ATLANTA, Nov. 6, 2017 /PRNewswire/ -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended September 30, 2017.

Invesco Mortgage Capital Inc. Logo (PRNewsFoto/Invesco Mortgage Capital Inc.)

Highlights:

  • Q3 2017 net income attributable to common stockholders of $49.1 million or $0.44 basic earnings per common share ("EPS") compared to $46.8 million or $0.42 basic EPS in Q2 2017
  • Q3 2017 core earnings* of $49.1 million or core EPS of $0.44 compared to $46.1 million or core EPS of $0.41 in Q2 2017
  • Q3 2017 book value per diluted common share*** of $18.34 compared to $18.27 at Q2 2017 and $17.48 at Q4 2016
  • Q3 2017 common stock dividend increased to $0.41 per share
  • Issued $287.5 million of preferred equity

Core earnings per share* improved to $0.44 for the quarter, an increase of $.03 or 7.3% over the previous quarter, primarily due to higher effective net interest income and the deployment of proceeds from the $287.5 million preferred equity offering in August. Substantially all the preferred equity offering proceeds were deployed in Agency RMBS and CMBS by the end of the quarter which should result in the Company realizing the full impact of its accretive benefits to core earnings in the fourth quarter.  Given the improvement in earnings, the common stock dividend paid on October 26, 2017 was raised to $0.41 per share, an increase of 2.5%.  As of September 30, 2017, 59% of the Company's equity was allocated to residential and commercial credit assets and 41% was allocated to Agency RMBS.  "Our portfolio performed well during the third quarter, and we continue to be very encouraged by the Company's dividend paying potential as demonstrated by our Board's declaration to increase the common stock dividend to $0.41 per share," said John Anzalone, Chief Executive Officer.  "In addition to our favorable economic return and continued book value stability, we are also pleased with our preferred equity raise in August and expect to see the full quarter of its accretive benefits to core earnings in the fourth quarter.  Importantly, we continue to believe the economic outlook is supportive of our strategy and attractive investment opportunities remain that may result in further earnings and dividend improvements."

* 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.
** Economic return for the quarter ended September 30, 2017 is defined as the change in book value per diluted common share from June 30, 2017 to September 30, 2017 of $0.07; plus dividends declared of $0.41 per common share; divided by the June 30, 2017 book value per diluted common share of $18.27. Economic return for the nine months ended September 30, 2017 is defined as the change in book value per diluted common share from December 31, 2016 to September 30, 2017 of $0.86; plus dividends declared of $1.21 per common share; divided by the December 31, 2016 book value per diluted common share of $17.48.
*** 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 (1,425,000 shares).

Key performance indicators for the quarters ended September 30, 2017 and June 30, 2017 are summarized in the table below.

($ in millions, except share amounts)

Q3 '17

Q2 '17

Variance

Average Balances

(unaudited)

(unaudited)

Average earning assets (at amortized costs)

$17,434.6

$16,029.5

$1,405.1

Average borrowings

$15,196.4

$13,955.3

$1,241.1

Average equity

$2,206.3

$2,185.4

$20.9




U.S. GAAP Financial Measures


Total interest income

$140.4

$127.0

$13.4

Total interest expense

$54.2

$44.1

$10.1

Net interest income

$86.2

$82.9

$3.3

Total expenses

$11.3

$10.6

$0.7

Net income (loss) attributable to common stockholders

$49.1

$46.8

$2.3




Average earning asset yields

3.22%

3.17%

0.05%

Cost of funds

1.43%

1.26%

0.17%

Net interest rate margin

1.79%

1.91%

(0.12%)




Book value per common share (diluted)*

$18.34

$18.27

$0.07

Earnings (loss) per common share (basic)

$0.44

$0.42

$0.02

Earnings (loss) per common share (diluted)

$0.43

$0.41

$0.02

Debt-to-equity ratio

6.0x

5.9x

0.1x




Non-GAAP Financial Measures**


Core earnings

$49.1

$46.1

$3.0

Effective interest income

$146.3

$132.9

$13.4

Effective interest expense

$78.1

$70.4

$7.7

Effective net interest income

$68.2

$62.4

$5.8




Effective yield

3.36%

3.32%

0.04%

Effective cost of funds

2.06%

2.01%

0.05%

Effective interest rate margin

1.30%

1.31%

(0.01%)




Core earnings per common share

$0.44

$0.41

$0.03

Repurchase agreement debt-to-equity ratio

6.3x

6.1x

0.2x

* 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 (1,425,000 shares).

