Invesco Mortgage Capital Inc. Reports Third Quarter 2015 Financial Results

-- Q3 2015 core earnings* of $49.2 million, core earnings per common share* of $0.40, and a common stock dividend of $0.40 per share

-- YTD core earnings per common share of $1.31 and YTD common stock dividends of $1.30 per common share

-- Q3 2015 book value per diluted common share** was $17.66 vs. $18.62 at Q2 2015, $18.82 at Q4 2014 and $17.97 at Q4 2013

-- Bought back 3.7 million shares of common stock for $50 million in Q3 2015

-- Economic return*** for the three and nine months ended September 30, 2015 of -3.0% and 0.7%, respectively

-- Q3 2015 comprehensive loss attributable to common stockholders was $86.2 million or ($0.71) per common share vs. $36.7 million or ($0.30) per common share for Q2 2015

-- Q3 2015 net loss attributable to common stockholders of $144.6 million or ($1.18) basic and diluted earnings per common share reflecting a $220.6 million net loss on interest rate hedges driven by a decline in swap yields

Nov 03, 2015, 16:15 ET from Invesco Mortgage Capital Inc.

ATLANTA, Nov. 3, 2015 /PRNewswire/ -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended September 30, 2015, reporting core earnings* of $0.40 per common share and book value per diluted common share** of $17.66. Third quarter core earnings were in line with the dividend of $0.40 per share.

During the third quarter of 2015, the Company bought back 3.7 million shares of common stock for $50 million using available cash flow and closed a $34 million commercial real estate loan. "With our equity allocation of 35% to Agency RMBS, 34% to commercial credit and 31% to residential credit as of September 30, 2015, we believe our company is well positioned to benefit from improving real estate fundamentals and interest rate normalization. Stock buybacks continue to be an attractive use of available cash flow at current market pricing," said Richard King, President and CEO.

"While financial conditions weakened for the second straight quarter, our asset quality continues to improve, and we anticipate higher economic returns derived from our liquid, high quality assets. The loans underlying our assets continue to season and benefit from growing borrower equity due to property price appreciation," said Mr. King.

* 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), effective debt-to-equity ratio and repurchase agreement debt-to-equity ratio 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 of net income attributable to common stockholders (and by calculation, basic earnings (loss) per common share), total interest income (and by calculation, 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).

***Economic return for the quarter ended September 30, 2015 is defined as the change in book value per diluted common share from June 30, 2015 to September 30, 2015 of ($0.96); plus dividends declared of $0.40 per common share; divided by the June 30, 2015 book value per diluted common share of $18.62. Economic return for the nine months ended September 30, 2015 is defined as the change in book value per diluted common share from December 31, 2014 to September 30, 2015 of ($1.16); plus dividends declared of $1.30 per common share; divided by the December 31, 2014 book value per diluted common share of $18.82.

Key performance indicators for the quarters ended September 30, 2015 and June 30, 2015 are summarized in the table below.

($ in millions, except share amounts)

Q3 '15

Q2 '15

(unaudited)

(unaudited)

Average earning assets (at amortized costs)

$20,175.0

$20,574.9

Average borrowed funds

18,070.1

18,284.1

Average equity

$2,292.0

$2,458.2

Interest income

$161.4

$160.8

Interest expense

69.2

70.4

Net interest income

92.2

90.4

Total other income (loss)

(218.0)

70.4

Total expenses

14.7

13.6

Net income (loss)

(140.5)

147.3

Net income (loss) attributable to non-controlling interest

(1.6)

1.7

Dividends to preferred stockholders

5.7

5.7

Net income (loss) attributable to common stockholders

($144.6)

$139.9

Average portfolio yield

3.20%

3.12%

Cost of funds

1.53%

1.54%

Debt to equity ratio

7.3x

6.9x

Book value per common share (diluted)**

$17.66

$18.62

Earnings (loss) per common share (basic)

($1.18)

$1.14

Dividends declared per common share

$0.40

$0.45

Dividends declared per preferred share on Series A Preferred Stock

$0.4844

$0.4844

Dividends declared per preferred share on Series B Preferred Stock

$0.4844

$0.4844

Non-GAAP Financial Measures*:

