ATLANTA, Nov. 3, 2016 /PRNewswire/ -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended September 30, 2016, reporting basic earnings of $1.16 per common share, core earnings* of $0.41 per common share and book value per diluted common share** of $18.08.

Credit spreads tightened in the third quarter of 2016 in a relatively stable interest rate environment. These conditions benefited the Company's high quality asset portfolio, driving book value per diluted common share** higher by 5.9% for the quarter. "Our equity is allocated 56% to residential and commercial credit assets, and 44% to Agency RMBS as of September 30, 2016. We are pleased with our portfolio positioning, having shortened maturities and reduced leverage in front of the upcoming elections, Federal Reserve meetings, and Brexit negotiations," said Richard King, President and CEO.

The Company's assets continue to improve as they season and benefit from growing borrower equity due to property price appreciation. Efforts to optimize risk-adjusted returns have provided for a steady dividend, lower book value volatility, and attractive economic return.***

 Highlights

• Q3 2016 net income attributable to common stockholders of $129.2 million or $1.16 basic earnings per common share and $1.05 diluted earnings per common share
• Q3 2016 core earnings* of $46.2 million, core earnings per common share* of $0.41, and a common stock dividend of $0.40 per share
• Q3 2016 book value per diluted common share** of $18.08 vs. $17.08 at Q2 2016 and $17.14 at Q4 2015
• Economic return*** for the three and nine months ended September 30, 2016 of 8.2% and 12.5%, respectively
• Q3 2016 comprehensive income attributable to common stockholders was $155.8 million or $1.40 basic comprehensive income per common share vs. $106.5 million or $0.95 basic comprehensive income per common share for Q2 2016
• Reduced debt-to-equity ratio to 6.0x as of September 30, 2016

* 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" below 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) and Series B Preferred Stock ($155.0 million); divided by total common shares outstanding plus Operating Partnership Units convertible into shares of common stock (1,425,000 shares).

***Economic return for the quarter ended September 30, 2016 is defined as the change in book value per diluted common share from June 30, 2016 to September 30, 2016 of $1.00; plus dividends declared of $0.40 per common share; divided by the June 30, 2016 book value per diluted common share of $17.08. Economic return for the nine months ended September 30, 2016 is defined as the change in book value per diluted common share from December 31, 2015 to September 30, 2016 of $0.94; plus dividends declared of $1.20 per common share; divided by the December 31, 2015 book value per diluted common share of $17.14.

Key performance indicators for the quarters ended September 30, 2016 and June 30, 2016 are summarized in the table 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 are non-GAAP financial measures. Refer to the section entitled "Non-GAAP Financial Measures" below 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 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.

**Book value per diluted common share is calculated as total equity less the liquidation preference of our Series A Preferred Stock ($140.0 million) and Series B Preferred Stock ($155.0 million); divided by total common shares outstanding plus Operating Partnership Units convertible into shares of common stock (1,425,000 shares).

Financial Summary

Net income attributable to common stockholders for the third quarter of 2016 was $129.2 million, compared to net loss attributable to common stockholders of $11.6 million for the second quarter of 2016. The third quarter of 2016 net income attributable to common stockholders increased primarily due to net gains on derivative instruments totaling $35.4 million during the third quarter compared to net losses on derivative instruments totaling $90.4 million during the second quarter.  During the third quarter of 2016, the Company recorded unrealized gains on interest rate swaps of $65.4 million and unrealized gains on credit derivatives of $26.0 million. Book value per diluted common share for the third quarter of 2016 increased by 5.9% to $18.08, primarily due to higher valuations of the Company's mortgage-backed and credit risk transfer securities portfolio resulting from broad credit spread tightening.

During the third quarter of 2016, the Company generated $46.2 million in core earnings, a decrease of $1.1 million or 2.3% from the second quarter of 2016.   The decrease in core earnings reflects lower effective net interest income on Agency residential mortgage-backed securities ("RMBS") as a result of a shift in portfolio mix and faster prepayment speeds.

Average earning assets increased to $16.1 billion for the quarter ended September 30, 2016 compared to $15.5 billion for the quarter ended June 30, 2016.  During the third quarter, the Company primarily used proceeds from paydowns and sales of investments to purchase 15 year fixed-rate Agency securities.  The Company increased its allocation of equity to Agency securities from 40% as of June 30, 2016 to 44% as of September 30, 2016 reflecting its strategy of decreasing risk in front of the upcoming elections, Federal Reserve meetings and Brexit negotiations, and to create capacity to invest in potential risk retention opportunities in the commercial real estate debt market.  Interest income decreased slightly to $118.1 million for the quarter ended September 30, 2016 compared to $118.8 million during the quarter ended June 30, 2016, reflecting a decrease in average earning asset yield to 2.94% from 3.07% in the quarter ended June 30, 2016.  The decrease in average earning asset yield was driven by a higher portfolio allocation to 15 year fixed-rate Agency securities that accounted for 21% of our average earning assets as of September 30, 2016 compared to 15% of our average earnings assets as of June 30, 2016. 

