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Invesco Mortgage Capital Inc. Reports Fourth Quarter 2018 Financial Results

Active management drives increase in portfolio yield

Fundamentals remain strong across diversified portfolio

Q4 common stock dividend of $0.42 per share

ATLANTA, Feb. 20, 2019 /PRNewswire/ -- Invesco Mortgage Capital Inc. (IVR) (the "Company") today announced financial results for the quarter ended December 31, 2018.

(PRNewsfoto/Invesco Mortgage Capital Inc.)

Highlights:

  • Q4 2018 net loss attributable to common stockholders of $172.2 million or $1.54 basic loss per common share compared to a net loss of $64.5 million or $0.58 basic loss per common share in Q3 2018
  • Q4 2018 core earnings* of $50.8 million or core earnings per share ("EPS") of $0.46 compared to $45.6 million or core EPS of $0.41 in Q3 2018
  • Q4 2018 book value per diluted common share** of $15.27 compared to $16.83 at Q3 2018 and $18.35 at Q4 2017
  • Q4 2018 common stock dividend maintained at $0.42 per share

"We are pleased to announce core earnings* of $0.46 per common share for the fourth quarter, up from $0.41 last quarter. During the second half of 2018, we began to reposition our Agency portfolio into newly issued 30 year Agency RMBS and Agency CMBS to take advantage of accretive opportunities in those sectors. Our portfolio repositioning drove an increase in our weighted average asset yield to 4.02% as of December 31, 2018, up 24 basis points from 3.78% as of September 30, 2018. As a result of the heightened volatility across nearly all Agency and credit assets during the fourth quarter, our book value** ended the year at $15.27, down 9.3% for the quarter, before recovering approximately half the decline during the month of January. The additional capital raised from our common stock offering in early February allowed us to take advantage of accretive opportunities in our target assets, given the attractive entry points as a result of the fourth quarter volatility" said John Anzalone, Chief Executive Officer.

* 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 diluted common share is calculated as total 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 plus Operating Partnership Units convertible into shares of common stock (no shares as of December 31, 2018; 1,425,000 shares as of September 30, 2018 and December 31, 2017, respectively).

Key performance indicators for the quarters ended December 31, 2018 and September 30, 2018 are summarized in the table below.

($ in millions, except share amounts)

Q4 '18

Q3 '18

Variance

Average Balances

(unaudited)

(unaudited)


Average earning assets (at amortized cost)

$18,144.7


$18,359.7


($215.0)


Average borrowings

$15,833.3


$15,972.8


($139.5)


Average equity

$1,947.3


$2,085.3


($138.0)






U.S. GAAP Financial Measures




Total interest income

$176.1


$162.1


$14.0


Total interest expense

$101.6


$91.3


$10.3


Net interest income

$74.5


$70.8


$3.7


Total expenses

$12.4


$11.8


$0.6


Net income (loss) attributable to common stockholders

($172.2)


($64.5)


($107.7)






Average earning asset yields

3.88

%

3.53

%

0.35

%

Average cost of funds

2.57

%

2.29

%

0.28

%

Average net interest rate margin

1.31

%

1.24

%

0.07

%

Period-end weighted average asset yields*

4.02

%

3.78

%

0.24

%

Period-end weighted average cost of funds

2.79

%

2.50

%

0.29

%

Period-end weighted average net interest rate margin

1.23

%

1.28

%

(0.05%)


Book value per diluted common share**

$15.27


$16.83


($1.56)


Loss per common share (basic)

($1.54)


($0.58)


($0.96)


Loss per common share (diluted)

($1.54)


($0.58)


($0.96)


Debt-to-equity ratio

6.7

x

6.4

x

0.3

x





Non-GAAP Financial Measures***




Core earnings

$50.8


$45.6


$5.2


Effective interest income

$181.7


$167.7


$14.0


Effective interest expense

$108.2


$100.4


$7.8


Effective net interest income

$73.4


$67.3


$6.1






Effective yield

4.00

%

3.65

%

0.35

%

Effective cost of funds

2.74

%

2.52

%

0.22

%

Effective interest rate margin

1.26

%

1.13

%

0.13

%





Core earnings per common share

$0.46


$0.41


$0.05


Repurchase agreement debt-to-equity ratio

7.0

x

6.6

x

0.4

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 diluted common share is calculated as total 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 plus Operating Partnership Units convertible into shares of common stock (no shares as of December 31, 2018; 1,425,000 shares as of September 30, 2018 and December 31, 2017, respectively).