** Core earnings (and by calculation, core earnings per common share), effective interest income (and by calculation, effective yield), effective interest expense (and by calculation, effective cost of funds), effective net interest income (and by calculation, effective interest rate margin), and repurchase agreement debt-to-equity ratio are non-GAAP financial measures. Refer to the section entitled "Non-GAAP Financial Measures" for important disclosures and a reconciliation to the most comparable U.S. GAAP measures of net income attributable to common stockholders (and by calculation, basic earnings (loss) per common share), total interest income (and by calculation, average earning asset yields), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and debt-to-equity ratio.

Financial Summary

Net income attributable to common stockholders for the third quarter of 2017 was $49.1 million compared to $46.8 million for the second quarter.  Higher net income attributable to common stockholders was driven by an increase in net interest income and a decrease in total other losses during the quarter that were partially offset by dividends on preferred stock issued during the quarter.  During the third quarter of 2017, the Company completed a public offering of 11,500,000 shares of 7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") at the price of $25.00 per share. Total proceeds were $287.5 million before issuance costs of $9.4 million.

Book value per diluted common share for the third quarter of 2017 increased by 0.4% to $18.34 reflecting the continued low volatility environment.  

During the third quarter of 2017, the Company generated $49.1 million in core earnings, an increase of $3.0 million or 6.5% over the second quarter.  Core earnings increased in the third quarter primarily due to higher effective net interest income that was partially offset by the Series C Preferred Stock dividends.

Total interest income increased to $140.4 million for the third quarter of 2017 compared to $127.0 million for the second quarter primarily due to higher average earning assets.  Average earning assets rose to $17.4 billion during the third quarter, up $1.4 billion (8.8%) from $16.0 billion during the second quarter.  The increase in average earning assets was primarily due to investing Series C Preferred Stock proceeds.  The Company leveraged Series C Preferred Stock proceeds and paydowns on securities to purchase $2.5 billion of 30 year fixed- rate Agency RMBS and $375.8 million of CMBS during the third quarter.

The Company increased its average borrowings by $1.2 billion (8.9%) in the third quarter, resulting in average borrowings of $15.2 billion and total interest expense of $54.2 million compared to average borrowings of $14.0 billion and total interest expense of $44.1 million during the second quarter.  The Company's total interest expense rose during the third quarter primarily due to higher interest rates and higher average borrowings leveraging MBS purchases during the quarter. The Company's cost of funds rose to 1.43% for the third quarter, up from 1.26% for the second quarter, reflecting the June 2017 increase in the federal funds rate and rising LIBOR rates throughout the third quarter.

The Company modestly increased leverage to 6.0x in the third quarter of 2017 from 5.9x in the second quarter. The Company retired $60.9 million of its Senior Exchangeable Notes (the "Notes") during the third quarter and has retired $242.2 million year-to-date. As of September 30, 2017, $157.8 million of Notes is outstanding. The Notes will mature in March 2018.

Total expenses for the third quarter of 2017 were approximately $11.3 million compared to $10.6 million for the second quarter. Management fees totaled $9.6 million in the third quarter, up from $9.0 million in the second quarter of 2017. Third quarter management fees rose primarily due to issuing the Series C Preferred Stock.  General and administrative expenses were $1.7 million in the third quarter of 2017, compared to $1.6 million in the second quarter. General and administrative expenses were higher during the third quarter primarily due to transaction fees related to new interest rate swaps added during the quarter and higher professional fees.

The ratio of annualized total expenses to average equity(1) increased to 2.04% for the third quarter of 2017 compared to 1.95% for the second quarter primarily due to higher management fees.