Core earnings

$49.2

$50.0

Core earnings per common share

$0.40

$0.41

Effective interest income

$167.8

$167.0

Effective yield

3.33%

3.24%

Effective interest expense

$100.3

$100.1

Effective cost of funds

2.22%

2.19%

Effective net interest income

$67.5

$66.9

Effective interest rate margin

1.11%

1.05%

Effective debt-to-equity ratio

6.2x

5.8x

Repurchase agreement debt-to-equity ratio

5.7x

5.3x

 

* 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), effective debt-to-equity ratio and repurchase agreement debt-to-equity ratio 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 of net income attributable to common stockholders (and by calculation, basic earnings (loss) per common share), total interest income (and by calculation, 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

During the third quarter of 2015, the Company generated $49.2 million in core earnings, a decrease of $0.7 million or 1.5% from the second quarter of 2015. Core earnings were relatively stable during the quarter as slightly higher net interest income was offset by increases in general and administrative expenses. Net interest income benefited from a higher portfolio yield and lower interest expense due to a decline in average borrowings. Net loss attributable to common stockholders for the third quarter of 2015 was $144.6 million, compared to net income attributable to common stockholders of $139.9 million for the second quarter of 2015. The third quarter of 2015 net loss attributable to common stockholders was primarily due to a $220.6 million net loss on interest rate hedges versus a $56.0 million net gain on interest rate hedges in the second quarter of 2015. Book value per diluted common share for the third quarter of 2015 decreased to $17.66 as lower swap yields resulted in a drop in fair value of interest rate hedges. Book value per diluted common share was also modestly impacted by widening real estate credit spreads. Generally weaker market conditions reflected uncertainty regarding slowing global growth prospects, especially in China and other emerging markets, and anticipation of the first increase in the federal funds rate.

For the quarter ended September 30, 2015, average earning assets were $20.2 billion, representing a decrease of $399.9 million from June 30, 2015. The Company's mortgage-backed and credit risk transfer securities portfolio totaled $16.8 billion, a decrease of $380.3 million from June 30, 2015 primarily due to continued paydowns and sales. During the third quarter of 2015, the Company utilized a portion of the proceeds from paydowns and sales of investments to buy back $50 million of common stock and invest in a $34 million commercial real estate loan.

The portfolio generated interest income of $161.4 million during the three months ended September 30, 2015, which reflects an increase of $0.5 million from the three months ended June 30, 2015. The increase in interest income was the result of an increase in average portfolio yield from 3.12% in the second quarter of 2015 to 3.20% for the three months ended September 30, 2015. The higher portfolio yield in the third quarter of 2015 reflects higher yields on 15 year fixed-rate, ARM and Hybrid ARM Agency RMBS.

For the quarter ended September 30, 2015, the Company had average borrowed funds of approximately $18.1 billion and effective interest expense of $100.3 million, compared to $18.3 billion and $100.1 million, respectively, for the second quarter of 2015. The slight decrease in average borrowed funds for the third quarter is due to lower average borrowings for non-Agency RMBS and asset-backed securities issued by securitization trusts. The Company's effective cost of funds was 2.22% and 2.19% for the third quarter and second quarter of 2015, respectively. In the third quarter the Company's leverage increased approximately 0.4 times due to lower equity after the quarterly decline in book value as the Company used cash from principal prepayments and maturities to buy back stock rather than reinvest in unencumbered assets.

Total expenses for the third quarter of 2015 were approximately $14.7 million, compared to $13.6 million for the second quarter of 2015. Expenses include management fees, general and administrative expenses and securitization trust expenses associated with direct operating costs of the Company's consolidated residential loan securitizations. Management fees totaled $10.1 million in the third quarter, up from $9.3 million in the second quarter of 2015 due to a change in the basis of the management fee calculation that was effective at the beginning of the third quarter. General and administrative expenses were $2.5 million in the third quarter of 2015, an increase of $0.6 million from the second quarter of 2015. During the third quarter of 2015, the Company incurred restatement-related expenses of approximately $750,000 for third party consulting, accounting, auditing and legal fees. Third quarter 2015 securitization trust expenses totaled $2.1 million versus $2.3 million in the second quarter of 2015. Securitization trust expenses are primarily a fixed percentage of the unpaid principal balance of residential loans. The ratio of annualized operating expenses to average equity* for the third quarter of 2015 was 2.19%, an increase of 35 basis points from the second quarter of 2015.

