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Invesco Mortgage Capital Inc. Reports First Quarter 2019 Financial Results

Book value per common* share rose 6.7% to $16.29

Increased common stock dividend 7.1% to $0.45 per share

Generated economic return** of 9.6%

Issued $258.6 million in common stock

ATLANTA, May 8, 2019 /PRNewswire/ -- Invesco Mortgage Capital Inc. (IVR) (the "Company") today announced financial results for the quarter ended March 31, 2019.

(PRNewsfoto/Invesco Mortgage Capital Inc.)

Financial Summary:

  • Q1 2019 net income attributable to common stockholders of $127.7 million or $1.05 basic income per common share compared to net loss attributable to common stockholders of $172.2 million or $1.54 basic loss per common share in Q4 2018;
  • Q1 2019 core earnings*** of $56.9 million or core earnings per common share ("EPS") of $0.47 compared to $50.8 million or core EPS of $0.46 in Q4 2018
  • Q1 2019 book value per common share* of $16.29 compared to $15.27 at Q4 2018
  • Q1 2019 common stock dividend of $0.45 per share compared to $0.42 in Q4 2018
  • Economic return** of 9.6% for the quarter

"We are pleased to announce core earnings of $0.47 per common share for the first quarter of 2019.  Core earnings continued to be supported by the impact of our recent portfolio repositioning, lower effective cost of funds and the deployment of our common stock issuance proceeds into accretive investments.  The strength in core earnings allowed us to increase our common dividend to $0.45 per share, which, combined with our improved book value, generated a strong 9.6% economic return for the first quarter. Our book value increased by 6.7%, reflecting tighter interest rate spreads across our investment portfolio." 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 March 31, 2019 is defined as the change in book value per common share from December 31, 2018 to March 31, 2019 of $1.02; plus dividends declared of $0.45 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 March 31, 2019 and December 31, 2018 are summarized in the table below.

 

($ in millions, except share amounts)

Q1 '19

Q4 '18

Variance

Average Balances

(unaudited)

(unaudited)


Average earning assets (at amortized cost)

$19,152.5


$18,144.7


$1,007.8


Average borrowings

$17,048.1


$15,833.3


$1,214.8


Average equity

$2,207.3


$1,947.3


$260.0






U.S. GAAP Financial Measures




Total interest income

$187.1


$176.1


$11.0


Total interest expense

$113.0


$101.6


$11.4


Net interest income

$74.1


$74.5


($0.4)


Total expenses

$11.8


$12.4


($0.6)


Net income (loss) attributable to common stockholders

$127.7


($172.2)


$299.9






Average earning asset yields

3.91

%

3.88

%

0.03

%

Average cost of funds

2.65

%

2.57

%

0.08

%

Average net interest rate margin

1.26

%

1.31

%

(0.05)

%





Period-end weighted average asset yields*

4.02

%

4.02

%

0.00

%

Period-end weighted average cost of funds

2.84

%

2.79

%

0.05

%

Period-end weighted average net interest rate margin

1.18

%

1.23

%

(0.05)

%





Book value per common share**

$16.29


$15.27


$1.02


Earnings (loss) per common share (basic)

$1.05


($1.54)


$2.59


Earnings (loss) per common share (diluted)

$1.05


($1.54)


$2.59


Debt-to-equity ratio

6.9

x

6.7

x

0.2

x





Non-GAAP Financial Measures***




Core earnings

$56.9


$50.8


$6.1


Effective interest income

$192.4


$181.7


$10.7


Effective interest expense

$114.4


$108.2


$6.2


Effective net interest income

$78.1


$73.4


$4.7






Effective yield

4.02

%

4.00

%

0.02

%

Effective cost of funds

2.68

%

2.74

%

(0.06)

%

Effective interest rate margin

1.34

%

1.26

%

0.08

%





Core earnings per common share***

$0.47


$0.46


$0.01

Repurchase agreement debt-to-equity ratio

7.2

x

7.0

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 first quarter of 2019 was $127.7 million compared to net loss attributable to common stockholders of $172.2 million for the fourth quarter of 2018. Net income attributable to common stockholders was primarily driven by a $268.4 million gain on investments and $74.1 million of net interest income that was partially offset by a $201.5 million loss on derivatives. The Company issued $258.6 million of common stock during the first quarter. Book value per common share for the first quarter of 2019 increased by 6.7% to $16.29, reflecting tighter interest rate spreads across the Company's credit assets and gains in the Company's Agency CMBS and specified pool Agency RMBS.

