Invesco Mortgage Capital Inc. Reports Third Quarter 2018 Financial Results

Active management drives increase in portfolio yield

The Company continues to benefit from a diversified strategy

Common stock dividend maintained at $0.42 per share

Economic return* of 1.1%

Company Release - 11/7/2018 4:21 PM ET

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

Financial Summary:

  • Q3 2018 comprehensive income attributable to common stockholders of $20.6 million compared to $36.1 million in Q2 2018
  • Q3 2018 net loss attributable to common stockholders of $64.5 million or $0.58 basic loss per common share primarily due to realized loss on sale of securities compared to net income attributable to common stockholders of  $80.0 million or $0.72 basic earnings per share ("EPS") in Q2 2018;
  • Q3 2018 core earnings** of $45.6 million or core EPS of $0.41 compared to $46.1 million or core EPS of $0.41 in Q2 2018
  • Q3 2018 book value per diluted common share*** of $16.83 compared to $17.06 at Q2 2018
  • Economic return* of 1.1% for the quarter, (1.4%) year to date
  • Q3 2018 debt-to-equity ratio of 6.4x compared to 6.1x at Q2 2018
  • Q3 2018 common stock dividend maintained at $0.42 per share

"We are pleased to announce core earnings of $0.41 per common share and an economic return of 1.1% for the third quarter.  During the quarter, we repositioned our Agency portfolio by rotating out of seasoned Agency RMBS and into newly issued 30 year Agency RMBS and Agency CMBS to take advantage of accretive opportunities in those sectors.  A net loss on the sale of these securities did not impact book value as we report mortgage-backed securities at fair market value on our balance sheet.  The portfolio repositioning drove an increase in our weighted average portfolio yield to 3.78% as of September 30, 2018, up 21 basis points from 3.57% as of June 30, 2018. We anticipate that our higher portfolio yield and active hedging strategy will help mitigate the impact of rising interest rates," said John Anzalone, Chief Executive Officer.  "In addition, our seasoned credit portfolio should continue to benefit from underlying price appreciation and strong borrower performance."

* Economic return for the quarter ended September 30, 2018 is defined as the change in book value per diluted common share from June 30, 2018 to September 30, 2018 of ($0.23); plus dividends declared of $0.42 per common share; divided by the June 30, 2018 book value per diluted common share of $17.06. Economic return for the nine months ended September 30, 2018 is defined as the change in book value per diluted common share from December 31, 2017 to September 30, 2018 of ($1.52); plus dividends declared of $1.26 per common share; divided by the December 31, 2017 book value per diluted common share of $18.35.

** 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 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, 2018 and June 30, 2018 are summarized in the table below.

($ in millions, except share amounts)

Q3 '18

Q2 '18

Variance

Average Balances

(unaudited)

(unaudited)


Average earning assets (at amortized costs)

$18,359.7


$17,731.5


$628.2


Average borrowings

$15,972.8


$15,276.0


$696.8


Average equity

$2,085.3


$2,093.4


-$8.1






U.S. GAAP Financial Measures




Total interest income

$162.1


$151.6


$10.5


Total interest expense

$91.3


$77.9


$13.4


Net interest income

$70.8


$73.7


-$2.9


Total expenses

$11.8


$11.6


$0.2


Net income (loss) attributable to common stockholders

($64.5)


$80.0


-$144.5






Average earning asset yields

3.53

%

3.42

%

0.11

%

Average cost of funds

2.29

%

2.04

%

0.25

%

Average net interest rate margin

1.24

%

1.38

%

-0.14

%





Period-end weighted average asset yields*

3.78

%

3.57

%

0.21

%

Period-end weighted average cost of funds

2.50

%

2.36

%

0.14

%

Period-end weighted average net interest rate margin

1.28

%

1.21

%

0.07

%





Book value per diluted common share**

$16.83


$17.06


-$0.23


Earnings (loss) per common share (basic)

($0.58)


$0.72


-$1.30


Earnings (loss) per common share (diluted)

($0.58)


$0.72


-$1.30


Debt-to-equity ratio

6.4

x

6.1

x

0.3

x

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

$0.18


$0.32


-$0.14






Non-GAAP Financial Measures***




Core earnings

$45.6


$46.1


-$0.5


Effective interest income

$167.7


$157.2


$10.5


Effective interest expense

$100.4


$89.3


$11.1


Effective net interest income

$67.3


$68.0


-$0.7






Effective yield

3.65

%

3.55

%

0.10

%

Effective cost of funds

2.52

%

2.34

%

0.18

%

Effective interest rate margin

1.13

%

1.21

%

-0.08

%





Core earnings per common share

$0.41


$0.41


$0.00


Repurchase agreement debt-to-equity ratio

6.6

x

6.5

x

0.1

x


*Period-end weighted average yields are based on amortized cost as of period end and incorporate future prepayment and loss assumptions.