*** 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 loss attributable to common stockholders for the fourth quarter of 2018 was $172.2 million, compared to net loss attributable to common stockholders of $64.5 million for the third quarter.  The net loss in the fourth quarter was primarily due to a $293.5 million net loss on derivative instruments that was only partially offset by a $77.0 million net gain on investments and $74.5 million of net interest income, whereas the Company's third quarter loss was primarily driven by a $140.7 million realized loss on the sale of investments. Fourth quarter derivative losses resulted from declining interest rates over the quarter while corresponding gains on investments were limited by higher interest rate spreads. Book value per diluted common share as of December 31, 2018 decreased to $15.27 compared to $16.83 as of September 30, 2018 reflecting net losses on derivative instruments that exceeded increases in the valuations of the Company's investment portfolio.

During the fourth quarter of 2018, the Company generated $50.8 million in core earnings compared to $45.6 million in the third quarter.   Higher core earnings reflect a $6.1 million increase in effective net interest income driven by the Company's portfolio repositioning in the second half of the year.

The Company continued to reposition its portfolio during the fourth quarter by rotating out of seasoned Agency RMBS and into newly issued 30 year Agency RMBS and Agency CMBS to take advantage of accretive opportunities in these sectors.  The Company purchased approximately $794 million of securities during the quarter with proceeds from sales and paydowns of securities.  The Company had average earning assets of $18.1 billion and interest income of $176.1 million in the fourth quarter compared to average earning assets of $18.4 billion and interest income of $162.1 million during the third quarter.  Average earning asset yields rose 35 basis points in the fourth quarter to 3.88% from 3.53% in the third quarter reflecting slower prepayment speeds in all asset classes as well as higher yields on recently acquired 30 year Agency RMBS and Agency CMBS assets and higher index rates on floating and adjustable rate securities.  As of December 31, 2018, the Company's holdings of 30 year fixed-rate Agency RMBS represented 56% of its total investment portfolio.  The Company allocated 49% of its equity to Agency RMBS and Agency CMBS as of December 31, 2018 as returns on Agency RMBS and CMBS continued to be attractive compared to credit assets.

The Company had average borrowings of $15.8 billion and total interest expense of $101.6 million in the fourth quarter compared to average borrowings of $16.0 billion and total interest expense of $91.3 million during the third quarter. The Company's average cost of funds rose to 2.57% in the fourth quarter from 2.29% in the third quarter.  The increase in the Company's cost of funds reflects higher repurchase agreement borrowing rates leading up to the December 2018 increase in the federal funds target interest rate.

The Company's debt-to-equity ratio was 6.7x as of December 31, 2018 compared to 6.4x as of September 30, 2018 reflecting a $198.7 million decrease in equity driven by losses on derivative instruments in the fourth quarter and the redemption of Invesco Ltd.'s wholly-owned subsidiary's minority interest in the Company's operating partnership.

Total expenses for the fourth quarter were approximately $12.4 million compared to $11.8 million for the third quarter. The ratio of annualized total expenses to average equity* for the fourth quarter was 2.55%.

As previously announced, the Company completed a public offering of 16.1 million shares of common stock at the price of $15.73 per share on February 7, 2019. Total net proceeds were approximately $249.7 million after deducting estimated offering expenses.

In addition, the Company declared the following dividends on December 14, 2018: a common stock dividend of $0.42 per share paid on January 28, 2019 to its stockholders of record as of December 26, 2018 and a Series A preferred stock dividend of $0.4844 per share paid on January 25, 2019 to its stockholders of record as of January 1, 2019. The Company declared the following dividends on its Series B and Series C Preferred Stock on February 14, 2019 to its stockholders of record as of March 5, 2019:  a Series B Preferred Stock dividend of $0.4844 per share payable on March 27, 2019 and a Series C Preferred Stock dividend of $0.46875 per share payable on March 27, 2019.