During the first quarter of 2019, the Company generated $56.9 million in core earnings, an increase of $6.1 million or 11.9% from the fourth quarter of 2018. Higher core earnings reflect a $4.7 million increase in effective net interest income driven by a higher effective yield and a lower effective cost of funds during the quarter. Effective yield was 4.02% during the first quarter, up 2 basis points from 4.00% in the fourth quarter of 2018 due primarily to the continued benefit of the Company's Agency portfolio repositioning in the second half of 2018. Effective cost of funds was 2.68% during the first quarter, down 6 basis points from 2.74% in the fourth quarter of 2018 due to changes in the composition of the Company's interest rate swap portfolio.

Total interest income for the first quarter of 2019 was $187.1 million compared to $176.1 million for the fourth quarter of 2018. Higher total interest income reflects a $1.0 billion (5.6%) increase in average earning assets to $19.2 billion from $18.1 billion in the fourth quarter of 2018. Average earning assets rose primarily due to the investment of $258.6 million in net proceeds from sales of common stock. Average earning asset yield was 3.91% for the first quarter of 2019 compared to 3.88% in the fourth quarter of 2018 as asset yield continued to benefit from the Company's Agency portfolio repositioning in the second half of 2018. The Company continued to actively manage its portfolio during the first quarter and increased its holdings of newly issued 30-year Agency RMBS and Agency CMBS as the return on equity profile of these securities remained attractive.

The Company increased its average borrowings by $1.2 billion (7.7%) in the first quarter of 2019 to $17.0 billion to finance its higher asset base compared to average borrowings of $15.8 billion in the fourth quarter of 2018. Total interest expense was $113.0 million compared to $101.6 million during the fourth quarter of 2018.

The Company's debt-to-equity ratio increased to 6.9x as of March 31, 2019 from 6.7x as of December 31, 2018 primarily due to a change in asset mix. The Company invested the majority of the proceeds of its first quarter 2019 common stock issuances in Agency RMBS and Agency CMBS securities that are leveraged at higher rates than credit assets. The Company's repurchase agreement debt-to-equity ratio increased to 7.2x as of March 31, 2019 from 7.0x as of December 31, 2018.

Total expenses for the first quarter of 2019 were approximately $11.8 million compared to $12.4 million for the fourth quarter of 2018. The ratio of annualized total expenses to average equity (1) decreased to 2.14% compared to 2.55% for the fourth quarter of 2018.

As previously announced, the Company declared the following dividends on March 18, 2019: a common stock dividend of $0.45 per share paid on April 26, 2019 and a Series A preferred stock dividend of $0.4844 per share paid on April 25, 2019. The Company declared the following dividends on its Series B and Series C Preferred Stock on May 3, 2019 to its stockholders of record as of June 5, 2019: a Series B Preferred Stock dividend of $0.4844 per share payable on June 27, 2019 and a Series C Preferred Stock dividend of $0.46875 per share payable on June 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, May 9, 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 May 23, 2019 by calling:

866-403-7102 (North America) or 1-203-369-0574 (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

$ in thousands, except share amounts

March 31, 2019


December 31, 2018


March 31, 2018

Interest Income






Mortgage-backed and credit risk transfer securities (1)

185,492



174,511



149,003


Commercial and other loans

1,582



1,593



4,222


Total interest income

187,074



176,104



153,225


Interest Expense






Repurchase agreements

101,875



91,057



59,585


Secured loans

11,144



10,565



6,927


Exchangeable senior notes





1,621


Total interest expense

113,019



101,622



68,133


Net interest income

74,055



74,482



85,092


Other Income (loss)






Gain (loss) on investments, net

268,382



76,957



(160,370)


Equity in earnings (losses) of unconsolidated ventures

692



624



896


Gain (loss) on derivative instruments, net

(201,460)



(293,485)



133,367


Realized and unrealized credit derivative income (loss), net

7,884



(9,026)



3,165


Net loss on extinguishment of debt





(26)


Other investment income (loss), net

1,029



850



3,102


Total other income (loss)

76,527



(224,080)



(19,866)


Expenses






Management fee – related party

9,534



10,294



10,221


General and administrative

2,258



2,116



1,756


Total expenses

11,792



12,410



11,977


Net income (loss)

138,790



(162,008)