In the third quarter of 2015, the Company bought back 3.7 million shares of common stock for $50.0 million. The Company also declared the following dividends: a common stock dividend of $0.40 per share paid on October 27, 2015; a Series A preferred stock dividend of $0.4844 per share paid on October 26, 2015; and a Series B preferred stock dividend of $0.4844 per share that will be paid on December 28, 2015.

 

*The ratio of consolidated operating 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. The Company excludes expenses of consolidated securitization trusts from this calculation to facilitate comparison of the Company's operating expenses to peers.

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 Wednesday, November 4, 2015, at 9:00 a.m. ET, by calling one of the following numbers:

North America Toll Free: 

888-942-8507

International: 

415-228-4839

Passcode:  

Invesco

An audio replay will be available until 5:00 pm ET on November 18, 2015 by calling:

866-425-0192 (North America) or 1-203-369-0875 (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, and the impact of the restatement of our consolidated financial statements for certain periods and the adequacy of our disclosure controls and procedures and internal controls over financial reporting. 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  September 30,

Nine Months Ended  September 30,

In thousands, except share amounts

2015

2014  (As Restated)

2015

2014  (As Restated)

Interest Income

Mortgage-backed and credit risk transfer securities

129,260

139,419

390,623

436,019

Residential loans (1)

28,380

22,713

88,001

60,888

Commercial loans

3,743

2,649

11,349

6,329

Total interest income

161,383

164,781

489,973

503,236

Interest Expense

Repurchase agreements

41,303

45,756

125,544

142,649

Secured loans

1,622

1,223

4,639

1,399

Exchangeable senior notes

5,620

5,620

16,840

16,840

Asset-backed securities (1)

20,686

17,660

64,913

47,421

Total interest expense

69,231

70,259

211,936

208,309

Net interest income

92,152

94,522

278,037

294,927

(Reduction in) provision for loan losses

(81)

(209)

(213)

(52)

Net interest income after (reduction in) provision for loan losses

92,233

94,731

278,250

294,979

Other Income (loss)

Gain (loss) on investments, net

(2,958)

(48,364)

10,090

(86,333)

Equity in earnings of unconsolidated ventures

1,894

1,145

9,131

5,480

Gain (loss) on derivative instruments, net

(220,602)

(3,704)

(287,344)

(322,832)

Realized and unrealized credit derivative income (loss), net

2,928

(28,613)

24,904

20,929

Other investment income (loss), net

739

(1,358)

1,518

(1,358)

Total other income (loss)

(217,999)

(80,894)

(241,701)

(384,114)

Expenses

Management fee – related party

10,058

9,214

28,816

27,876

General and administrative

2,507

2,519

6,186

6,906

Consolidated securitization trusts (1)

2,132

1,560

6,544

4,108

Total expenses

14,697

13,293

41,546

38,890

Net income (loss)

(140,463)

544

(4,997)

(128,025)

Net income (loss) attributable to non-controlling interest

(1,629)

6

(80)

(1,456)

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

(138,834)

538

(4,917)

(126,569)

Dividends to preferred stockholders

5,716

2,713

17,148

8,138

Undeclared cumulative dividends to preferred stockholders

661

661

Net income (loss) attributable to common stockholders

(144,550)

(2,836)

(22,065)

(135,368)

Earnings (loss) per share:

Net income (loss) attributable to common stockholders

Basic

(1.18)

(0.02)

(0.18)

(1.10)

Diluted

(1.18)

(0.02)

(0.18)

(1.10)

Dividends declared per common share

0.40

0.50

1.30

1.50

(1)

     The condensed consolidated statements of operations include income and expenses of consolidated variable interest entities. 

