Invesco Mortgage Capital Inc. Reports Second Quarter 2019 Financial Results

Book value per common* share of $16.21

Maintained common stock dividend of $0.45 per share

Generated economic return** of 2.3%

Company Release - 8/7/2019 4:15 PM ET

ATLANTA, Aug. 7, 2019 /PRNewswire/ -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended June 30, 2019.

Financial Summary:

  • Q2 2019 net income attributable to common stockholders of $7.2 million or $0.06 basic income per common share compared to net income attributable to common stockholders of $127.7 million or $1.05 basic income per common share in Q1 2019
  • Q2 2019 core earnings*** of $59.1 million or core earnings per common share ("EPS") of $0.46 compared to $56.9 million or core EPS of $0.47 in Q1 2019
  • Q2 2019 book value per common share* of $16.21 compared to $16.29 at Q1 2019
  • Q2 2019 common stock dividend of $0.45 per share compared to $0.45 in Q1 2019
  • Economic return** of 2.3% for Q2 2019 and 12.0% for the year to date ended June 30, 2019

"We are pleased to announce core earnings of $0.46 per common share for the second quarter of 2019. Core earnings exceeded our $0.45 dividend, as the portfolio benefited from the full quarter impact of our February common stock offering. Despite volatile market conditions during the quarter, our diversified portfolio and dynamic hedging strategy combined to keep our book value relatively stable at $16.21. This helped produce a 2.3% economic return for the quarter, bringing our year-to-date economic return to 12.0%." said John Anzalone, Chief Executive Officer.

 

*

Book value per 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.

**

Economic return for the quarter ended June 30, 2019 is defined as the change in book value per common share from March 31, 2019 to June 30, 2019 of $(0.08); plus dividends declared of $0.45 per common share; divided by the March 31, 2019 book value per common share of $16.29. Economic return for the year to date ended June 30, 2019 is defined as the change in book value per common share from December 31, 2018 to June 30, 2019 of $0.94; plus dividends declared of $0.90 per common share; divided by the December 31, 2018 book value per common share of $15.27.

***

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.

 

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

($ in millions, except share amounts)

Q2 '19

Q1 '19

Variance

Average Balances

(unaudited)

(unaudited)


Average earning assets (at amortized cost)

$20,803.2


$19,152.5


$1,650.7


Average borrowings

$18,908.9


$17,048.1


$1,860.8


Average equity

$2,338.0


$2,207.3


$130.7






U.S. GAAP Financial Measures




Total interest income

$202.2


$187.1


$15.1


Total interest expense

$129.2


$113.0


$16.2


Net interest income

$73.0


$74.1


($1.1)


Total expenses

$11.4


$11.8


($0.4)


Net income attributable to common stockholders

$7.2


$127.7


($120.5)






Average earning asset yields

3.89

%

3.91

%

(0.02)

%

Average cost of funds

2.73

%

2.65

%

0.08

%

Average net interest rate margin

1.16

%

1.26

%

(0.10)

%





Period-end weighted average asset yields*

4.03

%

4.02

%

0.01

%

Period-end weighted average cost of funds

2.77

%

2.84

%

(0.07)

%

Period-end weighted average net interest rate margin

1.26

%

1.18

%

0.08

%





Book value per common share**

$16.21


$16.29


($0.08)


Earnings per common share (basic)

$0.06


$1.05


($0.99)


Earnings per common share (diluted)

$0.06


$1.05


($0.99)


Debt-to-equity ratio

7.0

x

6.9

x

0.1

x





Non-GAAP Financial Measures***




Core earnings

$59.1


$56.9


$2.2


Effective interest income

$207.5


$192.4


$15.1


Effective interest expense

$127.6


$114.4


$13.2


Effective net interest income

$79.9


$78.1


$1.8






Effective yield

3.99

%

4.02

%

(0.03)

%

Effective cost of funds

2.70

%

2.68

%

0.02

%

Effective interest rate margin

1.29

%

1.34

%

(0.05)

%





Core earnings per common share

$0.46


$0.47


($0.01)


Repurchase agreement debt-to-equity ratio

7.4

x

7.2

x

0.2

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 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.