53,249


Net income (loss) attributable to non-controlling interest



(899)



671


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

138,790



(161,109)



52,578


Dividends to preferred stockholders

11,107



11,106



11,107


Net income (loss) attributable to common stockholders

127,683



(172,215)



41,471


Earnings per share:






Net income (loss) attributable to common stockholders






Basic

1.05



(1.54)



0.37


Diluted

1.05



(1.54)



0.37


 

 

(1)

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




Three Months Ended

$ in thousands

March 31, 2019


December 31, 2018


March 31, 2018

Coupon interest

192,442



183,059



166,319


Net premium amortization

(6,950)



(8,548)



(17,316)


Mortgage-backed and credit risk transfer securities interest income

185,492



174,511



149,003


 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)



Three Months Ended

In thousands

March 31, 2019


December 31, 2018


March 31, 2018

Net income (loss)

138,790



(162,008)



53,249


Other comprehensive income (loss):






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

52,349



10,376



(132,317)


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

10,147



39,756



9,237


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

(5,851)



(5,980)



(6,539)


Currency translation adjustments on investment in unconsolidated venture

(276)



(119)



312


Total other comprehensive income (loss)

56,369



44,033



(129,307)


Comprehensive income (loss)

195,159



(117,975)



(76,058)


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



1,027



959


Less: Dividends to preferred stockholders

(11,107)



(11,106)



(11,107)


Comprehensive income (loss) attributable to common stockholders

184,052



(128,054)



(86,206)


 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(
Unaudited)



As of

 $ in thousands except share amounts

March 31, 2019


December 31, 2018

ASSETS


Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $20,544,317 and $17,082,825, respectively)

21,127,598



17,396,642


Cash and cash equivalents

78,482



135,617


Restricted cash

5,025




Due from counterparties

13,000



13,500


Investment related receivable

70,789



66,598


Derivative assets, at fair value

26,580



15,089


Other assets

177,913



186,059


Total assets

21,499,387



17,813,505


LIABILITIES AND EQUITY




Liabilities:




Repurchase agreements

16,824,387



13,602,484


Secured loans

1,650,000



1,650,000


Derivative liabilities, at fair value

8,463



23,390


Dividends and distributions payable

60,433



49,578


Investment related payable

222,500



132,096


Accrued interest payable

47,100



37,620


Collateral held payable

2,273



18,083


Accounts payable and accrued expenses

2,384



1,694


Due to affiliate

10,133



11,863


Total liabilities

18,827,673



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; 128,267,497 and 
     111,584,996 shares issued and outstanding, respectively

1,282



1,115


Additional paid in capital

2,642,050



2,383,532


Accumulated other comprehensive income

277,182



220,813


Retained earnings (distributions in excess of earnings)

(812,124)



(882,087)


Total stockholders' equity

2,671,714



2,286,697


Total liabilities and stockholders' equity

21,499,387



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 March 31, 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

$ in thousands, except per share data

March 31, 2019


December 31, 2018


March 31, 2018

Net income (loss) attributable to common stockholders

127,683



(172,215)



41,471


Adjustments:






(Gain) loss on investments, net

(268,382)



(76,957)



160,370


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

232,387



252,323



(113,578)


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

(26,418)



40,533



(31,901)


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

(2,534)



14,595



2,468


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



(7)



(1,814)


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

(5,851)



(5,980)



(6,539)


Net loss on extinguishment of debt





26


Subtotal

(70,798)



224,507



9,032


Cumulative adjustments attributable to non-controlling interest



(1,449)



(114)


Core earnings attributable to common stockholders

56,885



50,843



50,389


Basic income (loss) per common share

1.05



(1.54)



0.37


Core earnings per share attributable to common stockholders (5)

0.47



0.46



0.45


 

(1)

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




Three Months Ended

$ in thousands

March 31, 2019


December 31, 2018


March 31, 2018

Realized gain (loss) on derivative instruments, net

(232,387)



(252,323)



113,578


Unrealized gain (loss) on derivative instruments, net

26,418



(40,533)



31,901


Contractual net interest income (expense) on interest rate swaps

4,509



(629)



(12,112)


Gain (loss) on derivative instruments, net

(201,460)



(293,485)



133,367


 

(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

$ in thousands

March 31, 2019


December 31, 2018


March 31, 2018

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

2,534



(14,595)



(2,468)


GSE CRT embedded derivative coupon interest

5,350



5,569



5,633


Realized and unrealized credit derivative income (loss), net

7,884



(9,026)



