Invesco Mortgage Capital Inc. Reports Third Quarter 2019 Financial Results

Book value per common* share of $16.31

Maintained common stock dividend of $0.45 per share

Generated economic return** of 3.4%

Issued $219.3 million in common stock

Company Release - 11/7/2019 4:30 PM ET

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

(PRNewsfoto/Invesco Mortgage Capital Inc.)

Financial Summary:

  • Q3 2019 net income attributable to common stockholders of $77.9 million or $0.57 basic income per common share compared to net income attributable to common stockholders of $7.2 million or $0.06 basic income per common share in Q2 2019
  • Q3 2019 core earnings*** of $63.7 million or core earnings per common share ("EPS") of $0.47 compared to $59.1 million or core EPS of $0.46 in Q2 2019
  • Q3 2019 book value per common share* of $16.31 compared to $16.21 at Q2 2019
  • Q3 2019 common stock dividend of $0.45 per share compared to $0.45 in Q2 2019
  • Economic return** of 3.4% for Q3 2019 and 15.7% for the year to date ended September 30, 2019

"We are pleased to announce core earnings of $0.47 per common share for the third quarter of 2019. Core earnings exceeded our $0.45 dividend for the fourth consecutive quarter as our portfolio benefits from an active management strategy that helps mitigate the impacts of prepayment risk. During the quarter, we issued an additional $219.3 million of common stock and quickly deployed the proceeds into accretive assets that will help support core earnings going forward. Despite volatility in both the funding and interest rate markets during the quarter, our diversified portfolio and dynamic hedging strategy combined to increase book value to $16.31. Our higher book value and stable dividend produced a 3.4% economic return for the quarter, bringing our year-to-date economic return to a robust 15.7%," 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 September 30, 2019 is defined as the change in book value per common share from June 30, 2019 to September 30, 2019 of $0.10; plus dividends declared of $0.45 per common share; divided by the June 30, 2019 book value per common share of $16.21. Economic return for the year to date ended September 30, 2019 is defined as the change in book value per common share from December 31, 2018 to September 30, 2019 of $1.04; plus dividends declared of $1.35 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 September 30, 2019 and June 30, 2019 are summarized in the table below.

($ in millions, except share amounts)

Q3 '19

Q2 '19

Variance

Average Balances

(unaudited)

(unaudited)


Average earning assets (at amortized cost)

$20,963.1


$20,803.2


$159.9


Average borrowings

$19,326.9


$18,908.9


$418.0


Average equity

$2,598.0


$2,338.0


$260.0






U.S. GAAP Financial Measures




Total interest income

$196.3


$202.2


($5.9)


Total interest expense

$123.3


$129.2


($5.9)


Net interest income

$73.0


$73.0


$0.0


Total expenses

$10.6


$11.4


($0.8)


Net income attributable to common stockholders

$77.9


$7.2


$70.7






Average earning asset yields

3.75

%

3.89

%

(0.14)

%

Average cost of funds

2.55

%

2.73

%

(0.18)

%

Average net interest rate margin

1.20

%

1.16

%

0.04

%





Period-end weighted average asset yields*

3.87

%

4.03

%

(0.16)

%

Period-end weighted average cost of funds

2.47

%

2.77

%

(0.30)

%

Period-end weighted average net interest rate margin

1.40

%

1.26

%

0.14

%





Book value per common share**

$16.31


$16.21


$0.10


Earnings per common share (basic)

$0.57


$0.06


$0.51


Earnings per common share (diluted)

$0.57


$0.06


$0.51


Debt-to-equity ratio

6.8

x

7.0

x

(0.2

x)





Non-GAAP Financial Measures***




Core earnings

$63.7


$59.1


$4.6


Effective interest income

$201.5


$207.5


($6.0)


Effective interest expense

$117.5


$127.6


($10.1)


Effective net interest income

$84.0


$79.9


$4.1






Effective yield

3.84

%

3.99

%

(0.15)

%

Effective cost of funds

2.43

%

2.70

%

(0.27)

