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Invesco Mortgage Capital Inc. Reports Fourth Quarter 2019 Financial Results

·15 mins read

ATLANTA , Feb. 19, 2020 /PRNewswire/ -- Invesco Mortgage Capital, Inc. (NYSE: IVR) (the "Company")  today announced financial results for the quarter ended December 31, 2019 .

(PRNewsfoto/Invesco Mortgage Capital Inc.)
(PRNewsfoto/Invesco Mortgage Capital Inc.)


Reported net income per common share


$0.75 compared to $0.57 per common share in Q3 2019






Increased core earnings* per common share


$0.52 compared to $0.47 per common share in Q3 2019






Raised common stock dividend


$0.50 compared to $0.45 in Q3 2019






Maintained stable book value per common share**


$16.29 compared to $16.31 per common share at Q3 2019






Generated an attractive

economic return***


2.9% for the quarter and 18.8% for the year ended December 31, 2019

Update from John Anzalone , Chief Executive Officer

"We are pleased to announce core earnings of $0.52 per common share for the fourth quarter of 2019. Core earnings exceeded our dividend for the fifth consecutive quarter as IVR benefits from an active portfolio management and hedging strategy. The 11.1% increase in our quarterly dividend to $0.50 per share drove an economic return of 2.9% for the quarter as book value remained stable.

"2019 was a strong year for Invesco Mortgage Capital's stockholders, as we raised the dividend 19.0% and improved book value per common share by 6.7%. As such, stockholders enjoyed an economic return of 18.8% for the year. Additionally, we raised over $500 million in common equity during the year, which allowed us to gain scale while investing in accretive assets.

"As always, active portfolio management and our hedging strategy have been key to our success. This was evident in our investment portfolio, where we focused on allocating capital to strategies that generate attractive returns while minimizing our exposure to prepayment risk. This was also evident in our hedging strategy, where we actively managed our hedges to protect book value and improve our effective interest rate margin. We enter 2020 on a strong note, having raised an additional $347 million in common equity earlier this month as we continue to build upon the positive momentum achieved in 2019."

* Core earnings (and by calculation, core earnings per common share) are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" for important disclosures and a reconciliation to the most comparable U.S. GAAP measures.

**Book value per common share is calculated as total stockholders' equity less the liquidation preference of our 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 December 31, 2019 is defined as the change in book value per common share from September 30, 2019 to December 31, 2019 of $(0.02); plus dividends declared of $0.50 per common share; divided by the September 30, 2019 book value per common share of $16.31. Economic return for the year ended December 31, 2019 is defined as the change in book value per common share from December 31, 2018 to December 31, 2019 of $1.02; plus dividends declared of $1.85 per common share; divided by the December 31, 2018 book value per common share of $15.27.

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

($ in millions, except share amounts)

Q4 '19

Q3 '19

Variance

Average Balances

(unaudited)

(unaudited)


Average earning assets (at amortized cost)

$21,318.1


$20,963.1


$355.0


Average borrowings

$19,676.2


$19,326.9


$349.3


Average stockholders' equity

$2,595.3


$2,598.0


($2.7)






U.S. GAAP Financial Measures




Total interest income

$192.8


$196.3


($3.5)


Total interest expense

$106.8


$123.3


($16.5)


Net interest income

$86.0


$73.0


$13.0


Total expenses

$12.4


$10.6


$1.8


Net income attributable to common stockholders

$106.9


$77.9


$29.0






Average earning asset yields

3.62

%

3.75

%

(0.13)

%

Average cost of funds

2.17

%

2.55

%

(0.38)

%

Average net interest rate margin

1.45

%

1.20

%

0.25

%





Period-end weighted average asset yields*

3.86

%

3.87

%

(0.01)

%

Period-end weighted average cost of funds

2.09

%

2.47

%

(0.38)

%

Period-end weighted average net interest rate margin

1.77

%

1.40

%

0.37

%





Book value per common share**

$16.29


$16.31


($0.02)


Earnings per common share (basic)

$0.75


$0.57


$0.18


Earnings per common share (diluted)

$0.75


$0.57


$0.18


Debt-to-equity ratio

6.5

x

6.8

x

(0.3)

x





Non-GAAP Financial Measures***




Core earnings

$74.9


$63.7


$11.2


Effective interest income

$197.8


$201.5


($3.7)