3,165


 

(3)

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




Three Months Ended

$ in thousands

March 31, 2019


December 31, 2018


March 31, 2018

Dividend income

1,029



843



1,288


Gain (loss) on foreign currency transactions, net



7



1,814


Other investment income (loss), net

1,029



850



3,102


 

(4)

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




Three Months Ended

$ in thousands

March 31, 2019


December 31, 2018


March 31, 2018

Interest expense on repurchase agreement borrowings

107,726



97,037



66,124


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

(5,851)



(5,980)



(6,539)


Repurchase agreements interest expense

101,875



91,057



59,585


 

(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 months ended March 31, 2019 are:



Three Months Ended

$ in thousands

March 31, 2019


December 31, 2018


March 31, 2018

Effective net interest income(1)

78,063



73,441



72,074


Dividend income

1,029



843



1,288


Equity in earnings (losses) of unconsolidated ventures

692



624



896


Total expenses

(11,792)



(12,410)



(11,977)


Total core earnings

67,992



62,498



62,281


Dividends to preferred stockholders

(11,107)



(11,106)



(11,107)


Core earnings attributable to non-controlling interest



(549)



(785)


Core earnings attributable to common stockholders

56,885



50,843



50,389




(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


March 31, 2019


December 31, 2018


March 31, 2018

$ in thousands

Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield

Total interest income

187,074



3.91

%


176,104



3.88

%


153,225



3.38

%

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

5,350



0.11

%


5,569



0.12

%


5,633



0.12

%

Effective interest income

192,424



4.02

%


181,673



4.00

%


158,858



3.50

%

 

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


March 31, 2019


December 31, 2018


March 31, 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

113,019



2.65

%


101,622



2.57

%


68,133



1.74

%

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

5,851



0.14

%


5,980



0.15

%


6,539



0.17

%

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

(4,509)



(0.11)

%


629



0.02

%


12,112



0.31

%

Effective interest expense

114,361



2.68

%


108,231



2.74

%


86,784



2.22

%

 

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


March 31, 2019


December 31, 2018


March 31, 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

74,055



1.26

%


74,482



1.31

%


85,092



1.64

%

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

(5,851)



(0.14)

%


(5,980)



(0.15)

%


(6,539)



(0.17)

%

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

5,350



0.11

%


5,568



0.12

%


5,633



0.12

%

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

4,509



0.11

%


(629)



(0.02)

%


(12,112)



(0.31)

%

Effective net interest income

78,063



1.34

%


73,441



1.26

%


72,074



1.28

%

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 March 31, 2019 and December 31, 2018. The Company's debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt (sum of repurchase agreements and secured loans) 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.

March 31, 2019

$ in thousands

Agency RMBS and Agency CMBS

Commercial Credit (1)

Residential Credit (2)

Total

Mortgage-backed and credit risk transfer securities

15,577,369


3,455,805


2,094,424


21,127,598


Cash and cash equivalents (3)

39,708


25,869


12,905


78,482


Restricted cash

5,025




5,025


Derivative assets, at fair value (4)

26,268


312



26,580


Other assets

91,933


109,886


59,883


261,702


Total assets

15,740,303


3,591,872


2,167,212


21,499,387







Repurchase agreements

13,508,022


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)

8,463




8,463


Other liabilities

300,843


28,468


15,512


344,823


Total liabilities

14,399,224


2,738,678


1,689,771


18,827,673







Total equity (allocated)

1,341,079


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

1,236,319


612,319


477,441


2,326,079


Debt-to-equity ratio (7)

10.5


3.2


3.5


6.9


Repurchase agreement debt-to-equity ratio (8)

10.9


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, GSE CRT and a loan participation interest are included in residential credit.