%

Effective interest rate margin

1.41

%

1.29

%

0.12

%





Core earnings per common share

$0.47


$0.46


$0.01


Repurchase agreement debt-to-equity ratio

6.9

x

7.4

x

(0.5

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 third quarter of 2019 was $77.9 million compared to $7.2 million for the second quarter of 2019. Net income attributable to common stockholders was $70.7 million higher in the third quarter primarily due to a decrease in net losses on derivatives that exceeded a decrease in net gains on investments. Net losses on derivatives totaled $177.2 million compared to $347.2 million in the second quarter and net gains on investments totaled $202.4 million in the third quarter compared to $302.2 million in the second quarter. Net gains on investments and net losses on derivative instruments were driven by a decline in interest rates as the benchmark 10 year U.S. Treasury note fell 34 basis points to 1.66% as of September 30, 2019. The Company also had unrealized gains on available-for-sale investments of $14.5 million in the third quarter and $47.2 million in the second quarter that are recorded in other comprehensive income.

Book value per common share for the third quarter of 2019 was $16.31 compared to $16.21 in the second quarter reflecting higher valuations on prepayment protected Agency RMBS securities and modest interest rate spread tightening in commercial credit during the quarter.

During the third quarter of 2019, the Company generated $63.7 million in core earnings, an increase of $4.6 million or 7.8% over the second quarter of 2019. Higher core earnings were driven by a $4.1 million increase in effective net interest income primarily due to a lower effective cost of funds during the quarter. Effective yield declined by 15 basis points to 3.84%, from 3.99% in the second quarter primarily due to higher Agency RMBS prepayment speeds reflecting increased borrower refinancing activity as interest rates declined. Effective cost of funds was 2.43%, 27 basis points lower than the second quarter, due to lower average repurchase agreement borrowing costs and higher swap interest income.

Total interest income decreased $5.9 million to $196.3 million during the third quarter and average earning asset yield decreased 14 basis points to 3.75%. Premium amortization increased $4.8 million to $18.6 million during the third quarter reflecting the impact of declining interest rates on prepayments of Agency RMBS investments. Average earning assets increased $159.9 million (0.8%) to $21.0 billion in the third quarter due to the investment of net proceeds from the Company's August common stock offering.

The Company increased its average borrowings by $418.0 million (2.2%) in the third quarter of 2019 to $19.3 billion to finance its higher asset base. Total interest expense decreased to $123.3 million compared to $129.2 million during the second quarter of 2019 reflecting an 18 basis point decrease in average cost of funds to 2.55% from 2.73% during the second quarter.

The Company's debt-to-equity ratio was 6.8x as of September 30, 2019 compared to 7.0x as of June 30, 2019. The Company's repurchase agreement debt-to-equity ratio was 6.9x as of September 30, 2019 compared to 7.4x as of June 30, 2019. Leverage decreased during the quarter due to a $241 million increase in shareholders' equity.

Total expenses for the third quarter of 2019 decreased to approximately $10.6 million compared to $11.4 million for the second quarter of 2019 primarily due to a lower management fee base. Total expenses include management fees and general and administrative expenses. The ratio of annualized total expenses to average equity (1) decreased to 1.63% compared to 1.95% for the second quarter of 2019.

As previously announced, the Company declared the following dividends on September 16, 2019: a common stock dividend of $0.45 per share paid on October 28, 2019 to its stockholders of record as of September 27, 2019 and a Series A preferred stock dividend of $0.4844 per share paid on October 25, 2019 to its stockholders of record as of October 1, 2019. The Company declared the following dividends on its Series B and Series C Preferred Stock on November 5, 2019 to its stockholders of record as of December 5, 2019: a Series B Preferred Stock dividend of $0.4844 per share payable on December 27, 2019 and a Series C Preferred Stock dividend of $0.46875 per share payable on December 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 Friday, November 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 November 22, 2019 by calling:

800-388-9920 (North America) or 1-402-998-1162 (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,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Interest Income










Mortgage-backed and credit risk transfer securities (1)