As previously announced, the Company declared the following dividends on September 14, 2017: a common stock dividend of $0.41 per share paid on October 26, 2017; a Series A preferred stock dividend of $0.4844 per share paid on October 25, 2017; and a Series B preferred stock dividend of $0.4844 per share that will be paid on December 27, 2017.  The Company also declared its first Series C Preferred Stock dividend of $0.6823 per share that will be paid on December 27, 2017 for the period from date of issuance to but not including December 27, 2017. The Company will declare its next dividend on Series B and Series C Preferred Stock following its regularly scheduled Board of Directors meeting in February 2018 for the period from December 27, 2017 through but not including March 27, 2018. The Company will continue to declare its quarterly dividends on common stock and Series A Preferred Stock in the third month of each quarter.

(1)

The ratio of annualized total expenses to average equity is calculated as the annualized sum of management fees plus general and administrative expenses divided by average equity. Average equity is calculated based on the weighted month-end balance of total equity excluding equity attributable to preferred stockholders.

About Invesco Mortgage Capital Inc.

Invesco Mortgage Capital Inc. is a real estate investment trust that primarily focuses on investing in, financing and managing residential and commercial mortgage-backed securities and mortgage loans. Invesco Mortgage Capital Inc. is externally managed and advised by Invesco Advisers, Inc., a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd., a leading independent global investment management firm.

Earnings Call

Members of the investment community and the general public are invited to listen to the Company's earnings conference call on Tuesday, November 7, 2017, at 9:00 a.m. ET, by calling one of the following numbers:

North America Toll Free:

800-857-7465

International:

1-312-470-0052

Passcode:

Invesco

An audio replay will be available until 5:00 pm ET on November 21, 2017 by calling:

800-510-9771 (North America) or 1-402-344-6800 (International)

The presentation slides that will be reviewed during the call will be available on the Company's website at www.invescomortgagecapital.com.

Cautionary Notice Regarding Forward-Looking Statements

This press release, the related presentation and comments made in the associated conference call, may include statements and information that constitute "forward-looking statements" within the meaning of the U.S. securities laws as defined in the Private Securities Litigation Reform Act of 1995, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements include our views on the risk positioning of our portfolio, domestic and global market conditions (including the residential and commercial real estate market), the market for our target assets, our financial performance, including our core earnings, economic return, comprehensive income and changes in our book value, our ability to continue performance trends, the stability of portfolio yields, interest rates, credit spreads, prepayment trends, financing sources, cost of funds, our leverage and equity allocation. In addition, words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "projects," "forecasts," and future or conditional verbs such as "will," "may," "could," "should," and "would" as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions "Risk Factors," "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission's website at www.sec.gov.

All written or oral forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


Three Months Ended

Nine Months Ended

$ in thousands, except share amounts

September 30,
2017

June 30, 2017

September 30,
2016

September 30,
2017

September 30,
2016

Interest Income








Mortgage-backed and credit risk transfer securities (1)

134,138

121,027

112,467

374,038

347,573

Commercial loans

6,251

6,021

5,680

18,036

16,520

Total interest income

140,389

127,048

118,147

392,074

364,093

Interest Expense








Repurchase agreements

45,907

36,072

24,892

111,926

97,952

Secured loans

5,544

4,535

2,746

13,492

8,149

Exchangeable senior notes

2,724

3,504

5,620

11,236

16,847

Total interest expense

54,175

44,111

33,258

136,654

122,948

Net interest income

86,214

82,937

84,889

255,420

241,145

Other Income (loss)








Gain (loss) on investments, net

(11,873)

11,175

(7,155)

(2,551)

5,860

Equity in earnings (losses) of unconsolidated ventures

408

(154)

729

(1,280)

1,992

Gain (loss) on derivative instruments, net

1,955

(53,513)

35,378

(46,096)

(293,528)

Realized and unrealized credit derivative income (loss), net

(2,930)

21,403

31,926

38,428

57,564

Net loss on extinguishment of debt

(1,344)

(526)

—

(6,581)

—

Other investment income (loss), net

2,313

2,533

(554)

6,175

(3,617)

Total other income (loss)

(11,471)

(19,082)

60,324

(11,905)

(231,729)

Expenses








Management fee – related party

9,557

9,027

6,719

27,385

25,292

General and administrative

1,697

1,608

1,836

5,389

5,769

Total expenses

11,254

10,635

8,555

32,774

31,061

Net income (loss)

63,489

53,220

136,658

210,741

(21,645)

Net income (loss) attributable to non-controlling interest

800

670

1,723

2,656

(235)