Effective interest expense

$100.7


$117.5


($16.8)


Effective net interest income

$97.1


$84.0


$13.1






Effective yield

3.71

%

3.84

%

(0.13)

%

Effective cost of funds

2.04

%

2.43

%

(0.39)

%

Effective interest rate margin

1.67

%

1.41

%

0.26

%





Core earnings per common share

$0.52


$0.47


$0.05


Repurchase agreement debt-to-equity ratio

6.6

x

6.9

x

(0.3)

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 stockholders' equity less the liquidation preference of our 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 (loss) 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 fourth quarter of 2019 was $106.9 million , up $29.0 million compared to $77.9 million for the third quarter of 2019. Higher net income attributable to common stockholders was primarily due to a $17.8 million increase in other income and a $13.0 million increase in net interest income. Other income was driven by net gains on derivatives that totaled $191.6 million compared to net losses on derivatives of $177.2 million in the third quarter and net losses on investments that totaled $148.5 million in the fourth quarter compared to net gains on investments of $202.4 million in the third quarter. Net gains on derivatives and net losses on investments were driven by an increase in interest rates as the benchmark 10 year U.S. Treasury note rose 24 basis points to 1.92% as of December 31, 2019 .

Book value per common share for the fourth quarter of 2019 was $16.29 compared to $16.31 in the third quarter reflecting the success of our active portfolio management and hedging strategy during the quarter. Higher interest rates negatively impacted most asset valuations during the quarter but were significantly offset by increases in the value of our interest rate swaps. Strong investor demand given declining volatility and attractive valuations drove significant spread tightening in Agency RMBS, as the sector posted modest gains for the quarter.

During the fourth quarter of 2019, the Company generated $74.9 million in core earnings, an increase of $11.2 million (17.6%) over the third quarter of 2019. Higher core earnings were driven by a $13.1 million increase in effective net interest income primarily due to a lower effective cost of funds during the quarter. Effective cost of funds was 2.04%, 39 basis points lower than the third quarter, primarily due to lower average repurchase agreement borrowing costs following the decrease in the federal funds target rate in September 2019 and the Federal Reserve's infusion of liquidity into the repurchase agreement market in the fourth quarter.

Total interest income decreased $3.5 million (1.8%) to $192.8 million during the fourth quarter and average earning asset yield decreased 13 basis points to 3.62%. Premium amortization increased $2.8 million to $21.4 million during the fourth quarter reflecting the impact of declining interest rates on prepayments of higher coupon Agency RMBS investments. Average earning assets increased $355.0 million (1.7%) to $21.3 billion in the fourth quarter reflecting trade settlement of approximately $1.2 billion of Agency CMBS securities purchased in the third quarter and sales of approximately $850 million of Agency RMBS. We continue to favor the prepayment protection embedded in Agency CMBS over Agency RMBS with less favorable prepayment characteristics.

The Company increased its average borrowings by $349.3 million (1.8%) in the fourth quarter of 2019 to $19.7 billion to finance its higher asset base. However, total interest expense decreased to $106.8 million compared to $123.3 million during the third quarter due to a 38 basis point decrease in average cost of funds to 2.17% from 2.55% during the third quarter.

The Company's debt-to-equity ratio was 6.5x as of December 31, 2019 compared to 6.8x at September 30, 2019. The Company's repurchase agreement debt-to-equity ratio was 6.6x as of December 31, 2019 compared to 6.9x as of September 30, 2019. The Company decreased leverage as of year end given elevated uncertainty surrounding prepayment speeds on our Agency MBS holdings and repurchase agreement funding levels.

Total expenses for the fourth quarter of 2019 increased to approximately $12.4 million compared to $10.6 million for the third quarter of 2019 primarily due to higher management fees. Total expenses include management fees and general and administrative expenses. The ratio of annualized total expenses to average stockholders' equity * increased to 1.91% compared to 1.63% for the third quarter of 2019.