*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 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 focuses on investing in, financing and managing residential and commercial mortgage-backed securities and other mortgage-related assets. Invesco Mortgage Capital Inc. is externally managed and advised by Invesco Advisers, Inc., a subsidiary of Invesco Ltd., a leading independent global investment management firm.

Earnings Call

Invesco Mortgage Capital Inc. (IVR) will announce its fourth quarter 2018 results on Wednesday, February 20th, at approximately 4:30 pm ET. Members of the investment community and the general public are invited to listen to the Company's earnings conference call on Thursday, February 21, 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

Webcast link: 

<< https://services.choruscall.com/links/ivr190220.html >>

An audio replay will be available until 5:00 pm ET on March 7, 2019 by calling:

800-925-4790 (North America) or 1-203-369-3533 (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, mortgage reform programs, our financial performance, including our core earnings, economic return, comprehensive income and changes in our book value per diluted common share, 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
CONSOLIDATED STATEMENTS OF OPERATIONS



Three Months Ended


Years Ended

$ in thousands, except share amounts

December 31,
2018


September 30,
2018


December 31,
2017


December 31,
2018


December 31,
2017


(unaudited)


(unaudited)


(unaudited)





Interest Income










Mortgage-backed and credit risk transfer securities

174,511



160,416



147,509



631,478



521,547


Commercial and other loans

1,593



1,672



5,472



11,538



23,508


Total interest income

176,104



162,088



152,981



643,016



545,055


Interest Expense










Repurchase agreements

91,057



81,763



51,955



301,794



163,881


Secured loans

10,565



9,490



5,878



35,453



19,370


Exchangeable senior notes





2,104



1,621



13,340


Total interest expense

101,622



91,253



59,937



338,868



196,591


Net interest income

74,482



70,835



93,044



304,148



348,464


Other Income (loss)










Gain (loss) on investments, net

76,957



(207,910)



(17,153)



(327,700)



(19,704)


Equity in earnings (losses) of unconsolidated ventures

624



1,084



(47)



3,402



(1,327)


Gain (loss) on derivative instruments, net

(293,485)



87,672



64,251



(5,277)



18,155


Realized and unrealized credit derivative income (loss), net

(9,026)



4,975



13,220



(151)



51,648


Net loss on extinguishment of debt, net





(233)



(26)



(6,814)


Other investment income (loss), net

850



1,068



1,206



2,860



7,381


Total other income (loss)

(224,080)



(113,111)



61,244



(326,892)



49,339


Expenses










Management fee – related party

10,294



10,105



10,171



40,722



37,556


General and administrative

2,116



1,673



1,801



7,070



7,190


Total expenses

12,410



11,778



11,972



47,792



44,746


Net income

(162,008)



(54,054)



142,316



(70,536)



353,057


Net income (loss) attributable to non-controlling interest

(899)



(681)



1,794



254



4,450


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

(161,109)



(53,373)



140,522



(70,790)



348,607


Dividends to preferred stockholders

11,106



11,107



3,086



44,426



28,080


Net income (loss) attributable to common stockholders

(172,215)



(64,480)



137,436



(115,216)



320,527


Earnings per share:










Net income (loss) attributable to common stockholders










Basic

(1.54)



(0.58)



1.23



(1.03)



2.87


Diluted

(1.54)



(0.58)



1.18



(1.03)



2.75

































(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,
2018


September 30,
2018


December 31,
2017


December 31,
2018


December 31,
2017

Coupon interest

183,059



175,696



166,726



689,240



616,697


Net premium amortization

(8,548)



(15,280)



(19,217)



(57,762)



(95,150)


Mortgage-backed and credit risk transfer securities interest
income

174,511



160,416



147,509



631,478



521,547


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






Three Months Ended


Years Ended

In thousands

December 31,
2018


September 30,
2018


December 31,
2017


December 31,
2018


December 31,
2017


(unaudited)