194,938



200,737



160,416



581,167



456,967


Commercial and other loans

1,353



1,484



1,672



4,419



9,945


Total interest income

196,291



202,221



162,088



585,586



466,912


Interest Expense










Repurchase agreements

112,851



117,978



81,763



332,704



210,737


Secured loans

10,413



11,258



9,490



32,815



24,888


Exchangeable senior notes









1,621


Total interest expense

123,264



129,236



91,253



365,519



237,246


Net interest income

73,027



72,985



70,835



220,067



229,666


Other Income (loss)










Gain (loss) on investments, net

202,413



302,182



(207,910)



772,977



(404,657)


Equity in earnings (losses) of unconsolidated ventures

403



702



1,084



1,797



2,778


Gain (loss) on derivative instruments, net

(177,244)



(344,733)



87,672



(723,437)



288,208


Realized and unrealized credit derivative income (loss), net

1



(2,438)



4,975



5,447



8,875


Net loss on extinguishment of debt









(26)


Other investment income (loss), net

1,005



1,007



1,068



3,041



2,010


Total other income (loss)

26,578



(43,280)



(113,111)



59,825



(102,812)


Expenses










Management fee – related party

8,740



9,370



10,105



27,644



30,428


General and administrative

1,862



1,999



1,673



6,119



4,954


Total expenses

10,602



11,369



11,778



33,763



35,382


Net income (loss)

89,003



18,336



(54,054)



246,129



91,472


Net income (loss) attributable to non-controlling interest





(681)





1,153


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

89,003



18,336



(53,373)



246,129



90,319


Dividends to preferred stockholders

11,107



11,106



11,107



33,320



33,320


Net income (loss) attributable to common stockholders

77,896



7,230



(64,480)



212,809



56,999


Earnings (loss) per share:










Net income attributable to common stockholders










Basic

0.57



0.06



(0.58)



1.66



0.51


Diluted

0.57



0.06



(0.58)



1.65



0.51




(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,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Coupon interest

213,546



214,501



175,696



620,489



506,180


Net premium amortization

(18,608)



(13,764)



(15,280)



(39,322)



(49,213)


Mortgage-backed and credit risk transfer securities interest
income

194,938



200,737



160,416



581,167



456,967


 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)



Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Net income (loss)

89,003



18,336



(54,054)



246,129



91,472


Other comprehensive income (loss):










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

14,482



47,188



(40,554)



114,019



(220,800)


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

(954)



(121)



134,280



9,072



153,406


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

(5,981)



(5,916)



(6,422)



(17,748)



(19,859)


Currency translation adjustments on
investment in unconsolidated venture

290



(320)



(1,126)



(306)



(328)


Total other comprehensive income (loss)

7,837



40,831



86,178



105,037



(87,581)


Comprehensive income

96,840



59,167



32,124



351,166



3,891


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





(405)





(48)


Less: Dividends to preferred stockholders

(11,107)



(11,106)



(11,107)



(33,320)



(33,320)


Comprehensive income (loss) attributable to common
stockholders

85,733



48,061



20,612



317,846



(29,477)


 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



As of

 $ in thousands except share amounts

September 30, 2019


December 31, 2018

ASSETS


Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of
$21,866,617 and $17,082,825, respectively)(1)

23,599,499



17,396,642


Cash and cash equivalents

125,888



135,617


Restricted cash

80,086




Due from counterparties

10,284



13,500


Investment related receivable

72,959



66,598


Derivative assets, at fair value

4,127



15,089


Other assets

168,480



186,059


Total assets

24,061,323



17,813,505


LIABILITIES AND EQUITY




Liabilities:




Repurchase agreements

18,072,032



13,602,484


Secured loans

1,650,000



1,650,000


Derivative liabilities, at fair value

46,381



23,390


Dividends and distributions payable

66,974



49,578


Investment related payable

1,271,718



132,096


Accrued interest payable

29,831



37,620


Collateral held payable

1,096



18,083


Accounts payable and accrued expenses

2,477



1,694


Due to affiliate

9,782



11,863


Total liabilities

21,150,291



15,526,808


Commitments and contingencies (See Note 14) (2):




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; 142,802,293 and
   111,584,996 shares issued and outstanding, respectively

1,427



1,115


Additional paid in capital

2,869,650



2,383,532


Accumulated other comprehensive income

325,850



220,813


Retained earnings (distributions in excess of earnings)

(849,219)



(882,087)


Total stockholders' equity

2,911,032



2,286,697


Total liabilities and stockholders' equity

24,061,323



17,813,505




(1)

Includes approximately $1.3 billion of to-be-announced ("TBA") Agency CMBS securities as of September 30, 2019 that cannot be pledged as collateral until settled. The Company's obligation to purchase these securities is recorded within investment related payable on the condensed consolidated balance sheet.