As previously announced, the Company declared the following dividends on December 16, 2019: a common stock dividend of $0.50 per share paid on January 28, 2020 to its stockholders of record as of December 27, 2019 and a Series A preferred stock dividend of $0.4844 per share paid on January 27, 2020 to its stockholders of record as of January 1, 2020. The Company declared the following dividends on its Series B and Series C Preferred Stock on February 18, 2020 to its stockholders of record as of March 5, 2020 : a Series B Preferred Stock dividend of $0.4844 per share payable on March 27, 2020 and a Series C Preferred Stock dividend of $0.46875 per share payable on March 27, 2020 .

*The ratio of annualized total expenses to average stockholders' equity is calculated as the annualized sum of management fees plus general and administrative expenses divided by average stockholders' equity. Average stockholders' equity is calculated based on weighted month-end balance of total stockholders' 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, February 20, 2020, 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 March 5, 2020 by calling:

888-562-7251 ( North America ) or 1-402-530-7628 (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.

Investor Relations Contact: Brandon Burke , 800-241-5477

 


INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS



Three Months Ended


Years Ended

$ in thousands, except share amounts

December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018


(unaudited)


(unaudited)


(unaudited)





Interest Income










Mortgage-backed and credit risk transfer securities (1)

191,490



194,938



174,511



772,657



631,478


Commercial and other loans

1,291



1,353



1,593



5,710



11,538


Total interest income

192,781



196,291



176,104



778,367



643,016


Interest Expense










Repurchase agreements

97,993



112,851



91,057



430,697



301,794


Secured loans

8,808



10,413



10,565



41,623



35,453


Exchangeable senior notes









1,621


Total interest expense

106,801



123,264



101,622



472,320



338,868


Net interest income

85,980



73,027



74,482



306,047



304,148


Other Income (loss)










Gain (loss) on investments, net

(148,511)



202,413



76,957



624,466



(327,700)


Equity in earnings (losses) of unconsolidated ventures

427



403



624



2,224



3,402


Gain (loss) on derivative instruments, net

188,682



(177,244)



(293,485)



(534,755)



(5,277)


Realized and unrealized credit derivative income (loss), net

2,896



1



(9,026)



8,343



(151)


Net loss on extinguishment of debt









(26)


Other investment income (loss), net

909



1,005



850



3,950



2,860


Total other income (loss)

44,403



26,578



(224,080)



104,228



(326,892)


Expenses










Management fee related party

10,529



8,740



10,294



38,173



40,722


General and administrative

1,882



1,862



2,116



8,001



7,070


Total expenses

12,411



10,602



12,410



46,174



47,792


Net income (loss)

117,972



89,003



(162,008)



364,101



(70,536)


Net income (loss) attributable to non-controlling interest





(899)





254


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

117,972



89,003



(161,109)



364,101



(70,790)


Dividends to preferred stockholders

11,106



11,107



11,106



44,426



44,426


Net income (loss) attributable to common stockholders

106,866



77,896



(172,215)



319,675



(115,216)


Earnings (loss) per share:










Net income (loss) attributable to common stockholders










Basic

0.75



0.57



(1.54)



2.42



(1.03)


Diluted

0.75



0.57



(1.54)



2.42



(1.03)



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

 


Three Months Ended


Years Ended

$ in thousands

December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018

Coupon interest

212,887



213,546



183,059



833,376



689,240


Net premium amortization

(21,397)



(18,608)



(8,548)



(60,719)



(57,762)


Mortgage-backed and credit risk transfer securities interest
income

191,490



194,938



174,511



772,657



631,478


 

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



Three Months Ended


Years Ended

$ in thousands

December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018


(unaudited)


(unaudited)


(unaudited)





Net income (loss)

117,972



89,003



(162,008)



364,101



(70,536)


Other comprehensive income (loss):










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

(30,054)



14,482



10,376



83,965



(210,424)


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



(954)



39,756



9,072



193,162


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

(5,981)



(5,981)



(5,980)



(23,729)



(25,839)


Currency translation adjustments on investment in
unconsolidated venture

(852)



290



(119)



(1,158)



(447)


Total other comprehensive income (loss)

(36,887)



7,837



44,033



68,150



(43,548)


Comprehensive income (loss)

81,085



96,840



(117,975)



432,251



(114,084)


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





1,027





979


Less: Dividends to preferred stockholders

(11,106)



(11,107)



(11,106)



(44,426)



(44,426)