***

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 2019 was $7.2 million compared to $127.7 million for the first quarter of 2019. Net income attributable to common stockholders was $120.5 million lower in the second quarter primarily due to higher net losses on derivatives totaling $347.2 million compared to $193.6 million in the first quarter. Net losses on derivatives were partially offset by higher net gains on investments totaling $302.2 million in the second quarter compared to $268.4 million in the first quarter. Higher net losses on derivative instruments and net gains on investments were driven by sharply declining interest rates in the second quarter as evidenced by the 40 basis point decline in 10 year Treasury rates compared to a 28 basis point decline in the first quarter. The Company also had unrealized gains on available-for-sale investments of $52.3 million in the first quarter and $47.2 million in the second quarter that are recorded in other comprehensive income.

Book value per common share for the second quarter of 2019 was $16.21 compared to $16.29 in the first quarter reflecting interest rate spread widening in Agency RMBS and GSE CRT assets that was partially offset by a positive duration gap and interest rate spread tightening in other asset classes.

During the second quarter of 2019, the Company generated $59.1 million in core earnings, an increase of $2.2 million or 3.9% from the first quarter of 2019. Higher core earnings were driven by a $1.8 million increase in effective net interest income reflecting the full quarter impact of the Company's February 2019 common stock offering. Effective yield was 3.99% during the second quarter, down 3 basis points from 4.02% in the first quarter of 2019 primarily due to the impact of declining interest rates on prepayments of specified pool Agency RMBS investments. Effective cost of funds was 2.70% during the second quarter, up 2 basis points from 2.68% in the first quarter of 2019 primarily due to slightly higher repurchase agreement borrowing costs early in the quarter.

Total interest income for the second quarter of 2019 was $202.2 million compared to $187.1 million for the first quarter of 2019. Higher total interest income reflects a $1.7 billion (8.6%) increase in average earning assets to $20.8 billion from $19.2 billion in the first quarter of 2019. Average earning assets rose primarily due to the investment of net proceeds from the Company's February common stock offering. Average earning asset yield was 3.89% for the second quarter of 2019 compared to 3.91% in the first quarter of 2019 reflecting a $6.8 million increase in premium amortization.

The Company increased its average borrowings by $1.9 billion (10.9%) in the second quarter of 2019 to $18.9 billion to finance its higher asset base compared to average borrowings of $17.0 billion in the first quarter of 2019. Total interest expense was $129.2 million compared to $113.0 million during the first quarter of 2019.

The Company's debt-to-equity ratio was 7.0x as of June 30, 2019 compared to 6.9x as of March 31, 2019. The Company's repurchase agreement debt-to-equity ratio was 7.4x as of June 30, 2019 compared to 7.2x as of March 31, 2019. Leverage increased slightly during the quarter largely due to an increase in the Company's equity allocation to Agency CMBS to 10%.

Total expenses for the second quarter of 2019 were approximately $11.4 million compared to $11.8 million for the first quarter of 2019. Total expenses include management fees and general and administrative expenses. The ratio of annualized total expenses to average equity (1) decreased to 1.95% compared to 2.14% for the first quarter of 2019.

As previously announced, the Company declared the following dividends on June 17, 2019: a common stock dividend of $0.45 per share paid on July 26, 2019 to its stockholders of record as of June 28, 2019 and a Series A preferred stock dividend of $0.4844 per share paid on July 25, 2019 to its stockholders of record as of July 1, 2019. The Company declared the following dividends on its Series B and Series C Preferred Stock on August 1, 2019 to its stockholders of record as of September 5, 2019: a Series B Preferred Stock dividend of $0.4844 per share payable on September 27, 2019 and a Series C Preferred Stock dividend of $0.46875 per share payable on September 27, 2019.