** Book value per diluted common share is calculated as total equity less the liquidation preference of 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 loss attributable to common stockholders for the third quarter of 2018 was $64.5 million compared to net income attributable to common stockholders of $80.0 million for the second quarter of 2018.  Net loss attributable to common stockholders was primarily driven by a $140.7 million realized loss on the sale of investments. The Company sold approximately $2.9 billion of Agency RMBS and reinvested approximately $4.2 billion of proceeds from the sales and paydowns of securities and commercial loans in newly issued 30 year Agency RMBS and Agency CMBS securities.  Net income attributable to common stockholders was also impacted by a $2.9 million decrease in net interest income.  While the Company's average earning asset yield rose 10 basis points during the quarter, average cost of funds rose 25 basis points reflecting higher borrowing costs driven by increases in the federal funds rate. Book value per diluted common share for the third quarter of 2018 decreased by 1.3% to $16.83 reflecting rising interest rates and wider Agency interest rate spreads.

During the third quarter of 2018, the Company generated $45.6 million in core earnings, a decrease of $0.5 million or 1.1% from the second quarter of 2018.  Core earnings decreased in the third quarter primarily due to a $0.7 million decrease in effective net interest income driven by higher borrowing rates in the third quarter.  Total effective cost of funds rose to 2.52%, up 18 basis points from 2.34% in the second quarter.

Total interest income for the third quarter of 2018 was $162.1 million compared to $151.6 million for the second quarter of 2018.  Higher total interest income reflects a $628.2 million (3.9%) increase in average earning assets and an increase in average earning asset yields to 3.53% from 3.42% in the second quarter.  Average earning assets rose primarily due to a change in asset mix.  The Company reinvested approximately $100 million in proceeds from repayments of commercial loans into Agency securities during the quarter.   Average earning asset yields benefited from repositioning the Agency portfolio into newly issued 30-year Agency RMBS and Agency CMBS assets as well as higher index rates on floating and adjustable rate non-Agency RMBS and GSE CRT securities and commercial loans.

The Company increased its average borrowings by $696.8 million (4.6%) in the third quarter of 2018 to $16.0 billion compared to average borrowings of $15.3 billion in the second quarter.  Total interest expense was $91.3 million compared to total interest expense of $77.9 million during the second quarter of 2018.

The Company's debt-to-equity ratio increased to 6.4x as of September 30, 2018 from 6.1x as of June 30, 2018 primarily due to the change in asset mix discussed above.  The Company's repurchase agreement debt-to-equity ratio increased to 6.6x as of September 30, 2018 from 6.5x as of June 30, 2018.

Total expenses for the third quarter of 2018 were approximately $11.8 million compared to $11.6 million for the second quarter of 2018.  The ratio of annualized total expenses to average equity (1) increased to 2.26% compared to 2.22% for the second quarter.

As previously announced, the Company declared the following dividends on September 14, 2018: a common stock dividend of $0.42 per share paid on October 26, 2018 and a Series A preferred stock dividend of $0.4844 per share paid on October 25, 2018.  The Company declared the following dividends on its Series B and Series C Preferred Stock on November 6, 2018 to its stockholders of record as of December 5, 2018: a Series B Preferred Stock dividend of $0.4844 per share payable on December 27, 2018 and a Series C Preferred Stock dividend of $0.46875 per share payable on December 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 Thursday, November 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 November 22, 2018 by calling:

866-465-2111 (North America) or 1-203-369-1428 (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


Nine Months Ended

$ in thousands, except share amounts

September 30,
2018


June 30,
2018


September 30,
2017


September 30,
2018


September 30,
2017

Interest Income










Mortgage-backed and credit risk transfer securities (1)