(unaudited)


(unaudited)





Net income

(162,008)



(54,054)



142,316



(70,536)



353,057


Other comprehensive income (loss):










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

10,376



(40,554)



(84,896)



(210,424)



(9,885)


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

39,756



134,280





193,162



1,508


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

(5,980)



(6,422)



(6,438)



(25,839)



(25,544)


Currency translation adjustments on investment in unconsolidated venture

(119)



(1,126)



531



(447)



863


Total other comprehensive income (loss)

44,033



86,178



(90,803)



(43,548)



(33,058)


Comprehensive income (loss)

(117,975)



32,124



51,513



(114,084)



319,999


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

1,027



(405)



(648)



979



(4,032)


Less: Dividends to preferred stockholders

(11,106)



(11,107)



(3,086)



(44,426)



(28,080)


Comprehensive income (loss) attributable to common
stockholders

(128,054)



20,612



47,779



(157,531)



287,887


 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS


As of


December 31, 2018


December 31, 2017

In thousands except share amounts


ASSETS




Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $17,082,825 and $17,560,811, respectively)

17,396,642



18,190,754


Commercial loans, held-for-investment

31,582



191,808


Cash and cash equivalents

135,617



88,381


Restricted cash



620


Due from counterparties

13,500




Investment related receivable

66,598



73,217


Derivative assets, at fair value

15,089



6,896


Other assets

154,477



105,580


Total assets

17,813,505



18,657,256


LIABILITIES AND EQUITY




Liabilities:




Repurchase agreements

13,602,484



14,080,801


Secured loans

1,650,000



1,650,000


Exchangeable senior notes



143,231


Derivative liabilities, at fair value

23,390



32,765


Dividends and distributions payable

49,578



50,193


Investment related payable

132,096



5,191


Accrued interest payable

37,620



17,845


Collateral held payable

18,083



7,327


Accounts payable and accrued expenses

1,694



2,200


Due to affiliate

11,863



10,825


Total liabilities

15,526,808



16,000,378


Commitments and contingencies (See Note 16) (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; 111,584,996 and 111,624,159 shares issued and outstanding, respectively

1,115



1,116


Additional paid in capital

2,383,532



2,384,356


Accumulated other comprehensive income

220,813



261,029


Retained earnings (distributions in excess of earnings)

(882,087)



(579,334)


Total stockholders' equity

2,286,697



2,630,491


Non-controlling interest



26,387


Total equity

2,286,697



2,656,878


Total liabilities and equity

17,813,505



18,657,256


(1)      See Note 16 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, 2018.

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 attributable to common stockholders to core earnings for the following periods:


Three Months Ended


Years Ended


December 31, 2018


September 30, 2018


December 31, 2017


December 31, 2018


December 31, 2017

$ in thousands, except per share data





Net income (loss) attributable to common stockholders

(172,215)



(64,480)



137,436



(115,216)



320,527


Adjustments:










(Gain) loss on investments, net

(76,957)



207,910



17,153



327,700



19,704


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

252,323



(99,641)



(73,646)



2,830



(67,838)


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

40,533



9,206



(7,368)



(17,568)



(27,393)


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

14,595



663



(7,401)



22,629



(28,305)


(Gain) loss on foreign currency transactions,

net (3)

(7)



(215)



(387)



930



(4,134)


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

(5,980)



(6,422)



(6,438)



(25,839)



(25,544)


Net loss on extinguishment of debt





233



26



6,814


Subtotal

224,507



111,501



(77,854)



310,708



(126,696)


Cumulative adjustments attributable to non-controlling interest

(1,449)



(1,405)



981



(2,536)



1,597


Series B preferred stock dividend cumulative adjustment (5)





(2,870)





(2,870)


Series C preferred stock dividend declared but not accumulated (6)





(5,211)






Core earnings

50,843



45,616



52,482



192,956



192,558


Basic earnings (loss) per common share

(1.54)



(0.58)



1.23



(1.03)



2.87


Core earnings per share attributable to common stockholders (7)