 

(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, August 8, 2019, 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, 2019 by calling:

800-430-5973 (North America) or 1-402-998-0105 (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,
2019


March 31,
2019


June 30,
2018


June 30,
2019


June 30,
2018

Interest Income










Mortgage-backed and credit risk transfer securities (1)

200,737



185,492



147,548



386,229



296,551


Commercial and other loans

1,484



1,582



4,051



3,066



8,273


Total interest income

202,221



187,074



151,599



389,295



304,824


Interest Expense










Repurchase agreements

117,978



101,875



69,389



219,853



128,974


Secured loans

11,258



11,144



8,471



22,402



15,398


Exchangeable senior notes









1,621


Total interest expense

129,236



113,019



77,860



242,255



145,993


Net interest income

72,985



74,055



73,739



147,040



158,831


Other Income (loss)










Gain (loss) on investments, net

302,182



268,382



(36,377)



570,564



(196,747)


Equity in earnings (losses) of unconsolidated ventures

702



692



798



1,394



1,694


Gain (loss) on derivative instruments, net

(344,733)



(201,460)



67,169



(546,193)



200,536


Realized and unrealized credit derivative income (loss), net

(2,438)



7,884



735



5,446



3,900


Net loss on extinguishment of debt









(26)


Other investment income (loss), net

1,007



1,029



(2,160)



2,036



942


Total other income (loss)

(43,280)



76,527



30,165



33,247



10,299


Expenses










Management fee – related party

9,370



9,534



10,102



18,904



20,323


General and administrative

1,999



2,258



1,525



4,257



3,281


Total expenses

11,369



11,792



11,627



23,161



23,604


Net income

18,336



138,790



92,277



157,126



145,526


Net income attributable to non-controlling interest





1,163





1,834


Net income attributable to Invesco Mortgage Capital Inc.

18,336



138,790



91,114



157,126



143,692


Dividends to preferred stockholders

11,106



11,107



11,106



22,213



22,213


Net income attributable to common stockholders

7,230



127,683



80,008



134,913



121,479


Earnings per share:










Net income attributable to common stockholders










Basic

0.06



1.05



0.72



1.08



1.09


Diluted

0.06



1.05



0.72



1.08



1.08



(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,
2019


March 31,
2019


June 30,
2018


June 30,
2019


June 30,
2018

Coupon interest

214,501



192,442



164,165



406,943



330,484


Net premium amortization

(13,764)



(6,950)



(16,617)



(20,714)



(33,933)


Mortgage-backed and credit risk transfer securities interest
income

200,737



185,492



147,548



386,229



296,551


 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)




Three Months Ended


Six Months Ended

$ in thousands

June 30,
2019


March 31,
2019


June 30,
2018


June 30,
2019


June 30,
2018

Net income

18,336



138,790



92,277



157,126



145,526


Other comprehensive income (loss):










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

47,188



52,349



(47,929)



99,537



(180,246)


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

(121)



10,147



9,889



10,026



19,126


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

(5,916)



(5,851)



(6,898)



(11,767)



(13,437)


Currency translation adjustments on
investment in unconsolidated venture

(320)



(276)



486



(596)



798


Total other comprehensive income (loss)

40,831



56,369



(44,452)



97,200



(173,759)


Comprehensive income (loss)

59,167



195,159



47,825



254,326



(28,233)


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





(602)





357


Less: Dividends to preferred stockholders

(11,106)



(11,107)



(11,106)



(22,213)



(22,213)


Comprehensive income (loss) attributable to common
stockholders

48,061



184,052



36,117



232,113



(50,089)


 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)




As of

 $ in thousands except share amounts

June 30, 2019


December 31, 2018

ASSETS


Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of
$20,848,269 and $17,082,825, respectively)

21,536,047



17,396,642


Cash and cash equivalents

99,620



135,617


Restricted cash

55,271




Due from counterparties

21,041



13,500


Investment related receivable

141,989



66,598


Derivative assets, at fair value

10,067



15,089


Other assets

174,043



186,059


Total assets

22,038,078



17,813,505


LIABILITIES AND EQUITY




Liabilities:




Repurchase agreements

17,075,065



13,602,484


Secured loans

1,650,000



1,650,000


Derivative liabilities, at fair value

36,969



23,390


Dividends and distributions payable

60,671



49,578


Investment related payable

462,060



132,096


Accrued interest payable

55,002



37,620


Collateral held payable

14,939



18,083


Accounts payable and accrued expenses

3,144



1,694


Due to affiliate

10,127



11,863


Total liabilities

19,367,977



15,526,808


Commitments and contingencies (See Note 14) (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; 128,795,528 and 
     111,584,996 shares issued and outstanding, respectively

1,287



1,115


Additional paid in capital

2,650,329



2,383,532


Accumulated other comprehensive income

318,013



220,813


Retained earnings (distributions in excess of earnings)

(862,852)



(882,087)


Total stockholders' equity

2,670,101



2,286,697


Total liabilities and stockholders' equity

22,038,078



17,813,505




(1)

See Note 14 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, 2019.

 

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


Six Months Ended

$ in thousands, except per share data

June 30,
2019


March 31,
2019


June 30,
2018


June 30,
2019


June 30,
2018

Net income attributable to common stockholders

7,230



127,683



80,008



134,913



121,479


Adjustments:










(Gain) loss on investments, net

(302,182)



(268,382)



36,377



(570,564)



196,747


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

307,239



232,387



(36,274)



539,626



(149,852)


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

45,019



(26,418)



(35,406)



18,601



(67,307)


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

7,738



(2,534)



4,903



5,204



7,371


Loss on foreign currency transactions, net (3)





2,966





1,152


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

(5,916)



(5,851)



(6,898)



(11,767)



(13,437)


Net loss on extinguishment of debt









26


Subtotal

51,898



(70,798)



(34,332)



(18,900)



(25,300)


Cumulative adjustments attributable to non-
controlling interest





432





318


Core earnings attributable to common stockholders

59,128



56,885



46,108



116,013



96,497


Basic income per common share

0.06



1.05



0.72



1.08



1.09


Core earnings per share attributable to common
stockholders (5)

0.46



0.47



0.41



0.93



0.86



(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,
2019


March 31,
2019


June 30,
2018


June 30,
2019


June 30,
2018

Realized gain (loss) on derivative instruments, net

(307,239)



(232,387)



36,274



(539,626)



149,852


Unrealized gain (loss) on derivative instruments, net

(45,019)



26,418



35,406



(18,601)



67,307


Contractual net interest income (expense) on interest
rate swaps

7,525



4,509



(4,511)



12,034



(16,623)


Gain (loss) on derivative instruments, net

(344,733)



(201,460)



67,169



(546,193)



200,536



(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,
2019


March 31,
2019


June 30,
2018


June 30,
2019


June 30,
2018

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

(7,738)



2,534



(4,903)



(5,204)



(7,371)


GSE CRT embedded derivative coupon interest

5,300



5,350



5,638



10,650



11,271


Realized and unrealized credit derivative income
(loss), net

(2,438)



7,884



735



5,446



3,900



(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,
2019


March 31,
2019


June 30,
2018


June 30,
2019


June 30,
2018

Dividend income

1,007



1,029



806



2,036



2,094


Loss on foreign currency transactions, net





(2,966)





(1,152)


Other investment income (loss), net

1,007



1,029



(2,160)



2,036



942



(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,
2019


March 31,
2019


June 30,
2018


June 30,
2019


June 30,
2018

Interest expense on repurchase agreement
borrowings

123,894



107,726



76,287



231,620



142,411


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

(5,916)



(5,851)



(6,898)



(11,767)



(13,437)


Repurchase agreements interest expense

117,978



101,875



69,389



219,853



128,974



(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.


          The components of core income for the three and six months ended June 30, 2019 are:



Three Months Ended


Six Months Ended

$ in thousands

June 30,
2019


March 31,
2019


June 30,
2018


June 30,
2019


June 30,
2018

Effective net interest income(1)

79,894



78,063



67,968



157,957



140,041


Dividend income

1,007



1,029



806



2,036



2,094


Equity in earnings (losses) of unconsolidated
ventures

702



692



798



1,394



1,694


Total expenses

(11,369)



(11,792)



(11,627)



(23,161)



(23,604)


Total core earnings

70,234



67,992



57,945



138,226



120,225


Dividends to preferred stockholders

(11,106)



(11,107)



(11,106)



(22,213)



(22,213)


Core earnings attributable to non-controlling
interest





(731)





(1,515)


Core earnings attributable to common stockholders

59,128



56,885



46,108



116,013



96,497



(1)  See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.