160,416



147,548



134,138



456,967



374,038


Commercial and other loans

1,672



4,051



6,251



9,945



18,036


Total interest income

162,088



151,599



140,389



466,912



392,074


Interest Expense










Repurchase agreements

81,763



69,389



45,907



210,737



111,926


Secured loans

9,490



8,471



5,544



24,888



13,492


Exchangeable senior notes





2,724



1,621



11,236


Total interest expense

91,253



77,860



54,175



237,246



136,654


Net interest income

70,835



73,739



86,214



229,666



255,420


Other Income (loss)










Gain (loss) on investments, net

(207,910)



(36,377)



(11,873)



(404,657)



(2,551)


Equity in earnings (losses) of unconsolidated ventures

1,084



798



408



2,778



(1,280)


Gain (loss) on derivative instruments, net

87,672



67,169



1,955



288,208



(46,096)


Realized and unrealized credit derivative income (loss), net

4,975



735



(2,930)



8,875



38,428


Net loss on extinguishment of debt





(1,344)



(26)



(6,581)


Other investment income (loss), net

1,068



(2,160)



2,313



2,010



6,175


Total other income (loss)

(113,111)



30,165



(11,471)



(102,812)



(11,905)


Expenses










Management fee – related party

10,105



10,102



9,557



30,428



27,385


General and administrative

1,673



1,525



1,697



4,954



5,389


Total expenses

11,778



11,627



11,254



35,382



32,774


Net income (loss)

(54,054)



92,277



63,489



91,472



210,741


Net income (loss) attributable to non-controlling interest

(681)



1,163



800



1,153



2,656


Net income (loss) attributable to Invesco Mortgage Capital Inc.

(53,373)



91,114



62,689



90,319



208,085


Dividends to preferred stockholders

11,107



11,106



13,562



33,320



24,994


Net income (loss) attributable to common stockholders

(64,480)



80,008



49,127



56,999



183,091


Earnings per share:










Net income (loss) attributable to common stockholders










Basic

(0.58)



0.72



0.44



0.51



1.64


Diluted

(0.58)



0.72



0.43



0.51



1.59


 

(1)

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



Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2018


June 30,
2018


September 30,

2017


September 30,

2018


September 30,
2017

Coupon interest

175,696



164,165



156,635



506,180



449,971


Net premium amortization

(15,280)



(16,617)



(22,497)



(49,213)



(75,933)


Mortgage-backed and credit risk transfer securities interest
income

160,416



147,548



134,138



456,967



374,038


 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



Three Months Ended


Nine Months Ended

In thousands

September 30,
2018


June 30, 2018


September 30,
2017


September 30,
2018


September 30,
2017

Net income (loss)

(54,054)



92,277



63,489



91,472



210,741


Other comprehensive income (loss):










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

(40,554)



(47,929)



19,089



(220,800)



75,011


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

134,280



9,889



7



153,406



1,508


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

(6,422)



(6,898)



(6,438)



(19,859)



(19,105)


Currency translation adjustments on investment in unconsolidated venture

(1,126)



486



807



(328)



331


Total other comprehensive income (loss)

86,178



(44,452)



13,465



(87,581)



57,745


Comprehensive income (loss)

32,124



47,825



76,954



3,891



268,486


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

(405)



(602)



(970)



(48)



(3,384)


Less: Dividends to preferred stockholders

(11,107)



(11,106)



(13,562)



(33,320)



(24,994)


Comprehensive income (loss) attributable to common stockholders

20,612



36,117



62,422



(29,477)



240,108


 

 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



As of

 $ in thousands except share amounts

September 30, 2018


December 31, 2017

ASSETS


Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $17,473,413 and $17,560,811, respectively)

18,336,825



18,190,754


Commercial loans, held-for-investment

31,707



191,808


Cash and cash equivalents

108,223



88,381


Restricted cash

300



620


Due from counterparties

26,380




Investment related receivable (including pledged securities of $449,289 and $0, respectively)

528,223



73,217


Derivative assets, at fair value

46,214



6,896


Other assets

145,015



105,580


Total assets

19,222,887



18,657,256


LIABILITIES AND EQUITY




Liabilities:




Repurchase agreements

14,378,518



14,080,801


Secured loans

1,650,000



1,650,000


Exchangeable senior notes, net



143,231


Derivative liabilities, at fair value

13,982



32,765


Dividends and distributions payable

50,205



50,193


Investment related payable

559,398



5,191


Accrued interest payable

25,624



17,845


Collateral held payable

47,687



7,327


Accounts payable and accrued expenses

1,620



2,200


Due to affiliate

10,430



10,825


Total liabilities

16,737,464



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; 111,652,661 and 111,624,159 shares issued and outstanding, respectively