Comprehensive income (loss) attributable to common stockholders

69,979



85,733



(128,054)



387,825



(157,531)


INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS



As of


December 31, 2019


December 31, 2018

$ in thousands, except share amounts


ASSETS




Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of
$21,132,742 and $17,082,825, respectively)

21,771,786



17,396,642


Cash and cash equivalents

172,507



135,617


Restricted cash

116,995




Due from counterparties

32,568



13,500


Investment related receivable

67,976



66,598


Derivative assets, at fair value

18,533



15,089


Other assets

166,180



186,059


Total assets

22,346,545



17,813,505


LIABILITIES AND STOCKHOLDERS' EQUITY




Liabilities:




Repurchase agreements

17,532,303



13,602,484


Secured loans

1,650,000



1,650,000


Derivative liabilities, at fair value

352



23,390


Dividends payable

74,841



49,578


Investment related payable

99,561



132,096


Accrued interest payable

43,998



37,620


Collateral held payable

170



18,083


Accounts payable and accrued expenses

1,560



1,694


Due to affiliate

11,861



11,863


Total liabilities

19,414,646



15,526,808


Commitments and contingencies (See Note 15) (1)




Stockholders' 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; 144,256,357 and 111,584,996 shares issued and outstanding, respectively

1,443



1,115


Additional paid in capital

2,892,652



2,383,532


Accumulated other comprehensive income

288,963



220,813


Retained earnings (distributions in excess of earnings)

(814,483)



(882,087)


Total stockholders' equity

2,931,899



2,286,697


Total liabilities and stockholders' equity

22,346,545



17,813,505













(1)

See Note 15 of the Company's consolidated financial statements filed in Part IV, Item 15 of the Company's Annual Report on Form 10-K for the year ended December 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 yield),

  • 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 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


Years Ended


December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018

$ in thousands, except per share data





Net income (loss) attributable to common stockholders

106,866



77,896



(172,215)



319,675



(115,216)


Adjustments:










(Gain) loss on investments, net

148,511



(202,413)



(76,957)



(624,466)



327,700


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

(116,156)



173,607



252,323



597,077



2,830


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

(60,435)



15,352



40,533



(26,482)



(17,568)


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

2,091



5,195



14,595



12,490



22,629


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

(20)



14



(7)



(6)



930


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

(5,981)



(5,981)



(5,980)



(23,729)



(25,839)


Net loss on extinguishment of debt









26


Subtotal

(31,990)



(14,226)



224,507



(65,116)



310,708


Cumulative adjustments attributable to non-controlling interest





(1,449)





(2,536)


Core earnings attributable to common stockholders

74,876



63,670



50,843



254,559



192,956


Basic earnings (loss) per common share

0.75



0.57



(1.54)



2.42



(1.03)


Core earnings per share attributable to common stockholders (7)

0.52



0.47



0.46



1.92



1.73


(1)

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


Three Months Ended


Years Ended


December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018

$ in thousands





Realized gain (loss) on derivative instruments, net

116,156



(173,607)



(252,323)



(597,077)



(2,830)


Unrealized gain (loss) on derivative instruments, net

60,435



(15,352)



(40,533)



26,482



17,568


Contractual net interest income (expense)

12,091



11,715



(629)



35,840



(20,015)


Gain (loss) on derivative instruments, net

188,682



(177,244)



(293,485)



(534,755)



(5,277)


(2)

U.S. GAAP realized and unrealized credit derivative income (loss), net on the consolidated statements of operations includes the following components:


Three Months Ended


Years Ended


December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018

$ in thousands





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

(2,091)



(5,195)



(14,595)



(12,490)



(22,629)


GSE CRT embedded derivative coupon interest

4,987



5,196



5,569



20,833



22,478


Realized and unrealized credit derivative income
(loss), net

2,896



1



(9,026)



8,343



(151)


(3)

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


Three Months Ended


Years Ended


December 31,
2019


September 30, 2019


December 31,
2018


December 31,
2019


December 31,
2018

$ in thousands





Dividend income

889



1,019



843



3,944



3,790


Gain (loss) on foreign currency transactions, net

20



(14)



7



6



(930)


Other investment income (loss), net

909



1,005



850



3,950



2,860


(4)

