ATLANTA, Feb. 20, 2018 /PRNewswire/ — Invesco Mortgage Capital Inc. (NYSE: IVR) (the “Company”) today announced financial results for the quarter ended December 31, 2017.
Highlights:
“We are pleased to report our fourth consecutive quarter of growth in core earnings and another year of strong economic returns,” said John Anzalone, Chief Executive Officer. “We also increased our common stock dividend for the second consecutive quarter reflecting the core earnings power of our portfolio. Additionally, the credit profile of our investment portfolio continues to strengthen as a result of further improvement in residential and commercial mortgage fundamentals.”
* 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 December 31, 2017 is defined as the change in book value per diluted common share from September 30, 2017 to December 31, 2017 of $0.01; plus dividends declared of $0.42 per common share; divided by the September 30, 2017 book value per diluted common share of $18.34. Economic return for the twelve months ended December 31, 2017 is defined as the change in book value per diluted common share fromDecember 31, 2016to December 31, 2017 of $0.87; plus dividends declared of $1.63 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 December 31, 2017 and September 30, 2017 are summarized in the table below.
*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 (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share), total interest income (and by calculation, average earning asset yields), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and debt-to-equity ratio.
Financial Summary
Net income attributable to common stockholders for the fourth quarter of 2017 was $137.4 million, compared to $49.1 million for the third quarter. The improvement in the fourth quarter was primarily due to a $64.3 million net gain on derivative instruments versus a $2.0 million net gain in the third quarter. Book value per diluted common share as of December 31, 2017 was $18.35 compared to $18.34 as of September 30, 2017.
During the fourth quarter of 2017, the Company generated $52.5 million in core earnings compared to $49.1 million in the third quarter. Higher core earnings reflect the full quarter accretive impact of the Company’s August 2017 Preferred C stock offering. Fully invested proceeds of the offering drove a $7.5 million increase in effective net interest income that was partially offset by a $2.8 million increase in preferred dividends and $0.6 million increase in management fees associated with the offering.
The Company had average earning assets of $18.3 billion and interest income of $153.0 million in the fourth quarter compared to average earning assets of $17.4 billion and interest income of $140.4 million during the third quarter. During the fourth quarter, the Company primarily used proceeds from paydowns and sales of investments to purchase 30 year fixed-rate Agency RMBS and CMBS and to repay debt. Average earning asset yields rose from 3.22% in the third quarter to 3.34% in the fourth quarter reflecting higher yields on 30 year fixed-rate Agency RMBS and CMBS. As of December 31, 2017, the Company’s holdings of 30 year fixed-rate Agency RMBS represented 42% of our total investment portfolio compared to 40% at September 30, 2017 and 20% at December 31, 2016. The Company has increased its allocation of equity to Agency RMBS to 45% as of December 31, 2017 from 41% as of September 30, 2017 and December 31, 2016, respectively, as returns on Agency RMBS continue to be attractive compared to credit assets.
The Company increased its average borrowings by $0.7 billion in the fourth quarter, resulting in average borrowings of $15.9 billion and total interest expense of $59.9 million in the fourth quarter compared to average borrowings of $15.2 billion and total interest expense of $54.2 million during the third quarter. The Company’s cost of funds was 1.51% and 1.43% for the fourth quarter and third quarter, respectively. The Company’s cost of funds rose during the fourth quarter primarily due to higher repurchase agreement borrowing rates leading up to the December 2017 increase in the Federal Funds target rate.
The Company held its debt-to-equity ratio constant at 6.0x in the fourth quarter of 2017. The Company retired an additional $14.4 million of its Exchangeable Senior Notes (the “Notes”) during the fourth quarter and has reduced the balance of Notes outstanding to $143.4 million as of December 31, 2017. The Company has sufficient liquidity through available cash and cash equivalents and additional borrowing capacity through repurchase agreements to retire the Notes when they mature on March 15, 2018.
Total expenses for the fourth quarter were approximately $12.0 million compared to $11.3 million for the third quarter. Total expenses were higher in the fourth quarter primarily due to a $0.6 million increase in management fees associated with the Company’s August 2017 offering of Preferred C stock. The ratio of annualized total expenses to average equity* for the fourth quarter was 2.17%.
As previously announced, the Company declared the following dividends on December 14, 2017: a common stock dividend of $0.42 per share paid on January 26, 2018 and a Series A preferred stock dividend of $0.4844 per share paid on January 25, 2018. The Company declared the following dividends on its Series B and Series C Preferred Stock on February 15, 2018 to its stockholders of record as of March 5, 2018: a Series B Preferred Stock dividend of $0.4844 per share payable on March 27, 2018 and a Series C Preferred Stock dividend of $0.46875 per share payable on March 27, 2018.
*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 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 Wednesday, February 21, 2018, 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 March 7, 2018 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.
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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
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:
The most directly comparable U.S. GAAP measures are:
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, 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 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:
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:
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 December 31, 2017 and September 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 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, 2017
September 30, 2017
Average Asset Balances
Average Borrowings and Equity Balances
SOURCE Invesco Mortgage Capital Inc.