0.46



0.41



0.47



1.73



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, 2018


September 30, 2018


December 31, 2017


December 31, 2018


December 31, 2017

$ in thousands





Realized gain (loss) on derivative instruments, net

(252,323)



99,641



73,646



(2,830)



67,838


Unrealized gain (loss) on derivative instruments, net

(40,533)



(9,206)



7,368



17,568



27,393


Contractual net interest expense

(629)



(2,763)



(16,763)



(20,015)



(77,076)


Gain (loss) on derivative instruments, net

(293,485)



87,672



64,251



(5,277)



18,155


(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, 2018


September 30, 2018


December 31, 2017


December 31, 2018


December 31, 2017

$ in thousands





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

(14,595)



(663)



7,401



(22,629)



28,305


GSE CRT embedded derivative coupon interest

5,569



5,638



5,819



22,478



23,343


Realized and unrealized credit derivative income (loss), net

(9,026)



4,975



13,220



(151)



51,648


(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, 2018


September 30, 2018


December 31, 2017


December 31, 2018


December 31, 2017

$ in thousands





Dividend income

843



853



819



3,790



3,247


Gain (loss) on foreign currency transactions, net

7



215



387



(930)



4,134


Other investment income (loss), net

850



1,068



1,206



2,860



7,381


(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, 2018


September 30, 2018


December 31, 2017


December 31, 2018


December 31, 2017

$ in thousands





Interest expense on repurchase agreements outstanding

97,037



88,185



58,393



327,633



189,425


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

(5,980)



(6,422)



(6,438)



(25,839)



(25,544)


Repurchase agreements interest expense

91,057



81,763



51,955



301,794



163,881


(5)   Cumulative dividends are charged to retained earnings when declared or earned under U.S. GAAP. Prior to 2017, the Company declared quarterly dividends on its Series B Preferred Stock prior to dividends accumulating.  As of September 14, 2017, the Company had declared cumulative dividends on its Series B Preferred Stock from the date of issuance through December 26, 2017.  In December 2017, the Company deferred declaring its next dividend on Series B Preferred Stock to February 2018.  The Company reduced core earnings for the three months ended December 31, 2017 for the cumulative impact of deferring the declaration date to February 2018 because the Company considers all dividends accumulated during a quarter a current component of its capital costs regardless of the dividend declaration date.

(6)   On September 14, 2017, the Company declared a dividend on its Series C Preferred Stock that covered the period from the date of issuance, August 16, 2017, to but not including the dividend payment date, December 27, 2017.  The Company increased core earnings for the three months ended September 30, 2017 for the portion of the dividend from October 1, 2017 through December 26, 2017 because the Company did not consider the future unaccumulated portion of the dividend a current component of its capital costs.  The Company reduced core earnings for this portion of the dividend for the three months ended December 31, 2017.

(7)  Core earnings per share attributable to common stockholders is equal to core earnings divided by the basic weighted average number of common shares outstanding.

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 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 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, 2018


Three Months Ended
 September 30, 2018


Three Months Ended December 31, 2017

$ in thousands

Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield

Total interest income

176,104



3.88

%


162,088



3.53

%


152,981



3.34

%

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

5,569



0.12

%


5,638



0.12

%


5,819



0.12

%

Effective interest income

181,673



4.00

%


167,726



3.65

%


158,800



3.46

%

 


Years Ended December 31,


2018


2017

$ in thousands

Reconciliation


Yield/Effective Yield


Reconciliation


Yield/Effective Yield

Total interest income

643,016



3.55

%


545,055



3.20

%

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

22,478



0.13

%


23,343



0.14

%

Effective interest income

665,494



3.68

%


568,398



3.34

%

 

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, 2018


Three Months Ended
 September 30, 2018


Three Months Ended December 31, 2017

$ 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

101,622



2.57

%


91,253



2.29

%


59,937



1.51

%

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

5,980



0.15

%


6,422



0.16

%


6,438



0.16

%

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

629



0.02

%


2,763



0.07

%


16,763



0.42

%

Effective interest expense

108,231



2.74

%


100,438



2.52

%


83,138



2.09

%

 