(2)

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 September 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


Nine Months Ended

$ in thousands, except per share data

September 30,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Net income (loss) attributable to common
stockholders

77,896



7,230



(64,480)



212,809



56,999


Adjustments:










(Gain) loss on investments, net

(202,413)



(302,182)



207,910



(772,977)



404,657


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

173,607



307,239



(99,641)



713,233



(249,493)


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

15,352



45,019



9,206



33,953



(58,101)


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

5,195



7,738



663



10,399



8,034


Loss on foreign currency transactions, net (3)

14





(215)



14



937


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

(5,981)



(5,916)



(6,422)



(17,748)



(19,859)


Net loss on extinguishment of debt









26


Subtotal

(14,226)



51,898



111,501



(33,126)



86,201


Cumulative adjustments attributable to non-
controlling interest





(1,405)





(1,087)


Core earnings attributable to common stockholders

63,670



59,128



45,616



179,683



142,113


Basic income (loss) per common share

0.57



0.06



(0.58)



1.66



0.51


Core earnings per share attributable to common
stockholders (5)

0.47



0.46



0.41



1.40



1.27


 

(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,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Realized gain (loss) on derivative instruments, net

(173,607)



(307,239)



99,641



(713,233)



249,493


Unrealized gain (loss) on derivative instruments, net

(15,352)



(45,019)



(9,206)



(33,953)



58,101


Contractual net interest income (expense) on interest
rate swaps

11,715



7,525



(2,763)



23,749



(19,386)


Gain (loss) on derivative instruments, net

(177,244)



(344,733)



87,672



(723,437)



288,208


 

(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,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

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

(5,195)



(7,738)



(663)



(10,399)



(8,034)


GSE CRT embedded derivative coupon interest

5,196



5,300



5,638



15,846



16,909


Realized and unrealized credit derivative income
(loss), net

1



(2,438)



4,975



5,447



8,875


 

(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,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Dividend income

1,019



1,007



853



3,055



2,947


Loss on foreign currency transactions, net

(14)





215



(14)



(937)


Other investment income (loss), net

1,005



1,007



1,068



3,041



2,010


 

(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,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Interest expense on repurchase agreement
borrowings

118,832



123,894



88,185



350,452



230,596


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

(5,981)



(5,916)



(6,422)



(17,748)



(19,859)


Repurchase agreements interest expense

112,851



117,978



81,763



332,704



210,737


 

(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 nine months ended September 30, 2019 are:


Three Months Ended


Nine Months Ended

$ in thousands

September 30,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Effective net interest income(1)

83,957



79,894



67,288



241,914



207,330


Dividend income

1,019



1,007



853



3,055



2,947


Equity in earnings (losses) of unconsolidated
ventures

403



702



1,084



1,797



2,778


Total expenses

(10,602)



(11,369)



(11,778)



(33,763)



(35,382)


Total core earnings

74,777



70,234



57,447



213,003



177,673


Dividends to preferred stockholders

(11,107)



(11,106)



(11,107)



(33,320)



(33,320)


Core earnings attributable to non-controlling
interest





(724)





(2,240)


Core earnings attributable to common stockholders

63,670



59,128



45,616



179,683



142,113




(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


September 30, 2019


June 30, 2019


September 30, 2018

$ in thousands

Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield

Total interest income

196,291



3.75

%


202,221



3.89

%


162,088



3.53

%

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

5,196



0.09

%


5,300



0.10

%


5,638



0.12

%

Effective interest income

201,487



3.84

%


207,521



3.99

%


167,726



3.65

%

 