1,116



1,116


Additional paid in capital

2,385,218



2,384,356


Accumulated other comprehensive income

174,553



261,029


Retained earnings (distributions in excess of earnings)

(663,007)



(579,334)


Total stockholders' equity

2,461,204



2,630,491


Non-controlling interest

24,219



26,387


Total equity

2,485,423



2,656,878


Total liabilities and equity

19,222,887



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 September 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, 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 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


Nine Months Ended

$ in thousands, except per share data

September 30,
2018


June 30, 2018


September 30,
2017


September 30,
2018


September 30,
2017

Net income (loss) attributable to common stockholders

(64,480)



80,008



49,127



56,999



183,091


Adjustments:










(Gain) loss on investments, net

207,910



36,377



11,873



404,657



2,551


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

(99,641)



(36,274)



(19,503)



(249,493)



5,808


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

9,206



(35,406)



95



(58,101)



(20,025)


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

663



4,903



8,803



8,034



(20,904)


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

(215)



2,966



(1,504)



937



(3,748)


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

(6,422)



(6,898)



(6,438)



(19,859)



(19,105)


Net loss on extinguishment of debt





1,344



26



6,581


Subtotal

111,501



(34,332)



(5,330)



86,201



(48,842)


Cumulative adjustments attributable to non-controlling interest

(1,405)



432



67



(1,087)



616


Preferred stock dividend declared but not accumulated (5)





5,211





5,211


Core earnings attributable to common stockholders

45,616



46,108



49,075



142,113



140,076


Basic income (loss) per common share

(0.58)



0.72



0.44



0.51



1.64


Core earnings per share attributable to common stockholders (6)

0.41



0.41



0.44



1.27



1.26


 

(1)

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

 


Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2018


June 30, 2018


September 30,
2017


September 30,
2018


September 30,
2017

Realized gain (loss) on derivative instruments, net

99,641



36,274



19,503



249,493



(5,808)


Unrealized gain (loss) on derivative instruments, net

(9,206)



35,406



(95)



58,101



20,025


Contractual net interest expense on interest rate swaps

(2,763)



(4,511)



(17,453)



(19,386)



(60,313)


Gain (loss) on derivative instruments, net

87,672



67,169



1,955



288,208



(46,096)


 

(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


Nine Months Ended

$ in thousands

September 30,
2018


June 30, 2018


September 30,
2017


September 30,
2018


September 30,
2017

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

(663)



(4,903)



(8,803)



(8,034)



20,904


GSE CRT embedded derivative coupon interest

5,638



5,638



5,873



16,909



17,524


Realized and unrealized credit derivative income (loss), net

4,975



735



(2,930)



8,875



38,428


 

(3)

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

 


Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2018


June 30, 2018


September 30,
2017


September 30,
2018


September 30,
2017

Dividend income

853



807



809



2,947



2,427


Gain (loss) on foreign currency transactions, net

215



(2,966)



1,504



(937)



3,748


Other investment income (loss), net

1,068



(2,159)



2,313



2,010



6,175


 

(4)

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

 


Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2018


June 30, 2018


September 30,
2017


September 30,
2018


September 30,
2017

Interest expense on repurchase agreement
borrowings

88,185



76,287



52,345



230,596



131,031


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

(6,422)



(6,898)



(6,438)



(19,859)



(19,105)


Repurchase agreements interest expense

81,763



69,389



45,907



210,737



111,926


 

(5)

Preferred stock dividend declared but not accumulated is a timing adjustment related to the first dividend declaration on Series C Preferred Stock.  On September 14, 2017, we declared a dividend on Series C Preferred Stock that covered the period from the date of issuance, August 16, 2017, to but not including the dividend payment date, December 27, 2017.  We adjusted core earnings for the period ended September 30, 2017 to exclude the portion of the dividend declared for the period from October 1, 2017 through December 26, 2017 because we did not consider the future unaccumulated portion of the dividend a current component of our capital costs.               