Years Ended December 31,


2018


2017

$ in thousands

Reconciliation


Cost of Funds / Effective Cost of Funds


Reconciliation


Cost of Funds / Effective Cost of Funds

Total interest expense

338,868



2.16

%


196,591



1.33

%

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

25,839



0.16

%


25,544



0.17

%

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

20,015



0.13

%


77,076



0.52

%

Effective interest expense

384,722



2.45

%


299,211



2.02

%

 

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, 2018


Three Months Ended
 September 30, 2018


Three Months Ended December 31, 2017

$ 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

74,482



1.31

%


70,835



1.24

%


93,044



1.83

%

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

(5,980)



(0.15)%



(6,422)



(0.16)%



(6,438)



(0.16)%


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

5,568



0.12

%


5,638



0.12

%


5,819



0.12

%

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

(629)



(0.02)%



(2,763)



(0.07)%



(16,763)



(0.42)%


Effective net interest income

73,441



1.26

%


67,288



1.13

%


75,662



1.37

%

 


Years Ended December 31,


2018


2017

$ in thousands

Reconciliation


Net Interest Rate Margin / Effective Interest Rate Margin


Reconciliation


Net Interest Rate Margin / Effective Interest Rate Margin

Net interest income

304,148



1.39

%


348,464



1.87

%

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

(25,839)



(0.16)%



(25,544)



(0.17)%


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

22,478



0.13

%


23,343



0.14

%

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

(20,015)



(0.13)%



(77,076)



(0.52)%


Effective net interest income

280,772



1.23

%


269,187



1.32

%

 

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 December 31, 2018 and September 30, 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 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, 2018

$ in thousands

Agency RMBS and CMBS

Commercial Credit (1)

Residential Credit (2)

Total

Investments

12,127,173


3,318,041


1,983,010


17,428,224


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


84,326


61,732


234,575


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, 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 class.

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

Net 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 equity.

(8)

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

 

 

 

September 30, 2018

 

$ in thousands

Agency

RMBS and CMBS

Commercial Credit (1)

Residential Credit (2)

Total

Investments

13,065,148


3,302,475


2,000,909


18,368,532


Cash and cash equivalents (3)

55,295


34,480


18,448


108,223


Restricted cash


300



300


Derivative assets, at fair value (4)

46,212


2



46,214


Other assets

556,914


91,814


50,890


699,618


Total assets

13,723,569


3,429,071


2,070,247


19,222,887







Repurchase agreements

11,252,479


1,525,347


1,600,692


14,378,518


Secured loans (5)

553,262


1,096,738



1,650,000


Derivative liabilities, at fair value (4)

13,887


95



13,982


Other liabilities

646,954


34,576


13,434


694,964


Total liabilities

12,466,582


2,656,756


1,614,126


16,737,464







Total equity (allocated)

1,256,987


772,315


456,121


2,485,423


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





Net equity in unsecured assets (6)


(55,924)



(55,924)


Collateral pledged against secured loans

(636,506)


(1,261,752)



(1,898,258)


Secured loans

553,262


1,096,738



1,650,000


Equity related to repurchase agreement debt

1,173,743


551,377


456,121


2,181,241


Debt-to-equity ratio (7)

9.4


3.4


3.5


6.4


Repurchase agreement debt-to-equity ratio (8)

9.6


2.8


3.5


6.6


(1)

Investments in 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 class.

(5)

Secured loans are allocated based on amount of collateral pledged.

(6)

Net 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 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 and Earning Asset Yields

The table below presents information related to the Company's average earning assets and average earning asset yields.