Nine Months Ended September 30,


2019


2018

$ in thousands

Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield

Total interest income

585,586



3.84

%


466,912



3.45

%

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

15,846



0.11

%


16,909



0.13

%

Effective interest income

601,432



3.95

%


483,821



3.58

%

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, 2019


June 30, 2019


September 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

123,264



2.55

%


129,236



2.73

%


91,253



2.29

%

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

5,981



0.12

%


5,916



0.13

%


6,422



0.16

%

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

(11,715)



(0.24)

%


(7,525)



(0.16)

%


2,763



0.07

%

Effective interest expense

117,530



2.43

%


127,627



2.70

%


100,438



2.52

%

 


Nine Months Ended September 30,


2019


2018

$ in thousands

Reconciliation


Cost of Funds
/ Effective
Cost of Funds


Reconciliation


Cost of Funds
/ Effective
Cost of Funds

Total interest expense

365,519



2.64

%


237,246



2.02

%

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

17,748



0.13

%


19,859



0.17

%

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

(23,749)



(0.17)

%


19,386



0.17

%

Effective interest expense

359,518



2.60

%


276,491



2.36

%

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, 2019


June 30, 2019


September 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

73,027



1.20

%


72,985



1.16

%


70,835



1.24

%

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

(5,981)



(0.12)

%


(5,916)



(0.13)

%


(6,422)



(0.16)

%

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

5,196



0.09

%


5,300



0.10

%


5,638



0.12

%

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

11,715



0.24

%


7,525



0.16

%


(2,763)



(0.07)

%

Effective net interest income

83,957



1.41

%


79,894



1.29

%


67,288



1.13

%

 


Nine Months Ended September 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

220,067



1.20

%


229,666



1.43

%

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

(17,748)



(0.13)

%


(19,859)



(0.17)

%

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

15,846



0.11

%


16,909



0.13

%

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

23,749



0.17

%


(19,386)



(0.17)

%

Effective net interest income

241,914



1.35

%


207,330



1.22

%

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, 2019 and June 30, 2019. The Company's debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt (sum of repurchase agreements and secured loans) to total 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, 2019

$ in thousands

Agency RMBS

Agency CMBS

Commercial
Credit (1)

Residential
Credit (2)

Total

Mortgage-backed and credit risk transfer
securities

12,864,217


4,936,184


3,851,552


1,947,546


23,599,499


Cash and cash equivalents (3)

56,122


17,226


37,536


15,004


125,888


Restricted cash (4)

57,878


22,208




80,086


Derivative assets, at fair value (4)

2,557


981


589



4,127


Other assets

76,417


13,452


111,501


50,353


251,723


Total assets

13,057,191


4,990,051


4,001,178


2,012,903


24,061,323








Repurchase agreements

11,124,901


3,306,244


2,018,542


1,622,345


18,072,032


Secured loans (5)

547,149



1,102,851



1,650,000


Derivative liabilities, at fair value (4)

33,519


12,862




46,381


Other liabilities

56,160


1,272,761


40,999


11,958


1,381,878


Total liabilities

11,761,729


4,591,867


3,162,392


1,634,303


21,150,291








Total equity (allocated)

1,295,462


398,184


838,786


378,600


2,911,032


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






Net equity in unsecured assets (6)



(47,493)



(47,493)


Collateral pledged against secured loans

(633,350)



(1,276,599)



(1,909,949)


Secured loans

547,149



1,102,851



1,650,000


Equity related to repurchase agreement debt

1,209,261


398,184


617,545


378,600


2,603,590


Debt-to-equity ratio (7)

9.0


8.3


3.7


4.3


6.8


Repurchase agreement debt-to-equity ratio (8)

9.2


8.3


3.3


4.3


6.9




(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.