 

(6)

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


September 30, 2018


June 30, 2018


September 30, 2017

$ in thousands

Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield

Total interest income

162,088



3.53

%


151,599



3.42

%


140,389



3.22

%

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

5,638



0.12

%


5,638



0.13

%


5,873



0.14

%

Effective interest income

167,726



3.65

%


157,237



3.55

%


146,262



3.36

%

 


Nine Months Ended September 30,


2018


2017

$ in thousands

Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield

Total interest income

466,912



3.45

%


392,074



3.15

%

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

16,909



0.13

%


17,524



0.14

%

Effective interest income

483,821



3.58

%


409,598



3.29

%

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


September 30, 2018


June 30, 2018


September 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

91,253



2.29

%


77,860



2.04

%


54,175



1.43

%

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

6,422



0.16

%


6,898



0.18

%


6,438



0.17

%

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

2,763



0.07

%


4,511



0.12

%


17,453



0.46

%

Effective interest expense

100,438



2.52

%


89,269



2.34

%


78,066



2.06

%

 


Nine Months Ended September 30,


2018


2017

$ in thousands

Reconciliation


Cost of Funds /
Effective Cost
of Funds


Reconciliation


Cost of Funds /
Effective Cost
of Funds

Total interest expense

237,246



2.02

%


136,654



1.26

%

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

19,859



0.17

%


19,105



0.18

%

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

19,386



0.17

%


60,313



0.56

%

Effective interest expense

276,491



2.36

%


216,072



2.00

%

 

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


September 30, 2018


June 30, 2018


September 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

70,835



1.24

%


73,739



1.38

%


86,214



1.79

%

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

(6,422)



(0.16)

%


(6,898)



(0.18)

%


(6,438)



(0.17)

%

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

5,638



0.12

%


5,638



0.13

%


5,873



0.14

%

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

(2,763)



(0.07)

%


(4,511)



(0.12)

%


(17,453)



(0.46)

%

Effective net interest income

67,288



1.13

%


67,968



1.21

%


68,196



1.30

%

 


Nine Months Ended September 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

229,666



1.43

%


255,420



1.89

%

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

(19,859)



(0.17)

%


(19,105)



(0.18)

%

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

16,909



0.13

%


17,524



0.14

%

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

(19,386)



(0.17)

%


(60,313)



(0.56)

%

Effective net interest income

207,330



1.22

%


193,526



1.29

%

 

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, 2018 and June 30, 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.

 

September 30, 2018


$ in thousands

Agency

RMBS and CMBS

Commercial Credit (1)

Residential Credit (2)

Total

Investments

13,065,148


3,302,475


2,000,909


18,368,532


Cash and cash equivalents (3)

55,295


34,480


18,448


108,223


Restricted cash


300



300


Derivative assets, at fair value (4)

46,212


2



46,214


Other assets

556,914


91,814


50,890


699,618


Total assets

13,723,569


3,429,071


2,070,247


19,222,887







Repurchase agreements

11,252,479


1,525,347


1,600,692


14,378,518


Secured loans (5)

553,262


1,096,738



1,650,000


Derivative liabilities, at fair value (4)

13,887


95



13,982


Other liabilities

646,954


34,576


13,434


694,964


Total liabilities

12,466,582


2,656,756


1,614,126


16,737,464







Total equity (allocated)

1,256,987


772,315


456,121


2,485,423


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





Net equity in unsecured assets (6)


(55,924)



(55,924)


Collateral pledged against secured loans

(636,506)


(1,261,752)



(1,898,258)


Secured loans

553,262


1,096,738



1,650,000


Equity related to repurchase agreement debt

1,173,743


551,377


456,121


2,181,241


Debt-to-equity ratio (7)

9.4


3.4


3.5


6.4


Repurchase agreement debt-to-equity ratio (8)

9.6


2.8


3.5


6.6


 

(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, GSE CRT and a loan participation interest 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.

 

 

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.

 

Average Asset Balances

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


Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2018


June 30, 2018


September 30,
2017


September 30,
2018


September 30,
2017

Average Balances (1):










Agency RMBS:










15 year fixed-rate, at amortized cost

1,613,967



2,648,396



3,223,684



2,376,050



3,370,401


30 year fixed-rate, at amortized cost

9,362,170



7,805,977



6,486,613



8,338,593



5,274,103


ARM, at amortized cost

181,721



220,960



258,304



211,147



275,010


Hybrid ARM, at amortized cost

1,303,070



1,595,131



1,847,709



1,520,365



2,043,497


Agency - CMO, at amortized cost

242,133



254,642



287,364



256,770



308,159


Agency CMBS, at amortized cost

516,992



50,179





190,951




Non-Agency CMBS, at amortized cost

3,236,226



3,177,398



2,920,587



3,202,556



2,721,306


Non-Agency RMBS, at amortized cost

1,055,671



1,030,949



1,339,639



1,056,962



1,537,013


GSE CRT, at amortized cost

762,235



769,821



790,886



769,546



784,301


Commercial loans, at amortized cost

55,607



178,080



279,840



137,028



277,642


Loan participation interest

29,875







10,068




Average earning assets

18,359,667



17,731,533



17,434,626



18,070,036



16,591,432












Average Earning Asset Yields (2):