 

Effective Interest Income/ Effective Yield/ Effective Interest Expense/Effective Cost of Funds/Effective Net Interest Income/Effective Interest Rate Margin

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

The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest income (expense) on its interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. The Company views its interest rate swaps as an economic hedge against increases in future market interest rates on its floating rate borrowings. The Company adds back the net payments it makes on its interest rate swap agreements to its total U.S. GAAP interest expense because the Company uses interest rate swaps to add stability to interest expense. The Company excludes the amortization of net deferred gains (losses) on de-designated interest rate swaps from its calculation of effective interest expense because the Company does not consider the amortization a current component of its borrowing costs.

The Company calculates effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for contractual net interest income (expense) on its interest rate swaps that is recorded as gain (loss) on derivative instruments, amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net.

The Company believes the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provide information that is useful to investors in understanding the Company's borrowing costs and operating performance.

The following tables reconcile total interest income to effective interest income and yield to effective yield for the following periods:


Three Months Ended


June 30, 2019


March 31, 2019


June 30, 2018

$ in thousands

Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield

Total interest income

202,221



3.89

%


187,074



3.91

%


151,599



3.42

%

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

5,300



0.10

%


5,350



0.11

%


5,638



0.13

%

Effective interest income

207,521



3.99

%


192,424



4.02

%


157,237



3.55

%

 


Six Months Ended June 30,


2019


2018

$ in thousands

Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield

Total interest income

389,295



3.90

%


304,824



3.40

%

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

10,650



0.10

%


11,270



0.13

%

Effective interest income

399,945



4.00

%


316,094



3.53

%

 

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, 2019


March 31, 2019


June 30, 2018

$ 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

129,236



2.73

%


113,019



2.65

%


77,860



2.04

%

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

5,916



0.13

%


5,851



0.14

%


6,898



0.18

%

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

(7,525)



(0.16)

%


(4,509)



(0.11)

%


4,511



0.12

%

Effective interest expense

127,627



2.70

%


114,361



2.68

%


89,269



2.34

%

 


Six Months Ended June 30,


2019


2018

$ in thousands

Reconciliation


Cost of Funds /
Effective Cost
of Funds


Reconciliation


Cost of Funds /
Effective Cost
of Funds

Total interest expense

242,255



2.69

%


145,993



1.89

%

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

11,767



0.13

%


13,437



0.17

%

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

(12,034)



(0.13)

%


16,624



0.22

%

Effective interest expense

241,988



2.69

%


176,054



2.28

%

 

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, 2019


March 31, 2019


June 30, 2018

$ 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

72,985



1.16

%


74,055



1.26

%


73,739



1.38

%

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

(5,916)



(0.13)

%


(5,851)



(0.14)

%


(6,898)



(0.18)

%

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

5,300



0.10

%


5,350



0.11

%


5,638



0.13

%

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

7,525



0.16

%


4,509



0.11

%


(4,511)



(0.12)

%

Effective net interest income

79,894



1.29

%


78,063



1.34

%


67,968



1.21

%

 


Six Months Ended June 30,


2019


2018

$ in thousands

Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin


Reconciliation


Net Interest
Rate Margin /
Effective
Interest Rate
Margin

Net interest income

147,040



1.21

%


158,831



1.51

%

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

(11,767)



(0.13)

%


(13,437)



(0.17)

%

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

10,650



0.10

%


11,270



0.13

%

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

12,034



0.13

%


(16,623)



(0.22)

%

Effective net interest income

157,957



1.31

%


140,041



1.25

%

 

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, 2019 and March 31, 2019. The Company's debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt (sum of repurchase agreements and secured loans) to total 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, 2019


$ in thousands

Agency RMBS

Agency CMBS

Commercial
Credit (1)

Residential
Credit (2)