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


Three Months Ended


Years Ended


December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018

$ in thousands





Interest expense on repurchase agreement borrowings

103,974



118,832



97,037



454,426



327,633


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

(5,981)



(5,981)



(5,980)



(23,729)



(25,839)


Repurchase agreements interest expense

97,993



112,851



91,057



430,697



301,794


(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 and year ended December 31, 2019 are:


Three Months Ended


Years Ended

$ in thousands

December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018

Effective net interest income (1)

97,077



83,957



73,441



338,991



280,772


Dividend income

889



1,019



843



3,944



3,790


Equity in earnings (losses) of unconsolidated ventures

427



403



624



2,224



3,402


Total expenses

(12,411)



(10,602)



(12,410)



(46,174)



(47,792)


Total core earnings

85,982



74,777



62,498



298,985



240,172


Dividends to preferred stockholders

(11,106)



(11,107)



(11,106)



(44,426)



(44,426)


Core earnings attributable to non-controlling interest





(549)





(2,790)


Core earnings attributable to common stockholders

74,876



63,670



50,843



254,559



192,956


(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
December 31, 2019


Three Months Ended
September 30, 2019


Three Months Ended
December 31, 2018

$ in thousands

Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield

Total interest income

192,781



3.62

%


196,291



3.75

%


176,104



3.88

%

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

4,987



0.09

%


5,196



0.09

%


5,569



0.12

%

Effective interest income

197,768



3.71

%


201,487



3.84

%


181,673



4.00

%


Years Ended December 31,


2019


2018

$ in thousands

Reconciliation


Yield/Effective
Yield


Reconciliation


Yield/Effective
Yield

Total interest income

778,367



3.78

%


643,016



3.55

%

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

20,833



0.11

%


22,478



0.13

%

Effective interest income

799,200



3.89

%


665,494



3.68

%

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
December 31, 2019


Three Months Ended
September 30, 2019


Three Months Ended
December 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

106,801



2.17

%


123,264



2.55

%


101,622



2.57

%

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

5,981



0.12

%


5,981



0.12

%


5,980



0.15

%

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

(12,091)



(0.25)

%


(11,715)



(0.24)

%


629



0.02

%

Effective interest expense

100,691



2.04

%


117,530



2.43

%


108,231



2.74

%


Years Ended December 31,


2019


2018

$ in thousands

Reconciliation


Cost of Funds
/ Effective
Cost of Funds


Reconciliation


Cost of Funds
/ Effective
Cost of Funds

Total interest expense

472,320



2.52

%


338,868



2.16

%

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

23,729



0.13

%


25,839



0.16

%

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

(35,840)



(0.19)

%


20,015



0.13

%

Effective interest expense

460,209



2.46

%


384,722



2.45

%

The following tables reconcile 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
December 31, 2019


Three Months Ended
September 30, 2019


Three Months Ended
December 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

85,980



1.45

%


73,027



1.20

%


74,482



1.31

%

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

(5,981)



(0.12)

%


(5,981)



(0.12)

%


(5,980)



(0.15)

%

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

4,987



0.09

%


5,196



0.09

%


5,568



0.12

%

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

12,091



0.25

%


11,715



0.24

%


(629)



(0.02)

%

Effective net interest income

97,077



1.67

%


83,957



1.41

%


73,441



1.26

%


Years Ended December 31,


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

306,047



1.26

%


304,148



1.39

%

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

(23,729)



(0.13)

%


(25,839)



(0.16)

%

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

20,833



0.11

%


22,478



0.13

%

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

35,840



0.19

%


(20,015)



(0.13)

%

Effective net interest income

338,991



1.43

%


280,772



1.23

%

Repurchase Agreement Debt-to-Equity Ratio

The following tables show the allocation of the Company's stockholders' equity to its target assets, the Company's debt-to-equity ratio, and the Company's repurchase agreement debt-to-equity ratio as of December 31, 2019 and September 30, 2019. The Company's debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt (sum of repurchase agreements and secured loans) to total stockholders' 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 its 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.