Three Months Ended


Years Ended

$ in thousands

December 31, 2018


September 30, 2018


December 31, 2017


December 31, 2018


December 31, 2017

Average Earning Asset Balances (1):










Agency RMBS:










15 year fixed-rate, at amortized cost

533,041



1,613,967



3,080,248



1,911,511



3,297,267


30 year fixed-rate, at amortized cost

10,438,730



9,362,170



7,657,132



8,867,942



5,874,757


ARM, at amortized cost

121,367



181,721



244,284



188,517



267,265


Hybrid ARM, at amortized cost

814,945



1,303,070



1,750,982



1,342,560



1,969,767


Agency - CMO, at amortized cost

263,464



242,133



283,962



258,457



302,060


Agency CMBS, at amortized cost

781,557



516,992





339,816




Non-Agency CMBS, at amortized cost

3,296,258



3,236,226



3,105,896



3,226,174



2,818,244


Non-Agency RMBS, at amortized cost

1,051,883



1,055,671



1,158,180



1,055,682



1,441,527


GSE CRT, at amortized cost

760,318



762,235



783,910



767,220



784,203


Commercial loans, at amortized cost

31,624



55,607



248,570



110,461



270,314


Loan participation interest

51,468



29,875





20,503




Average earning assets

18,144,655



18,359,667



18,313,164



18,088,843



17,025,404


 

Average Earning Asset Yields (2):










Agency RMBS:










15 year fixed-rate

3.17

%


2.59

%


1.98

%


2.23

%


1.98

%

30 year fixed-rate

3.41

%


2.96

%


2.90

%


3.09

%


2.79

%

ARM

2.58

%


2.49

%


2.36

%


2.44

%


2.32

%

Hybrid ARM

2.66

%


2.57

%


2.25

%


2.40

%


2.26

%

Agency - CMO

3.34

%


3.20

%


2.74

%


3.01

%


1.54

%

Agency CMBS

3.19

%


2.85

%


%


3.30

%


%

Non-Agency CMBS

4.95

%


4.88

%


4.77

%


4.91

%


4.50

%

Non-Agency RMBS

7.07

%


7.17

%


7.18

%


7.11

%


6.22

%

GSE CRT (3)

3.67

%


3.56

%


2.79

%


3.40

%


2.58

%

Commercial loans

10.78

%


10.05

%


8.73

%


9.54

%


8.70

%

Loan participation interest

6.04

%


5.87

%


%


6.10

%


%

Average earning asset yields

3.88

%


3.53

%


3.34

%


3.55

%


3.20

%

(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 earnings 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, 2018


September 30, 2018


December 31, 2017


December 31, 2018


December 31, 2017

Average Borrowings (1):










Agency RMBS (2)

10,819,707



11,326,323



11,649,089



11,178,636



10,494,355


Agency CMBS

718,436



472,011





311,024




Non-Agency CMBS(2)

2,670,071



2,575,504



2,511,435



2,586,509



2,323,689


Non-Agency RMBS

900,036



895,504



947,117



887,132



1,142,769


GSE CRT

686,404



681,079



654,453



677,545



643,070


Exchangeable senior notes





147,498



28,646



228,846


Loan participation interest

38,601



22,406





15,377




Total average borrowings

15,833,255



15,972,827



15,909,592



15,684,869



14,832,729


Maximum borrowings during the period (3)

16,144,062



16,078,387



15,959,127



16,144,062



15,959,127


 

Average Cost of Funds (4):










Agency RMBS (2)

2.52

%


2.24

%


1.40

%


2.10

%


1.18

%

Agency CMBS

2.40

%


2.26

%


%


2.31

%


%

Non-Agency CMBS(2)

3.11

%


2.88

%


2.00

%


2.74

%


1.73

%

Non-Agency RMBS

3.49

%


3.40

%


2.74

%


3.25

%


2.49

%

GSE CRT

3.47

%


3.26

%


2.71

%


3.19

%


2.55

%

Exchangeable senior notes

%


%


5.71

%


5.58

%


5.83

%

Loan participation interest

4.04

%


3.83

%


%


4.04

%


%

Cost of funds

2.57

%


2.29

%


1.51

%


2.16

%


1.33

%

Interest rate swaps average fixed pay rate (5)

2.19

%


2.35

%


2.08

%


2.30

%


2.11

%

Interest rate swaps average floating receive rate (6)

(2.17)%



(2.25)%



(1.32)%



(2.10)%



(1.14)%


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

2.74

%


2.52

%


2.09

%


2.45

%


2.02

%











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

6.7

x


6.4x


6.0x


6.7

x


6.0x

(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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