Total

Mortgage-backed and credit risk transfer
securities

12,935,301


2,926,243


3,651,586


2,022,917


21,536,047


Cash and cash equivalents (3)

44,940


9,724


31,996


12,960


99,620


Restricted cash (4)

45,074


10,197




55,271


Derivative assets, at fair value (4)

8,207


1,857


3



10,067


Other assets

91,609


77,742


113,682


54,040


337,073


Total assets

13,125,131


3,025,763


3,797,267


2,089,917


22,038,078








Repurchase agreements

11,234,043


2,299,766


1,849,544


1,691,712


17,075,065


Secured loans (5)

580,915



1,069,085



1,650,000


Derivative liabilities, at fair value (4)

29,904


6,765


300



36,969


Other liabilities

86,687


464,263


42,437


12,556


605,943


Total liabilities

11,931,549


2,770,794


2,961,366


1,704,268


19,367,977








Total equity (allocated)

1,193,582


254,969


835,901


385,649


2,670,101


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






Net equity in unsecured assets (6)



(49,996)



(49,996)


Collateral pledged against secured loans

(688,520)



(1,267,117)



(1,955,637)


Secured loans

580,915



1,069,085



1,650,000


Equity related to repurchase agreement debt

1,085,977


254,969


587,873


385,649


2,314,468


Debt-to-equity ratio (7)

9.9


9.0


3.5


4.4


7.0


Repurchase agreement debt-to-equity ratio (8)

10.3


9.0


3.1


4.4


7.4




(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)

Restricted cash, derivative assets and derivative 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, 2019


$ in thousands

Agency RMBS

Agency CMBS

Commercial
Credit (1)

Residential
Credit (2)

Total

Mortgage-backed and credit risk transfer securities

13,575,817


2,001,552


3,455,805


2,094,424


21,127,598


Cash and cash equivalents (3)

35,406


4,302


25,869


12,905


78,482


Restricted cash(4)

4,379


646




5,025


Derivative assets, at fair value (4)

22,893


3,375


312



26,580


Other assets

84,476


7,457


109,886


59,883


261,702


Total assets

13,722,971


2,017,332


3,591,872


2,167,212


21,499,387








Repurchase agreements

11,868,925


1,639,097


1,642,106


1,674,259


16,824,387


Secured loans (5)

581,896



1,068,104



1,650,000


Derivative liabilities, at fair value (4)

7,376


1,087




8,463


Other liabilities

69,863


230,980


28,468


15,512


344,823


Total liabilities

12,528,060


1,871,164


2,738,678


1,689,771


18,827,673








Total equity (allocated)

1,194,911


146,168


853,194


477,441


2,671,714


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






Net equity in unsecured assets (6)



(48,583)



(48,583)


Collateral pledged against secured loans

(686,656)



(1,260,396)



(1,947,052)


Secured loans

581,896



1,068,104



1,650,000


Equity related to repurchase agreement debt

1,090,151


146,168


612,319


477,441


2,326,079


Debt-to-equity ratio (7)

10.4


11.2


3.2


3.5


6.9


Repurchase agreement debt-to-equity ratio (8)

10.9


11.2


2.7


3.5


7.2




(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)

Restricted cash, derivative assets and derivative 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 Earning 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,
2019


March 31,
2019


June 30,
2018


June 30,
2019


June 30,
2018

Average Earning Asset Balances (1):










Agency RMBS:










15 year fixed-rate, at amortized cost

342,822



371,228



2,648,396



356,946



2,763,406


30 year fixed-rate, at amortized cost

12,569,625



11,780,005



7,805,977



12,176,996



7,818,321


ARM, at amortized cost

6,326



19,355



220,960



12,805



226,103


Hybrid ARM, at amortized cost

146,331



224,458



1,595,131



185,179



1,630,813


Agency - CMO, at amortized cost

377,794



291,914



254,642



335,091



264,210


Agency CMBS, at amortized cost

1,940,906



1,129,227



50,179



1,537,309



25,228


Non-Agency CMBS, at amortized cost

3,470,708



3,361,132



3,177,398



3,416,222



3,185,442


Non-Agency RMBS, at amortized cost

1,020,856



1,084,721



1,030,949



1,052,612



1,057,619


GSE CRT, at amortized cost

852,083



808,296



769,821



830,310



773,263


Loan participation interest

51,377



54,763





53,061




Commercial loans, at amortized cost

24,365



27,375



178,080



25,862



185,767


Average earning assets

20,803,193



19,152,474



17,731,533



19,982,393



17,930,172


Average Earning Asset Yields (2):