Agency RMBS:










15 year fixed-rate

2.59

%


1.99

%


1.95

%


2.15

%


1.99

%

30 year fixed-rate

2.96

%


2.95

%


2.73

%


2.96

%


2.73

%

ARM

2.49

%


2.43

%


2.35

%


2.41

%


2.31

%

Hybrid ARM

2.57

%


2.28

%


2.19

%


2.35

%


2.26

%

Agency - CMO

3.20

%


3.04

%


2.71

%


2.90

%


1.16

%

Agency CMBS

2.85

%


3.63

%


%


3.34

%


%

Non-Agency CMBS

4.88

%


4.95

%


4.52

%


4.89

%


4.40

%

Non-Agency RMBS

7.17

%


7.12

%


6.56

%


7.12

%


5.97

%

GSE CRT (3)

3.56

%


3.37

%


2.74

%


3.31

%


2.51

%

Commercial loans

10.05

%


9.12

%


8.86

%


9.45

%


8.69

%

Loan participation interest

5.87

%


%


%


5.87

%


%

Average earning asset yields

3.53

%


3.42

%


3.22

%


3.45

%


3.15

%

 

(1)

Average balances for each period are based on weighted month-end average earning assets.

(2)

Average earning asset yields for the period are calculated by dividing interest income, including amortization of premiums and discounts, by average month-end earning assets based on 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


Nine Months Ended

$ in thousands

September 30,
2018


June 30, 2018


September 30,
2017


September 30,
2018


September 30,
2017

Average Borrowings (1):










Agency RMBS (2)

11,326,323



11,146,252



10,919,243



11,299,625



10,105,277


Agency CMBS

472,011



43,984





173,727




Non-Agency CMBS (2)

2,575,504



2,556,166



2,367,648



2,558,317



2,260,356


Non-Agency RMBS

895,504



861,598



1,062,528



882,784



1,208,702


GSE CRT

681,079



667,972



661,095



674,560



639,234


Exchangeable senior notes





185,930



38,300



256,261


        Loan participation interest

22,406







7,551




Total average borrowings

15,972,827



15,275,972



15,196,444



15,634,864



14,469,830


Maximum borrowings during the period (3)

16,078,387



15,352,321



15,896,218



16,078,387



15,896,218












Average Cost of Funds (4):










Agency RMBS (2)

2.24

%


1.98

%


1.28

%


1.96

%


1.09

%

Agency CMBS

2.26

%


2.10

%


%


2.22

%


%

Non-Agency CMBS (2)

2.88

%


2.68

%


1.91

%


2.61

%


1.63

%

Non-Agency RMBS

3.40

%


3.19

%


2.67

%


3.17

%


2.42

%

GSE CRT

3.26

%


3.16

%


2.69

%


3.10

%


2.50

%

Exchangeable senior notes

%


%


5.86

%


5.58

%


5.85

%

    Loan participation interest

3.83

%


%


%


3.83

%


%

Cost of funds

2.29

%


2.04

%


1.43

%


2.02

%


1.26

%

Interest rate swaps average fixed pay rate (5)

2.35

%


2.18

%


2.09

%


2.26

%


2.12

%

Interest rate swaps average floating receive rate (6)

(2.25)

%


(2.00)

%


(1.24)

%


(1.98)

%


(1.07)

%

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

2.52

%


2.34

%


2.06

%


2.36

%


2.00

%











Average Equity (8)

2,085,263



2,093,426



2,206,307



2,099,093



2,173,671


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

7.7

x


7.3

x


6.9

x


7.4

x


6.7

x

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

6.4

x


6.1

x


6.0

x


6.4

x


6.0

x

 

(1)

Average borrowings for each period are based on weighted month-end balances.

(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:http://www.prnewswire.com/news-releases/invesco-mortgage-capital-inc-reports-third-quarter-2018-financial-results-300746026.html

SOURCE Invesco Mortgage Capital Inc.