 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended  September 30,

Nine Months Ended  September 30,

In thousands

2015

2014  (As Restated)

2015

2014  (As Restated)

Net income (loss)

(140,463)

544

(4,997)

(128,025)

Other comprehensive income (loss):

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

41,978

(81,267)

(25,390)

325,045

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

1,380

49,169

(3,223)

81,653

Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense

15,724

21,227

51,182

64,055

Currency translation adjustments on investment in unconsolidated venture

(33)

(33)

Total other comprehensive income (loss)

59,049

(10,871)

22,536

470,753

Comprehensive income (loss)

(81,414)

(10,327)

17,539

342,728

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

942

117

(191)

(3,919)

Less: Dividends to preferred stockholders

(5,716)

(2,713)

(17,148)

(8,138)

Less: Undeclared cumulative dividends to preferred shareholders

(661)

(661)

Comprehensive income (loss) attributable to common stockholders

(86,188)

(13,584)

200

330,010

 

 

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of

 In thousands except share amounts

September 30, 2015

December 31, 2014

(Unaudited)

(As Restated)

ASSETS

Mortgage-backed and credit risk transfer securities, at fair value

16,814,961

17,248,895

Residential loans, held-for-investment (1)

3,307,249

3,365,003

Commercial loans, held-for-investment

187,038

145,756

Cash and cash equivalents

76,658

164,144

Due from counterparties

174,741

57,604

Investment related receivable

24,897

38,717

Accrued interest receivable

69,064

66,044

Derivative assets, at fair value

1,308

24,178

Deferred securitization and financing costs

10,689

13,080

Other investments

113,297

106,498

Other assets

1,444

1,098

Total assets (1)

20,781,346

21,231,017

LIABILITIES AND EQUITY

Liabilities:

Repurchase agreements

12,912,131

13,622,677

Secured loans

1,675,000

1,250,000

Asset-backed securities issued by securitization trusts (1)

2,859,423

2,929,820

Exchangeable senior notes

400,000

400,000

Derivative liabilities, at fair value

343,897

254,026

Dividends and distributions payable

54,067

61,757

Investment related payable

54,996

17,008

Accrued interest payable

37,296

29,670

Collateral held payable

14,890

Accounts payable and accrued expenses

3,910

2,439

Due to affiliate

11,259

9,880

Total liabilities (1)

18,351,979

18,592,167

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

Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 119,453,846 and 123,110,454       shares issued and outstanding, respectively

1,195

1,231

Additional paid in capital

2,482,742

2,532,130

Accumulated other comprehensive income

446,857

424,592

Retained earnings (distributions in excess of earnings)

(813,520)

(632,854)

Total stockholders' equity

2,402,490

2,610,315

Non-controlling interest

26,877

28,535

Total equity

2,429,367

2,638,850

Total liabilities and equity

20,781,346

21,231,017

 

(1)

The condensed consolidated balance sheets include assets of consolidated variable interest entities ("VIEs") that can only be used to settle obligations and liabilities of the VIEs for which creditors do not have recourse to the Company. As of September 30, 2015 and December 31, 2014, total assets of the consolidated VIEs were $3,331,942 and $3,380,597, respectively, and total liabilities of the consolidated VIEs were $2,876,059 and $2,938,512, respectively.

 

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), effective debt-to-equity ratio 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, 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.

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 (excluding contractual net interest on interest rate swaps); unrealized (gain) loss on derivative instruments, net; realized and unrealized change in fair value of GSE CRT embedded derivatives, net; (gain) loss on foreign currency transactions, net; amortization of net deferred swap losses on de-designation; and an adjustment attributable to non-controlling interest. The Company records changes in the valuation of its mortgage-backed securities 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:

Three Months Ended

Nine Months Ended

September 30, 2015

June 30, 2015

September 30, 2014

September 30, 2015

September 30, 2014

$ in thousands, except per share data

(As Restated)

(As Restated)

Net income (loss) attributable to common stockholders

(144,550)

139,925

(2,836)

(22,065)

(135,368)

Adjustments:

(Gain) loss on investments, net

2,958

(10,876)

48,364

(10,090)

86,333

Realized (gain) loss on derivative instruments, net (excluding contractual net interest on interest rate swaps of $46,785, $46,011, $50,446, $138,404 and $154,092, respectively)

3,079

15,212

1,016

44,394

34,877

Unrealized (gain) loss on derivative instruments, net

170,738

(117,226)

(47,758)

104,546

133,863

Realized and unrealized change in fair value of GSE CRT embedded derivatives, net

3,564

6,591

33,644

(5,091)

(8,307)

(Gain) loss on foreign currency transactions, net

(996)

1,479

529

1,479

Amortization of deferred swap losses on de-designation

15,724

16,313

21,227

51,182

64,055

Subtotal

196,063

(90,982)

57,972

185,470

312,300

Adjustment attributable to non-controlling interest

(2,272)

1,041

(664)

(2,152)

(3,564)

Core earnings

49,241

49,984

54,472

161,253

173,368

Basic income (loss) per common share

(1.18)

1.14

(0.02)

(0.18)

(1.10)

Core earnings per share attributable to common stockholders

0.40

0.41

0.44

1.31

1.41

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 in realized and unrealized credit derivative income (loss), net. 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.

The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for net interest paid on its interest rate swaps that is recorded in gain (loss) on derivative instruments and the amortization of net deferred swap losses on de-designated interest rate swaps that is being amortized into interest expense over the remaining lives of the swaps. 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 subtracts amortization of net deferred losses on de-designated interest rate swaps 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 paid on its interest rate swaps that is recorded in gain (loss) on derivative instruments, the amortization of net deferred losses on de-designated interest rate swaps that is being amortized into interest expense over the remaining lives of the swaps and GSE CRT embedded derivative coupon interest that is recorded in 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:

Three Months Ended  September 30, 2015

Three Months Ended  June 30, 2015

Three Months Ended  September 30, 2014   (As Restated)

$ in thousands

Reconciliation

Yield/Effective Yield

Reconciliation

Yield/Effective Yield

Reconciliation

Yield/Effective Yield

Total interest income

161,383

3.20

%

160,836

3.12

%

164,781

3.37

%

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

6,373

0.13

%

6,157

0.12

%

4,784

0.1

%

Effective interest income

167,756

3.33

%

166,993

3.24

%

169,565

3.47

%

 

Nine Months Ended September 30,

2015

2014  (As Restated)

$ in thousands

Reconciliation

Yield/Effective Yield

Reconciliation

Yield/Effective Yield

Total interest income

489,973

3.20

%

503,236

3.41

%

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

18,443

0.12

%

11,754

0.08

%

Effective interest income

508,416

3.32

%

514,990

3.49

%

 

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, 2015

Three Months Ended June 30, 2015

Three Months Ended  September 30, 2014   (As Restated)

$ 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

69,231

1.53

%

70,426

1.54

%

70,259

1.62

%

Less: Amortization of net deferred   swap losses on de-designation

(15,724)

(0.35)

%

(16,313)

(0.36)

%

(21,227)

(0.49)

%

Add: Net interest paid - interest           rate swaps

46,785

1.04

%

46,011

1.01

%

50,446

1.16

%

Effective interest expense

100,292

2.22

%

100,124

2.19

%

99,478

2.29

%

 

Nine Months Ended September 30,

2015

2014  (As Restated)

$ in thousands

Reconciliation

Cost of Funds / Effective Cost of Funds

Reconciliation

Cost of Funds / Effective Cost of Funds

Total interest expense

211,936

1.56

%

208,309

1.60

%

Less: Amortization of net deferred   swap losses on de-designation

(51,182)

(0.38)

%

(64,055)

(0.49)

%

Add: Net interest paid - interest           rate swaps

138,404

1.02

%

154,092

1.18

%

Effective interest expense

299,158

2.20

%

298,346

2.29

%

 

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, 2015

Three Months Ended  June 30, 2015

Three Months Ended  September 30, 2014   (As Restated)