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

62,689

52,550

134,935

208,085

(21,410)

Dividends to preferred stockholders

13,562

5,716

5,716

24,994

17,148

Net income (loss) attributable to common stockholders

49,127

46,834

129,219

183,091

(38,558)

Earnings (loss) per share:








Net income (loss) attributable to common stockholders








Basic

0.44

0.42

1.16

1.64

(0.34)

Diluted

0.43

0.41

1.05

1.59

(0.34)

Dividends declared per common share

0.41

0.40

0.40

1.21

1.20


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



Three Months Ended

Nine Months Ended

$ in thousands

September 30,
2017

June 30, 2017

September 30,
2016

September 30,
2017

September 30,
2016

Coupon interest

156,635

147,267

144,325

449,971

433,095

Net (premium amortization)/discount accretion

(22,497)

(26,240)

(31,858)

(75,933)

(85,522)

Mortgage-backed and credit risk transfer securities interest income

134,138

121,027

112,467

374,038

347,573

 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


Three Months Ended

Nine Months Ended

In thousands

September 30,
2017

June 30, 2017

September 30,
2016

September 30,
2017

September 30,
2016

Net income (loss)

63,489

53,220

136,658

210,741

(21,645)

Other comprehensive income (loss):








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

19,089

39,633

32,015

75,011

270,591

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

7

651

—

1,508

(11,581)

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

(6,438)

(6,369)

(4,831)

(19,105)

11,331

Currency translation adjustments on
investment in unconsolidated venture

807

139

(235)

331

(10)

Total other comprehensive income (loss)

13,465

34,054

26,949

57,745

270,331

Comprehensive income (loss)

76,954

87,274

163,607

268,486

248,686

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

(970)

(1,099)

(2,063)

(3,384)

(3,157)

Less: Dividends to preferred stockholders

(13,562)

(5,716)

(5,716)

(24,994)

(17,148)

Comprehensive income (loss) attributable to common
stockholders

62,422

80,459

155,828

240,108

228,381

 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


As of

 $ in thousands except share amounts

September 30, 2017

December 31, 2016

ASSETS

Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of
$17,398,372 and $14,422,198, respectively)

18,259,552

14,981,331

Commercial loans, held-for-investment

280,989

273,355

Cash and cash equivalents

73,530

161,788

Due from counterparties

1,550

86,450

Investment related receivable

20,934

43,886

Accrued interest receivable

56,532

46,945

Derivative assets, at fair value

7,394

3,186

Other assets

102,343

109,297

Total assets

18,802,824

15,706,238

LIABILITIES AND EQUITY


Liabilities:


Repurchase agreements

14,088,838

11,160,669

Secured loans

1,650,000

1,650,000

Exchangeable senior notes, net

157,380

397,041

Derivative liabilities, at fair value

40,631

134,228

Dividends and distributions payable

59,909

50,924

Investment related payable

122,896

9,232

Accrued interest payable

12,255

21,066

Collateral held payable

2,955

1,700

Accounts payable and accrued expenses

1,788

1,534

Due to affiliate

10,778

9,660

Total liabilities

16,147,430

13,436,054

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

—

Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 111,616,551 and
111,594,595 shares issued and outstanding, respectively

1,116

1,116

Additional paid in capital

2,384,157

2,379,863

Accumulated other comprehensive income

350,686

293,668

Retained earnings (distributions in excess of earnings)

(670,261)

(718,303)

Total stockholders' equity

2,629,022

2,241,560

Non-controlling interest

26,372

28,624

Total equity

2,655,394

2,270,184

Total liabilities and equity

18,802,824

15,706,238


(1)

See Note 16 of the Company's condensed consolidated financial statements filed in Item 1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2017

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 additional reconciling items to its core earnings calculation in the future if 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, the majority of the Company's mortgage-backed securities are classified as available-for-sale securities, and changes in the valuation of these securities are recorded in other comprehensive income on its condensed consolidated balance sheet.  The Company elected the fair value option for its mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in the condensed consolidated statement of operations.  In addition, certain gains and losses represent one-time events.