December 31, 2019

$ in thousands

Agency RMBS

Agency CMBS

Commercial
Credit (1)

Residential
Credit (2)

Total

Mortgage-backed and credit risk transfer
securities

11,301,037


4,767,930


3,829,031


1,873,788


21,771,786


Cash and cash equivalents (3)

73,927


27,881


51,092


19,607


172,507


Restricted cash (4)

81,830


34,441


724



116,995


Derivative assets, at fair value (4)

13,034


5,499




18,533


Other assets

94,525


12,460


110,122


49,617


266,724


Total assets

11,564,353


4,848,211


3,990,969


1,943,012


22,346,545








Repurchase agreements

9,666,964


4,246,359


2,041,968


1,577,012


17,532,303


Secured loans (5)

540,299



1,109,701



1,650,000


Derivative liabilities, at fair value (4)



352



352


Other liabilities

65,353


124,305


29,727


12,606


231,991


Total liabilities

10,272,616


4,370,664


3,181,748


1,589,618


19,414,646








Total stockholders' equity (allocated)

1,291,737


477,547


809,221


353,394


2,931,899


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






Net stockholders' equity in unsecured assets (6)



(46,053)



(46,053)


Collateral pledged against secured loans

(621,667)



(1,276,822)



(1,898,489)


Secured loans

540,299



1,109,701



1,650,000


Stockholders' equity related to repurchase
agreement debt

1,210,369


477,547


596,047


353,394


2,637,357


Debt-to-equity ratio (7)

7.9


8.9


3.9


4.5


6.5


Repurchase agreement debt-to-equity ratio (8)

8.0


8.9


3.4


4.5


6.6




















(1)

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

(2)

Investments in non-Agency RMBS, single family GSE CRT and a loan participation interest are included in residential credit.

(3)

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

(4)

Restricted cash, derivative assets and derivative liabilities are allocated based on the hedging strategy for each class.

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

Net stockholders' equity in unsecured assets includes commercial loans and investments in unconsolidated joint ventures.

(7)

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

(8)

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

September 30, 2019

$ in thousands

Agency RMBS

Agency CMBS

Commercial
Credit (1)

Residential
Credit (2)

Total

Mortgage-backed and credit risk transfer
securities

12,864,217


4,936,184


3,851,552


1,947,546


23,599,499


Cash and cash equivalents (3)

56,122


17,226


37,536


15,004


125,888


Restricted cash (4)

57,878


22,208




80,086


Derivative assets, at fair value (4)

2,557


981


589



4,127


Other assets

76,417


13,452


111,501


50,353


251,723


Total assets

13,057,191


4,990,051


4,001,178


2,012,903


24,061,323








Repurchase agreements

11,124,901


3,306,244


2,018,542


1,622,345


18,072,032


Secured loans (5)

547,149



1,102,851



1,650,000


Derivative liabilities, at fair value (4)

33,519


12,862




46,381


Other liabilities

56,160


1,272,761


40,999


11,958


1,381,878


Total liabilities

11,761,729


4,591,867


3,162,392


1,634,303


21,150,291








Total stockholders' equity (allocated)

1,295,462


398,184


838,786


378,600


2,911,032


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






Net stockholders' equity in unsecured assets (6)



(47,493)



(47,493)


Collateral pledged against secured loans

(633,350)



(1,276,599)



(1,909,949)


Secured loans

547,149



1,102,851



1,650,000


Stockholders' equity related to repurchase
agreement debt

1,209,261


398,184


617,545


378,600


2,603,590


Debt-to-equity ratio (7)

9.0


8.3


3.7


4.3


6.8


Repurchase agreement debt-to-equity ratio (8)

9.2


8.3


3.3


4.3


6.9




















(1)

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

(2)

Investments in non-Agency RMBS, single family GSE CRT and a loan participation interest are included in residential credit.

(3)

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

(4)

Restricted cash, derivative assets and derivative liabilities are allocated based on the hedging strategy for each class.

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

Net stockholders' equity in unsecured assets includes commercial loans and investments in unconsolidated joint ventures.

