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.

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