The Company believes that providing transparency into core earnings enables its investors to consistently measure, evaluate and compare its operating performance to that of its peers over multiple reporting periods. However, the Company cautions that core earnings should not be considered as an alternative to net income (determined in accordance with U.S. GAAP), or as an indication of the Company's cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of the Company's liquidity, or an indication of amounts available to fund its cash needs, including its ability to make cash distributions.

The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to core earnings for the following periods:

Three Months Ended

Nine Months Ended

$ in thousands, except per share data

September 30,
2017

June 30, 2017

September 30,
2016

September 30,
2017

September 30,
2016

Net income (loss) attributable to common stockholders

49,127

46,834

129,219

183,091

(38,558)

Adjustments:








(Gain) loss on investments, net

11,873

(11,175)

7,155

2,551

(5,860)

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

(19,503)

40,229

(1,347)

5,808

62,222

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

95

(6,682)

(60,419)

(20,025)

150,842

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

8,803

(15,559)

(25,963)

(20,904)

(39,175)

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

(1,504)

(1,731)

1,340

(3,748)

6,007

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

(6,438)

(6,369)

(4,831)

(19,105)

11,331

Net loss on extinguishment of debt

1,344

526

—

6,581

—

Subtotal

(5,330)

(761)

(84,065)

(48,842)

185,367

Cumulative adjustments attributable to non-controlling interest

67

10

1,060

616

(2,289)

Preferred stock dividend declared but not accumulated (5)

5,211

—

—

5,211

—

Core earnings

49,075

46,083

46,214

140,076

144,520

Basic income (loss) per common share

0.44

0.42

1.16

1.64

(0.34)

Core earnings per share attributable to common stockholders (6)

0.44

0.41

0.41

1.26

1.29


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



Three Months Ended

Nine Months Ended

$ in thousands

September 30,
2017

June 30, 2017

September 30,
2016

September 30,
2017

September 30,
2016

Realized gain (loss) on derivative instruments, net

19,503

(40,229)

1,347

(5,808)

(62,222)

Unrealized gain (loss) on derivative instruments, net

(95)

6,682

60,419

20,025

(150,842)

Contractual net interest expense

(17,453)

(19,966)

(26,388)

(60,313)

(80,464)

Gain (loss) on derivative instruments, net

1,955

(53,513)

35,378

(46,096)

(293,528)


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



Three Months Ended

Nine Months Ended

$ in thousands

September 30,
2017

June 30, 2017

September 30,
2016

September 30,
2017

September 30,
2016

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

(8,803)

15,559

25,963

20,904

39,175

GSE CRT embedded derivative coupon interest

5,873

5,844

5,963

17,524

18,389

Realized and unrealized credit derivative income (loss), net

(2,930)

21,403

31,926

38,428

57,564


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



Three Months Ended

Nine Months Ended

$ in thousands

September 30,
2017

June 30, 2017

September 30,
2016

September 30,
2017

September 30,
2016

Dividend income

809

802

786

2,427

2,390

Gain (loss) on foreign currency transactions, net

1,504

1,731

(1,340)

3,748

(6,007)

Other investment income (loss), net

2,313

2,533

(554)

6,175

(3,617)


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



Three Months Ended

Nine Months Ended

$ in thousands

September 30,
2017

June 30, 2017

September 30,
2016

September 30,
2017

September 30,
2016

Interest expense on repurchase agreement borrowings

52,345

42,441

29,723

131,031

86,621

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

(6,438)

(6,369)

(4,831)

(19,105)

11,331

Repurchase agreements interest expense

45,907

36,072

24,892

111,926

97,952


(5)     Preferred stock dividend declared but not accumulated is a timing adjustment related to the first dividend declaration on
Series C Preferred Stock.  On September 14, 2017, the Company declared a dividend on Series C Preferred Stock that
covers the period from the date of issuance, August 16, 2017, to but not including the dividend payment date, December
27, 2017.  The Company adjusted core earnings for the period ended September 30, 2017 to exclude the portion of the
dividend declared for the period from October 1, 2017 through December 26, 2017 because the Company does not
consider the future unaccumulated portion of the dividend a current component of its capital costs.