$ 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

92,152

1.67

%

90,410

1.58

%

94,522

1.75

%

Add: Amortization of net deferred swap losses on   de-designation

15,724

0.35

%

16,313

0.36

%

21,227

0.49

%

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

6,373

0.13

%

6,157

0.12

%

4,784

0.10

%

Less: Net interest paid - interest rate swaps

(46,785)

(1.04)

%

(46,011)

(1.01)

%

(50,446)

(1.16)

%

Effective net interest income

67,464

1.11

%

66,869

1.05

%

70,087

1.18

%

 

Nine Months Ended September 30,

2015

2014  (As Restated)

$ in thousands

Reconciliation

Net Interest Rate Margin / Effective Interest Rate Margin

Reconciliation

Net Interest Rate Margin / Effective Interest Rate Margin

Net interest income

278,037

1.64

%

294,927

1.81

%

Add: Amortization of net deferred swap losses on    de-designation

51,182

0.38

%

64,055

0.49

%

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

18,443

0.12

%

11,754

0.08

%

Less: Net interest paid - interest rate swaps

(138,404)

(1.02)

%

(154,092)

(1.18)

%

Effective net interest income

209,258

1.12

%

216,644

1.20

%

 

Effective Debt-to-Equity Ratio and 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, the Company's effective debt-to-equity ratio, and the Company's repurchase agreement debt-to-equity ratio as of September 30, 2015 and June 30, 2015. The Company presents an effective debt-to-equity ratio that excludes asset-backed securities issued by consolidated securitization trusts from debt because holders of these asset-backed securities do not have recourse to the Company. The Company also presents a repurchase agreement debt-to-equity ratio 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 effective debt-to-equity ratio and repurchase agreement debt-to-equity ratio, non-GAAP financial measures of leverage, when considered together with U.S. GAAP financial measures, provides information that is useful to investors in understanding the Company's refinancing risks, and gives investors comparable statistics to those other mortgage REITs who do not consolidate variable interest entities and who almost exclusively borrow using short-term repurchase agreements that are subject to refinancing risk.

September 30, 2015

$ in thousands

Agency RMBS

Non-Agency RMBS (6)

GSE CRT(6)

CMBS (7)

Comm-

ercial Loans (7)

Consol-

idated

VIEs (4)(6)

Other (7)

Elimin-

ations (5)

Total

Investments

10,234,434

3,064,454

651,705

3,304,214

187,038

3,307,249

37,922

(439,846)

20,347,170

Cash and cash equivalents (1)

33,879

17,275

4,559

20,945

76,658

Derivative assets, at fair value (2)

72

1,044

147

45

1,308

Other assets

251,765

7,339

525

68,292

1,101

24,692

6,047

(3,551)

356,210

Total assets

10,520,150

3,090,112

656,789

3,393,451

188,286

3,331,941

44,014

(443,397)

20,781,346

Repurchase agreements

8,637,589

2,362,985

497,213

1,414,344

12,912,131

Secured loans (3)

439,264

1,235,736

1,675,000

Asset-backed securities issued by securitization trusts (ABS)

3,299,269

(439,846)

2,859,423

Exchangeable senior notes

400,000

400,000

Derivative liabilities, at fair value

343,847

50

343,897

Other liabilities

100,966

19,191

4,288

19,557

20,191

889

(3,554)

161,528

Total liabilities

9,521,666

2,382,176

501,501

2,669,637

50

3,319,460

400,889

(443,400)

18,351,979

Allocated equity

998,484

707,936

155,288

723,814

188,236

12,481

(356,875)

3

2,429,367

Less equity associated with secured loans:

Collateral pledged

(519,597)

(1,461,730)

(1,981,327)

Secured loans

439,264

1,235,736

1,675,000

Net equity (excluding secured loans)

918,151

707,936

155,288

497,820

NA

NA

NA

3

2,279,195

Debt-to-equity ratio (8)

9.1

3.3

3.2

3.7

 NA

 NA

 NA

7.3

Effective debt-to-equity ratio (9)

9.1

3.3

3.2

3.7

 NA

 NA

 NA

6.2

Repurchase agreement debt-to-equity ratio (10)

9.4

3.3

3.2

2.8

 NA

 NA

 NA

 NA

5.7

(1)

Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, Non-Agency RMBS, GSE CRT and CMBS.