Agency RMBS:










15 year fixed-rate

3.21

%


3.50

%


1.99

%


3.36

%


2.02

%

30 year fixed-rate

3.43

%


3.38

%


2.95

%


3.40

%


2.96

%

ARM

3.60

%


3.70

%


2.43

%


3.67

%


2.37

%

Hybrid ARM

2.85

%


3.47

%


2.28

%


3.23

%


2.26

%

Agency - CMO

3.24

%


3.56

%


3.04

%


3.38

%


2.76

%

Agency CMBS

3.49

%


3.52

%


3.63

%


3.50

%


3.63

%

Non-Agency CMBS

5.07

%


4.98

%


4.95

%


5.02

%


4.90

%

Non-Agency RMBS

6.53

%


6.71

%


7.12

%


6.62

%


7.10

%

GSE CRT (3)

3.56

%


3.67

%


3.37

%


3.61

%


3.18

%

Commercial loans

11.13

%


11.08

%


9.12

%


11.10

%


8.98

%

Loan participation interest

6.12

%


6.14

%


%


6.13

%


%

Average earning asset yields

3.89

%


3.91

%


3.42

%


3.90

%


3.40

%



(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 Cost of Funds

The table below presents information related to the Company's average borrowings and average cost of funds.


Three Months Ended


Six Months Ended

$ in thousands

June 30,
2019


March 31,
2019


June 30,
2018


June 30,
2019


June 30,
2018

Average Borrowings (1):










Agency RMBS (2)

12,516,268



11,664,156



11,146,252



12,092,572



11,286,117


Agency CMBS

1,881,685



1,074,917



43,984



1,480,530



22,114


Non-Agency CMBS (2)

2,819,109



2,663,941



2,556,166



2,741,948



2,549,519


Non-Agency RMBS

901,451



886,554



861,598



894,044



876,318


GSE CRT

751,882



717,482



667,972



734,777



671,245


Exchangeable senior notes









57,767


        Loan participation interest

38,532



41,072





39,795




Total average borrowings

18,908,927



17,048,122



15,275,972



17,983,666



15,463,080


Maximum borrowings during the period (3)

19,365,413



18,474,387



15,352,321



19,365,413



15,674,202


Average Cost of Funds (4):










Agency RMBS (2)

2.73

%


2.59

%


1.98

%


2.66

%


1.82

%

Agency CMBS

2.68

%


2.64

%


2.38

%


2.66

%


2.38

%

Non-Agency CMBS (2)

3.19

%


3.24

%


2.68

%


3.22

%


2.48

%

Non-Agency RMBS

3.46

%


3.54

%


3.19

%


3.50

%


3.05

%

GSE CRT

3.47

%


3.49

%


3.16

%


3.48

%


3.02

%

Exchangeable senior notes

%


%


%


%


5.58

%

        Loan participation interest

4.11

%


4.15

%


%


4.13

%


%

Cost of funds

2.73

%


2.65

%


2.04

%


2.69

%


1.89

%

Interest rate swaps average fixed pay rate (5)

2.28

%


2.43

%


2.18

%


2.35

%


2.26

%

Interest rate swaps average floating receive rate (6)

(2.51)

%


(2.58)

%


(2.00)

%


(2.54)

%


(1.89)

%

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

2.70

%


2.68

%


2.34

%


2.69

%


2.28

%











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

7.0

x


6.9

x


6.1

x


7.0

x


6.1

x



(1)

Average borrowings for each period are based on weighted month-end balances; all percentages are annualized.

(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."

 

 

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SOURCE Invesco Mortgage Capital Inc.