(6)     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

September 30, 2017

 

June 30, 2017

September 30, 2016

$ in thousands

Reconciliation

Yield/Effective
Yield

 

 

Reconciliation

 

Yield/Effective
Yield

Reconciliation

Yield/Effective
Yield

Total interest income

140,389

3.22

%

127,048

3.17

%

118,147

2.94

%

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

5,873

0.14

%

5,844

0.15

%

5,963

0.15

%

Effective interest income

146,262

3.36

%

132,892

3.32

%

124,110

3.09

%

 

Nine Months Ended

September 30, 2017

September 30, 2016

$ in thousands

Reconciliation

Yield/Effective
Yield

Reconciliation

Yield/Effective
Yield

Total interest income

392,074

3.15

%

364,093

3.10

%

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

17,524

0.14

%

18,389

0.16

%

Effective interest income

409,598

3.29

%

382,482

3.26

%

 

The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:

Three Months Ended

September 30, 2017

June 30, 2017

September 30, 2016

$ 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

54,175

1.43

%

44,111

1.26

%

33,258

0.94

%

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

6,438

0.17

%

6,369

0.18

%

4,831

0.14

%

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

17,453

0.46

%

19,966

0.57

%

26,388

0.74

%

Effective interest expense

78,066

2.06

%

70,446

2.01

%

64,477

1.82

%

 

 

Nine Months Ended

September 30, 2017

September 30, 2016

$ in thousands

Reconciliation

Cost of Funds /
Effective Cost
of Funds

Reconciliation

Cost of Funds /
Effective Cost
of Funds

Total interest expense

136,654

1.26

%

122,948

1.19

%

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

19,105

0.18

%

(11,331)

(0.11)

%

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

60,313

0.56

%

80,464

0.78

%

Effective interest expense

216,072

2.00

%

192,081

1.86

%

 

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

September 30, 2017

June 30, 2017

September 30, 2016

$ 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

86,214

1.79

%

82,937

1.91

%

84,889

2.00

%

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

(6,438)

(0.17)

%

(6,369)

(0.18)

%

(4,831)

(0.14)

%

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

5,873

0.14

%

5,844

0.15

%

5,963

0.15

%

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

(17,453)

(0.46)

%

(19,966)

(0.57)

%

(26,388)

(0.74)

%

Effective net interest income

68,196

1.30

%

62,446

1.31

%

59,633

1.27

%

 

Nine Months Ended

September 30, 2017

September 30, 2016

$ in thousands

Reconciliation

Net Interest
Rate Margin /
Effective
Interest Rate
Margin

Reconciliation

Net Interest
Rate Margin /
Effective
Interest Rate
Margin

Net interest income

255,420

1.89

%

241,145

1.91

%

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

(19,105)

(0.18)

%

11,331

0.11

%

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

17,524

0.14

%

18,389

0.16

%

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

(60,313)

(0.56)

%

(80,464)

(0.78)

%

Effective net interest income

193,526

1.29

%

190,401

1.40

%

 

Repurchase Agreement Debt-to-Equity Ratio

The following tables show the allocation of the Company's equity to its target assets, the Company's debt-to-equity ratio, and the Company's repurchase agreement debt-to-equity ratio as of September 30, 2017 and June 30, 2017. 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, secured loans and exchangeable senior notes) to total equity.  The Company presents a repurchase agreement debt-to-equity ratio, a non-GAAP financial measure of leverage, because the mortgage REIT industry primarily uses repurchase agreements, which typically mature within one year, to finance investments. The Company believes presenting the Company's repurchase agreement debt-to-equity ratio, when considered together with U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding the Company's refinancing risks, and gives investors a comparable statistic to those other mortgage REITs who almost exclusively borrow using short-term repurchase agreements that are subject to refinancing risk.

September 30, 2017

$ in thousands

Agency

RMBS

Residential
Credit (1)

Commercial
Credit (2)

Exchangeable
Senior Notes
and Other

Total

Investments

12,869,842

2,280,913

3,412,470

—

18,563,225

Cash and cash equivalents (3)

30,453

15,569

27,508

—

73,530

Derivative assets, at fair value (4)

7,394

—

—

—

7,394

Other assets

82,161

6,135

66,397

3,982

158,675

Total assets

12,989,850

2,302,617

3,506,375

3,982

18,802,824






Repurchase agreements

11,115,979

1,688,915

1,283,944

—

14,088,838

Secured loans (5)