(7)

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

(8)

Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to stockholders' 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


Years Ended

$ in thousands

December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018

Average Earning Asset Balances (1):










Agency RMBS:










15 year fixed-rate, at amortized cost

288,050



312,603



533,041



328,404



1,911,511


30 year fixed-rate, at amortized cost

10,852,691



11,837,640



10,438,730



11,757,662



8,867,942


Hybrid ARM, at amortized cost

57,182



66,671



936,312



129,396



1,531,077


Agency - CMO, at amortized cost

420,532



420,889



263,464



378,253



258,457


Agency CMBS, at amortized cost

4,185,558



2,796,732



781,557



2,522,256



339,816


Non-Agency CMBS, at amortized cost

3,685,198



3,607,381



3,296,258



3,532,202



3,226,174


Non-Agency RMBS, at amortized cost

873,774



946,446



1,051,883



980,775



1,055,682


GSE CRT, at amortized cost

885,571



905,062



760,318



863,080



767,220


Commercial loans, at amortized cost

24,099



24,233



31,624



25,007



110,461


Loan participation interest

45,419



45,465



51,468



49,220



20,503


Average earning assets

21,318,074



20,963,122



18,144,655



20,566,255



18,088,843


Average Earning Asset Yields (2):










Agency RMBS:










15 year fixed-rate

3.32

%


3.32

%


3.17

%


3.34

%


2.23

%

30 year fixed-rate

3.03

%


3.19

%


3.41

%


3.26

%


3.09

%

Hybrid ARM

3.27

%


3.22

%


2.66

%


3.27

%


2.40

%

Agency - CMO

3.50

%


3.40

%


3.34

%


3.41

%


3.01

%

Agency CMBS

3.14

%


3.44

%


3.19

%


3.32

%


3.30

%

Non-Agency CMBS

5.09

%


5.09

%


4.95

%


5.06

%


4.91

%

Non-Agency RMBS

7.18

%


6.54

%


7.07

%


6.73

%


7.11

%

GSE CRT (3)

3.03

%


3.33

%


3.67

%


3.39

%


3.40

%

Commercial loans

10.49

%


10.89

%


10.78

%


10.90

%


9.54

%

Loan participation interest

5.71

%


6.18

%


6.04

%


6.04

%


6.10

%

Average earning asset yields

3.62

%


3.75

%


3.88

%


3.78

%


3.55

%



(1)

Average earning asset 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


Years Ended

$ in thousands

December 31,
2019


September 30,
2019


December 31,
2018


December 31,
2019


December 31,
2018

Average Borrowings (1):










Agency RMBS (2)

10,809,305



11,808,241



10,819,707



11,697,604



11,178,636


Agency CMBS

4,118,846



2,794,691



718,436



2,476,770



311,024


Non-Agency CMBS (2)

3,146,907



3,047,334



2,670,071



2,920,840



2,586,509


Non-Agency RMBS

808,299



865,961



900,036



865,353



887,132


GSE CRT

758,793



776,555



686,404



751,361



677,545


Exchangeable senior notes









28,646


Loan participation interest

34,064



34,099



38,601



36,915



15,377


Total average borrowings

19,676,214



19,326,881



15,833,255



18,748,843



15,684,869


Maximum borrowings during the period (3)

20,377,801



19,898,863



16,144,062



20,377,801



16,144,062


Average Cost of Funds (4):










Agency RMBS (2)

2.18

%


2.54

%


2.52

%


2.52

%


2.10

%

Agency CMBS

2.13

%


2.54

%


2.40

%


2.40

%


2.31

%

Non-Agency CMBS (2)

2.61

%


3.00

%


3.11

%


3.00

%


2.74

%

Non-Agency RMBS

2.82

%


3.26

%


3.49

%


3.28

%


3.25

%

GSE CRT

2.85

%


3.22

%


3.47

%


3.25

%


3.19

%

Exchangeable senior notes

%


%


%


%


5.58

%

Loan participation interest

3.61

%


4.03

%


4.04

%


3.99

%


4.04

%

Cost of funds

2.17

%


2.55

%


2.57

%


2.52

%


2.16

%

Interest rate swaps average fixed pay rate (5)

1.56

%


1.92

%


2.19

%


2.03

%


2.30

%

Interest rate swaps average floating receive rate (6)

(1.89)

%


(2.28)

%


(2.17)

%


(2.29)

%


(2.10)

%

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

2.04

%


2.43

%


2.74

%


2.46

%


2.45

%











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

6.5

x


6.8

x


6.7

x


6.5

x


6.7

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."

Brandon Burke, Investor Relations
800-241-5477

Cision
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SOURCE Invesco Mortgage Capital Inc.