For the quarter ended September 30, 2016, the Company had average borrowed funds of $14.2 billion compared to $13.5 billion for the second quarter of 2016 and interest expense of $33.3 million compared to $39.6 million during the quarter ended June 30, 2016. The Company's cost of funds was 0.94% and 1.17% for the third quarter of 2016 and second quarter of 2016, respectively.  The Company's repurchase agreement interest expense for the three months ended September 30, 2016 includes amortization of net deferred gains on the Company's de-designated interest rate swaps totaling $4.8 million that is recorded as a reduction in repurchase agreements interest expense under U.S. GAAP.  In the second quarter of 2016, amortization of net deferred losses on the Company's de-designated interest rate swaps totaled $3.2 million and was recorded as an increase in repurchase agreements interest expense.  Accordingly, interest expense and the cost of funds in the third quarter of 2016 benefited from an $8.0 million decrease in amortization of net deferred losses on de-designated interest rate swaps from the second quarter of 2016.  During the next 12 months, the Company estimates that $25.3 million of net deferred gains on de-designated interest rate swaps currently recorded in other comprehensive income will be reclassified as a decrease to interest expense.

Total expenses for the third quarter of 2016 were approximately $8.6 million, compared to $11.0 million for the second quarter of 2016. Management fees totaled $6.7 million in the third quarter, down from $9.1 million in the second quarter of 2016.  Management fees decreased in the third quarter of 2016 primarily due to a cumulative one-time adjustment of $2.3 million related to accounting for premiums and discounts associated with non-Agency RMBS not of high credit quality.  General and administrative expenses were $1.8 million in the third quarter of 2016, a slight decrease of $0.1 million from the second quarter of 2016.

Excluding the cumulative one-time adjustment to management fees, the ratio of annualized total expenses to average equity* decreased from 2.16% for the second quarter of 2016 to 2.03% for the third quarter of 2016, reflecting the Company's higher third quarter average equity base.

The Company's average assets, average borrowings, interest income, and interest expense are significantly lower in 2016 than in 2015 primarily due to the deconsolidation of the residential securitizations in December 2015 and also the impact of share repurchases over the past twelve months.  Since September 30, 2015, the Company has repurchased 7.9 million shares of common stock at a weighted average price of $12.72 per share for a net cost of $100.6 million including acquisition expenses. The Company has reduced its debt-to-equity ratio and held steady its repurchase agreement debt-to-equity ratio over the last nine months.

As previously announced, the Company declared the following dividends on September 14, 2016: a common stock dividend of $0.40 per share paid on October 26, 2016; a Series A preferred stock dividend of $0.4844 per share paid on October 25, 2016; and a Series B preferred stock dividend of $0.4844 per share that will be paid on December 27, 2016.

*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 a weighted balance basis.

About Invesco Mortgage Capital Inc.

Invesco Mortgage Capital Inc. is a real estate investment trust that focuses on 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 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 Friday, November 4, 2016, at 9:00 a.m. ET, by calling one of the following numbers:

 

An audio replay will be available until 5:00 pm ET on November 18, 2016 by calling:

866-431-7854 (North America) or 1-203-369-0970 (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, 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.

 

 

 

 

 

 

Non-GAAP Financial Measures

In addition to the results presented in accordance with U.S. GAAP, this release contains the non-GAAP financial measures of 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 Company's management uses these non-GAAP financial measures in its internal analysis of results and believes these measures are useful to investors for the reasons explained below. The most directly comparable U.S. GAAP measures are net income 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.  Certain prior period U.S. GAAP and non-GAAP financial measures have been revised to correct immaterial errors in accounting for premiums and discounts on non-Agency RMBS not of high credit quality.  For further information, see Note 16 of the Company's condensed consolidated financial statements to be filed in Item 1 of the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016. 

These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP and may not be comparable to other similarly titled measures of other companies. An analysis of any non-GAAP financial measure should be made in conjunction with results presented in accordance with U.S. GAAP. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate.

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; and cumulative adjustments attributable to non-controlling interest. The Company records changes in the valuation of its mortgage-backed securities, excluding securities for which the Company elected the fair value option and the valuation assigned to the debt host contract associated with its GSE CRTs, in other comprehensive income on its consolidated balance sheets.

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 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:

 

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

 

 

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

 

 

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

 

 

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

 

 

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

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 recorded as realized and unrealized credit derivative income (loss), net. 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 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 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 table reconciles total interest income to effective interest income and yield to effective yield for the following periods:

 

 

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

 

 

 

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:

 

 

 

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, 2016 and June 30, 2016. 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, 2016

 

June 30, 2016

Average Balances

The table below presents certain information for the Company's earning assets for the following periods.

 

 

 

 

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SOURCE Invesco Mortgage Capital Inc.