517,771

—

1,132,229

—

1,650,000

Exchangeable senior notes, net

—

—

—

157,380

157,380

Derivative liabilities, at fair value

39,292

—

1,339

—

40,631

Other liabilities

162,669

17,566

29,995

351

210,581

Total liabilities

11,835,711

1,706,481

2,447,507

157,731

16,147,430






Total equity (allocated)

1,154,139

596,136

1,058,868

(153,749)

2,655,394

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




Net equity in unsecured assets and exchangeable
senior notes (6)

—

—

(303,673)

153,749

(149,924)

Collateral pledged against secured loans

(598,870)

—

(1,309,570)

—

(1,908,440)

Secured loans

517,771

—

1,132,229

—

1,650,000

Equity related to repurchase agreement debt

1,073,040

596,136

577,854

—

2,247,030

Debt-to-equity ratio (7)

10.1

2.8

2.3

NA

6.0

Repurchase agreement debt-to-equity ratio (8)

10.4

2.8

2.2

NA

6.3


(1)

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

(2)

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

(3)

Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, residential credit and commercial credit.

(4)

Derivative assets 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 and exchangeable senior notes includes commercial loans, investments in unconsolidated joint ventures, exchangeable senior notes and other.

(7)

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

(8)

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

 

 

June 30, 2017

$ in thousands

Agency

RMBS

Residential
Credit (1)

Commercial
Credit (2)

Exchangeable
Senior Notes
and Other

Total

Investments

10,852,753

2,453,015

3,079,693

—

16,385,461

Cash and cash equivalents (3)

29,985

18,653

15,431

—

64,069

Derivative assets, at fair value (4)

11,005

—

—

—

11,005

Other assets

132,267

6,950

70,200

3,979

213,396

Total assets

11,026,010

2,478,618

3,165,324

3,979

16,673,931






Repurchase agreements

9,227,679

1,792,375

1,098,894

—

12,118,948

Secured loans (5)

506,909

—

1,143,091

—

1,650,000

Exchangeable senior notes, net

—

—

—

217,804

217,804

Derivative liabilities, at fair value

43,047

—

1,100

—

44,147

Other liabilities

195,806

20,960

62,951

3,221

282,938

Total liabilities

9,973,441

1,813,335

2,306,036

221,025

14,313,837






Total equity (allocated)

1,052,569

665,283

859,288

(217,046)

2,360,094

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




Net equity in unsecured assets and exchangeable
senior notes (6)

—

—

(302,177)

217,046

(85,131)

Collateral pledged against secured loans

(596,514)

—

(1,345,151)

—

(1,941,665)

Secured loans

506,909

—

1,143,091

—

1,650,000

Equity related to repurchase agreement debt

962,964

665,283

355,051

—

1,983,298

Debt-to-equity ratio (7)

9.2

2.7

2.6

NA

5.9

Repurchase agreement debt-to-equity ratio (8)

9.6

2.7

3.1

NA

6.1


(1)

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

(2)

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

(3)

Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, residential credit and commercial credit.

(4)

Derivative assets 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 and exchangeable senior notes includes commercial loans, investments in unconsolidated joint ventures, exchangeable senior notes and other.

(7)

Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) 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 Asset Balances

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

Three Months Ended

Nine Months Ended

$ in thousands

September 30,
2017

June 30, 2017

September 30,
2016

September 30,
2017

September 30,
2016

Average Balances (1):








Agency RMBS:








15 year fixed-rate, at amortized cost

3,223,684

3,374,039

3,409,739

3,370,401

2,409,219

30 year fixed-rate, at amortized cost

6,486,613

4,852,769

3,613,116

5,274,103

3,784,762

ARM, at amortized cost

258,304

276,272

332,801

275,010

368,409

Hybrid ARM, at amortized cost

1,847,709

1,996,026

2,703,529

2,043,497

2,893,860

Agency - CMO, at amortized cost

287,364

309,113

362,825

308,159

383,995

Non-Agency RMBS, at amortized cost

1,339,639

1,483,354

2,079,681

1,537,013

2,243,941

GSE CRT, at amortized cost

790,886

796,050

612,531

784,301

641,445

CMBS, at amortized cost

2,920,587

2,663,808

2,532,667

2,721,306

2,610,204

U.S. Treasury securities, at amortized cost

—

—

169,041

—

60,610

Commercial loans, at amortized cost

279,840

278,052

272,614

277,642

263,532

Average earning assets

17,434,626

16,029,483

16,088,544

16,591,432

15,659,977














Average Earning Asset Yields (2):