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 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


Nine Months Ended

$ in thousands

September 30,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Average Earning Asset Balances (1):










Agency RMBS:










15 year fixed-rate, at amortized cost

312,603



342,822



1,613,967



342,003



2,376,050


30 year fixed-rate, at amortized cost

11,837,640



12,569,625



9,362,170



12,062,635



8,338,593


Hybrid ARM, at amortized cost

66,671



152,657



1,484,791



153,731



1,731,512


Agency - CMO, at amortized cost

420,889



377,794



242,133



364,005



256,770


Agency CMBS, at amortized cost

2,796,732



1,940,906



516,992



1,961,730



190,951


Non-Agency CMBS, at amortized cost

3,607,381



3,470,708



3,236,226



3,480,642



3,202,556


Non-Agency RMBS, at amortized cost

946,446



1,020,856



1,055,671



1,016,835



1,056,962


GSE CRT, at amortized cost

905,062



852,083



762,235



855,501



769,546


Loan participation interest

45,465



51,377



29,875



50,501



10,068


Commercial loans, at amortized cost

24,233



24,365



55,607



25,313



137,028


Average earning assets

20,963,122



20,803,193



18,359,667



20,312,896



18,070,036












Average Earning Asset Yields (2):










Agency RMBS:










15 year fixed-rate

3.32

%


3.21

%


2.59

%


3.35

%


2.15

%

30 year fixed-rate

3.19

%


3.43

%


2.96

%


3.34

%


2.96

%

Hybrid ARM

3.22

%


2.88

%


2.56

%


3.26

%


2.36

%

Agency - CMO

3.40

%


3.24

%


3.20

%


3.38

%


2.90

%

Agency CMBS

3.44

%


3.49

%


2.85

%


3.46

%


3.34

%

Non-Agency CMBS

5.09

%


5.07

%


4.88

%


5.05

%


4.89

%

Non-Agency RMBS

6.54

%


6.53

%


7.17

%


6.60

%


7.12

%

GSE CRT (3)

3.33

%


3.56

%


3.56

%


3.51

%


3.31

%

Commercial loans

10.89

%


11.13

%


10.05

%


11.04

%


9.45

%

Loan participation interest

6.18

%


6.12

%


5.87

%


6.14

%


5.87

%

Average earning asset yields

3.75

%


3.89

%


3.53

%


3.84

%


3.45

%



(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


Nine Months Ended

$ in thousands

September 30,
2019


June 30,
2019


September 30,
2018


September 30,
2019


September 30,
2018

Average Borrowings (1):










Agency RMBS (2)

11,808,241



12,516,268



11,326,323



11,996,851



11,299,625


Agency CMBS

2,794,691



1,881,685



472,011



1,923,397



173,727


Non-Agency CMBS (2)

3,047,334



2,819,109



2,575,504



2,844,764



2,558,317


Non-Agency RMBS

865,961



901,451



895,504



884,580



882,784


GSE CRT

776,555



751,882



681,079



748,856



674,560


Exchangeable senior notes









38,300


        Loan participation interest

34,099



38,532



22,406



37,876



7,551


Total average borrowings

19,326,881



18,908,927



15,972,827



18,436,324



15,634,864


Maximum borrowings during the period (3)

19,898,863



19,365,413



16,078,387



19,898,863



16,078,387












Average Cost of Funds (4):










Agency RMBS (2)

2.54

%


2.73

%


2.24

%


2.62

%


1.96

%

Agency CMBS

2.54

%


2.68

%


2.26

%


2.59

%


2.22

%

Non-Agency CMBS (2)

3.00

%


3.19

%


2.88

%


3.14

%


2.61

%

Non-Agency RMBS

3.26

%


3.46

%


3.40

%


3.42

%


3.17

%

GSE CRT

3.22

%


3.47

%


3.26

%


3.39

%


3.10

%

Exchangeable senior notes

%


%


%


%


5.58

%

        Loan participation interest

4.03

%


4.11

%


3.83

%


4.10

%


3.83

%

Cost of funds

2.55

%


2.73

%


2.29

%


2.64

%


2.02

%

Interest rate swaps average fixed pay rate (5)

1.92

%


2.28

%


2.35

%


2.21

%


2.26

%

Interest rate swaps average floating receive rate (6)

(2.28)

%


(2.51)

%


(2.25)

%


(2.45)

%


(1.98)

%

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

2.43

%


2.70

%


2.52

%


2.60

%


2.36

%











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

6.8

x


7.0

x


6.4

x


6.8

x


6.4

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.