity ratio (as of period end)

6.1

x


6.2

x


5.9

x


6.1

x


5.9

x



(1)

Average amounts for each period are based on weighted month-end balances; all percentages are annualized. Average balances are presented on an amortized cost basis.

(2)

Agency RMBS and non-Agency CMBS average borrowings 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 excluding amortization of net deferred gain (loss) on de-designated interest rate swaps by the Company's average borrowings.

(5)

Interest rate swaps average fixed pay rate is calculated by dividing annualized contractual swap interest expense by the Company's average notional balance of interest rate swaps.

(6)

Interest rate swaps average floating receive rate is calculated by dividing annualized contractual swap interest income by the Company's average notional balance of interest rate swaps.

(7)

For a reconciliation of cost of funds to effective cost of funds, see "Non-GAAP Financial Measures."

(8)

Average equity is calculated based on the weighted month-end balance of total equity excluding equity attributable to preferred stockholders.

 


Cision View original content with multimedia:http://www.prnewswire.com/news-releases/invesco-mortgage-capital-inc-reports-second-quarter-2018-financial-results-300693609.html

SOURCE Invesco Mortgage Capital Inc.

View Comments and Join the Discussion!