Agency RMBS:





15 year fixed-rate

1.95%

1.97%

1.86%

1.99%

1.97%

30 year fixed-rate

2.73%

2.83%

2.55%

2.73%

2.76%

ARM

2.35%

2.27%

2.18%

2.31%

2.31%

Hybrid ARM

2.19%

2.29%

2.06%

2.26%

2.15%

Agency - CMO

2.71%

0.34%

2.42%

1.16%

2.60%

Non-Agency RMBS

6.56%

5.90%

5.06%

5.97%

4.90%

GSE CRT (3)

2.74%

2.62%

0.98%

2.51%

0.89%

CMBS

4.52%

4.45%

4.28%

4.40%

4.34%

U.S. Treasury securities

—%

—%

1.09%

—%

1.15%

Commercial loans

8.86%

8.69%

8.27%

8.69%

8.35%

Average earning asset yields

3.22%

3.17%

2.94%

3.15%

3.10%


(1)

Average amounts for each period are based on weighted month-end balances; all percentages are annualized. Average balances are presented on an amortized
cost basis.

(2)

Average earning asset yields for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the average balance of 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 Equity Balances

The table below presents information related to the Company's average borrowings and average equity for the following periods.

Three Months Ended

Nine Months Ended

$ in thousands

September 30,
2017

June 30, 2017

September 30,
2016

September 30,
2017

September 30,
2016

Average Borrowings (1):








Agency RMBS (2)

10,919,243

9,665,651

9,334,305

10,105,277

8,823,633

Non-Agency RMBS

1,062,528

1,155,529

1,681,136

1,208,702

1,812,516

GSE CRT

661,095

655,715

428,798

639,234

451,024

CMBS (2)

2,367,648

2,239,854

2,213,541

2,260,356

2,187,871

U.S. Treasury securities

—

—

168,689

—

73,310

Exchangeable senior notes

185,930

238,530

396,213

256,261

395,599

Total average borrowings

15,196,444

13,955,279

14,222,682

14,469,830

13,743,953

Maximum borrowings during the period (3)

15,896,218

13,986,752

14,381,178

15,896,218

14,381,178




















Average Cost of Funds (4):








Agency RMBS (2)

1.28

%

1.10

%

0.67

%

1.09

%

0.66

%

Non-Agency RMBS

2.67

%

2.47

%

1.94

%

2.42

%

1.86

%

GSE CRT

2.69

%

2.51

%

2.16

%

2.50

%

2.14

%

CMBS (2)

1.91

%

1.63

%

1.14

%

1.63

%

1.13

%

U.S. Treasury securities

—

%

—

%

0.26

%

—

%

0.25

%

Exchangeable senior notes

5.86

%

5.88

%

5.67

%

5.85

%

5.68

%

Cost of funds

1.43

%

1.26

%

0.94

%

1.26

%

1.19

%

Interest rate swaps average fixed pay rate (5)

2.09

%

2.13

%

2.13

%

2.12

%

2.11

%

Interest rate swaps average floating receive rate (6)

(1.24)

%

(1.06)

%

(0.56)

%

(1.07)

%

(0.49)

%

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

2.06

%

2.01

%

1.82

%

2.00

%

1.86

%

Average Equity (8):

2,206,307

2,185,448

2,130,097

2,173,671

2,032,636

Average debt-to-equity ratio (average during period)

6.9

x

6.4

x

6.7x

6.7

x

6.8

x

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

6.0

x

5.9

x

6.0x

6.0

x

6.0

x


(1)

Average amounts for each period are based on weighted month-end balances; all percentages are annualized. Average balances are presented on an amortized cost basis.

(2)

Agency RMBS and 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."

(8)

Average equity is calculated based on the weighted month-end balance of total equity excluding equity attributable to preferred stockholders.

 


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SOURCE Invesco Mortgage Capital Inc.

Copyright 2017 PR Newswire

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