(3)

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

(4)

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

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

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

(7)

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

(8)

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

 

December 31, 2018

$ in thousands

Agency RMBS and Agency CMBS

Commercial Credit (1)

Residential Credit (2)

Total

Mortgage-backed and credit risk transfer securities

12,127,173


3,286,459


1,983,010


17,396,642


Cash and cash equivalents (3)

68,689


45,632


21,296


135,617


Derivative assets, at fair value (4)

15,089




15,089


Other assets

88,517


115,908


61,732


266,157


Total assets

12,299,468


3,447,999


2,066,038


17,813,505







Repurchase agreements

10,339,802


1,616,473


1,646,209


13,602,484


Secured loans (5)

600,856


1,049,144



1,650,000


Derivative liabilities, at fair value (4)

23,219


171



23,390


Other liabilities

212,057


25,819


13,058


250,934


Total liabilities

11,175,934


2,691,607


1,659,267


15,526,808







Total equity (allocated)

1,123,534


756,392


406,771


2,286,697


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





Net equity in unsecured assets (6)


(55,594)



(55,594)


Collateral pledged against secured loans

(702,952)


(1,227,412)



(1,930,364)


Secured loans

600,856


1,049,144



1,650,000


Equity related to repurchase agreement debt

1,021,438


522,530


406,771


1,950,739


Debt-to-equity ratio (7)

9.7


3.5


4.0


6.7


Repurchase agreement debt-to-equity ratio (8)

10.1


3.1


4.0


7.0




(1)

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

(2)

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

(3)

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

(4)

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

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

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

(7)

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

(8)

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

 

Average Earning Asset Balances

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


Three Months Ended

$ in thousands

March 31, 2019


December 31, 2018


March 31, 2018

Average Earning Asset Balances (1):






Agency RMBS:






15 year fixed-rate, at amortized cost

371,228



533,041



2,879,696


30 year fixed-rate, at amortized cost

11,780,005



10,438,730



7,830,802


ARM, at amortized cost

19,355



121,367



231,303


Hybrid ARM, at amortized cost

224,458



814,945



1,666,890


Agency - CMO, at amortized cost

291,914



263,464



273,884


Agency CMBS, at amortized cost

1,129,227



781,557




Non-Agency CMBS, at amortized cost

3,361,132



3,296,258



3,193,575


Non-Agency RMBS, at amortized cost

1,084,721



1,051,883



1,084,584


GSE CRT, at amortized cost

808,296



760,318



776,742


Loan participation interest

54,763



51,468




Commercial loans, at amortized cost

27,375



31,624



193,540


Average earning assets

19,152,474



18,144,655



18,131,016


 

Average Earning Asset Yields (2):






Agency RMBS:






15 year fixed-rate

3.50

%


3.17

%


2.04

%

30 year fixed-rate

3.38

%


3.41

%


2.96

%

ARM

3.70

%


2.58

%


2.32

%

Hybrid ARM

3.47

%


2.66

%


2.24

%

Agency - CMO

3.56

%


3.34

%


2.51

%

Agency CMBS

3.52

%


3.19

%


%

Non-Agency CMBS

4.98

%


4.95

%


4.85

%

Non-Agency RMBS

6.71

%


7.07

%


7.08

%

GSE CRT (3)

3.67

%


3.67

%


3.00

%

Commercial loans

11.08

%


10.78

%


8.85

%

Loan participation interest

6.14

%


6.04

%


%

Average earning asset yields

3.91

%


3.88

%


3.38

%



(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

$ in thousands

March 31,
2019


December 31, 2018


March 31,
2018

Average Borrowings (1):






Agency RMBS (2)

11,664,156



10,819,707



11,427,614


Agency CMBS

1,074,917



718,436




Non-Agency CMBS (2)

2,663,941



2,670,071



2,542,722


Non-Agency RMBS

886,554



900,036



891,202


GSE CRT

717,482



686,404



674,555


Exchangeable senior notes





116,176


        Loan participation interest

41,072



38,601




Total average borrowings

17,048,122



15,833,255



15,652,269


Maximum borrowings during the period (3)

18,474,387



16,144,062



15,674,202




















 

Average Cost of Funds (4):






Agency RMBS (2)

2.59

%


2.52

%


1.65

%

Agency CMBS

2.64

%


2.40

%


%

Non-Agency CMBS (2)

3.24

%


3.11

%


2.28

%

Non-Agency RMBS

3.54

%


3.49

%


2.91

%

GSE CRT

3.49

%


3.47

%


2.87

%

Exchangeable senior notes

%


%


5.58

%

        Loan participation interest

4.15

%


4.04

%


%

Cost of funds

2.65

%


2.57

%


1.74

%

Interest rate swaps average fixed pay rate (5)

2.43

%


2.19

%


2.22

%

Interest rate swaps average floating receive rate (6)

(2.58)

%


(2.17)

%


(1.68)

%

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

2.68

%


2.74

%


2.22

%







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

6.9x


6.7x


6.2x













(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."

 


Cision

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