(2)

Derivative assets are allocated based on the hedging strategy for each asset class.

(3)

Secured loans are allocated based on amount of collateral pledged.

(4)

Represents VIE assets and liabilities before intercompany eliminations. VIEs are securitized entities with no substantive equity at risk.

(5)

Represents the Company's ownership of asset-backed securities ("ABS")and accrued interest eliminated upon consolidation.

(6)

Non-Agency RMBS, GSE CRT and Consolidated VIEs are considered residential credit.

(7)

CMBS, Commercial Loans and Investments in unconsolidated ventures of $37.9 million (which are included in Other), are considered commercial credit.

(8)

Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans, asset-backed securities issued by securitization trusts and exchangeable senior notes) to total equity.

(9)

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

(10)

Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to net equity (excluding secured loans).

 

June 30, 2015

$ in thousands

Agency RMBS

Non-Agency RMBS (6)

GSE CRT(6)

CMBS (7)

Comm-

ercial Loans (7)

Consol-

idated

VIEs (4)(6)

Other (7)

Elimin-

ations (5)

Total

Investments

10,434,839

3,250,833

665,896

3,293,853

155,011

3,461,992

44,803

(450,183)

20,857,044

Cash and cash equivalents (1)

38,532

21,564

4,805

22,102

87,003

Derivative assets, at fair value (2)

18,350

1,140

969

45

20,504

Other assets

147,504

7,034

527

67,452

1,155

25,859

6,667

(1,846)

254,352

Total assets

10,639,225

3,280,571

671,228

3,383,407

157,135

3,487,851

51,515

(452,029)

21,218,903

Repurchase agreements

8,795,055

2,452,975

509,617

1,417,213

13,174,860

Secured loans (3)

324,756

1,225,244

1,550,000

Asset-backed securities issued by securitization trusts (ABS)

3,456,230

(450,183)

3,006,047

Exchangeable senior notes

400,000

400,000

Derivative liabilities, at fair value

188,306

1,363

189,669

Other liabilities

201,603

20,209

9,306

29,937

18,534

5,889

(1,846)

283,632

Total liabilities

9,509,720

2,473,184

518,923

2,672,394

1,363

3,474,764

405,889

(452,029)

18,604,208

Allocated equity

1,129,505

807,387

152,305

711,013

155,772

13,087

(354,374)

2,614,695

Less equity associated with secured loans:

Collateral pledged

(387,366)

(1,461,463)

(1,848,829)

Secured loans

324,756

1,225,244

1,550,000

Net equity (excluding secured loans)

1,066,895

807,387

152,305

474,794

NA

NA

NA

2,501,381

Debt-to-equity ratio (8)

8.1

3.0

3.3

3.7

 NA

 NA

 NA

6.9

Effective debt-to-equity ratio (9)

8.1

3.0

3.3

3.7

 NA

 NA

 NA

5.8

Repurchase agreement debt-to-equity ratio (10)

8.2

3.0

3.3

3.0

 NA

 NA

 NA

 NA

5.3

(1)

Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, Non-Agency RMBS, GSE CRT and CMBS.

(2)

Derivative assets are allocated based on the hedging strategy for each asset class.

(3)

Secured loans are allocated based on amount of collateral pledged.

(4)

Represents VIE assets and liabilities before intercompany eliminations. VIEs are securitized entities with no substantive equity at risk.

(5)

Represents our ownership of asset-backed securities and accrued interest eliminated upon consolidation.

(6)

Non-Agency RMBS, GSE CRT and Consolidated VIEs are considered residential credit.

(7)

CMBS, Commercial Loans and Investments in unconsolidated ventures of $44.8 million (which are included in Other), are considered commercial credit.

(8)

Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans, asset-backed securities issued by securitization trusts and exchangeable senior notes) to total equity.

(9)

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

(10)

Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to net equity (excluding secured loans).

 

 

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SOURCE Invesco Mortgage Capital Inc.



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