Business Context and Reporting Period
Company: Invesco Mortgage Capital Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: The Company is a Maryland corporation focused on investing in, financing, and managing residential and commercial mortgage-backed securities (MBS) and mortgage loans. It intends to qualify as a Real Estate Investment Trust (REIT). The Company is externally managed by Invesco Advisers, Inc.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 |
|---|---|---|
| Net Interest Income | $22.8 million | $37.2 million |
| Net Income (Total) | $22.1 million | $35.2 million |
| Net Income Attributable to Common Shareholders | $20.8 million | $32.8 million |
| Earnings Per Share (Basic/Diluted) | $0.91 | $1.70 |
| Dividends Declared Per Share | $0.74 | $1.52 |
| Total Assets | $2.44 billion (as of June 30, 2010) | |
| Total Liabilities | $1.89 billion (as of June 30, 2010) | |
| Total Shareholders' Equity | $516.2 million (as of June 30, 2010) | |
| Repurchase Agreements (Debt) | $1.68 billion (as of June 30, 2010) | |
| TALF Financing | $151.8 million (as of June 30, 2010) | |
| Cash and Restricted Cash | $47.1 million (as of June 30, 2010) |
Material Changes vs. Prior Period
- Portfolio Expansion: Total assets increased from $853.4 million at December 31, 2009, to $2.44 billion at June 30, 2010. Mortgage-backed securities (MBS) grew from $802.6 million to $2.32 billion.
- Equity Capitalization: The Company completed two follow-on public offerings in 2010 (January and May), raising approximately $342 million in net proceeds. This significantly increased shareholders' equity from $180.5 million to $516.2 million.
- Leverage: Repurchase agreements increased from $546.0 million to $1.68 billion to fund the expanded portfolio. TALF financing increased from $80.4 million to $151.8 million.
- Profitability: The Company reported net income of $22.1 million for the quarter ended June 30, 2010, compared to a net loss of $84,000 for the same period in 2009. The 2009 period is noted as not meaningful for comparison due to the Company's initial operations.
- Investment Mix: The portfolio now consists of approximately $1.4 billion in Agency RMBS, $690.1 million in Non-Agency RMBS, and $199.4 million in CMBS.
Guidance, Outlook, Risks, and Unusual Items
- Management Commentary: Management attributes the increase in net income primarily to the growth in the investment portfolio resulting from the May 2010 follow-on offering. The Company aims to maintain a debt-to-equity ratio of 3 to 5 times overall.
- Hedging Strategy: The Company utilizes interest rate swaps to mitigate interest rate risk. As of June 30, 2010, it held swaps with a total notional amount of $925.0 million. An unrealized loss of $10,000 was recognized in earnings for the quarter due to hedge ineffectiveness.
- Impairment: The Company recognized a loss of $262,000 for the quarter and $386,000 for the six months ended June 30, 2010, related to other-than-temporarily impaired securities (credit losses).
- Risk Factors:
- Regulatory Changes: The Dodd-Frank Act, signed into law on July 21, 2010, may affect the cost of doing business, limit investment opportunities, and alter the competitive landscape.
- Liquidity and Margin Calls: The Company relies on repurchase agreements. Declines in security values can trigger margin calls. The weighted average haircut for Agency RMBS was 4.82% and for Non-Agency RMBS was 29.08%.
- Prepayment Risk: Accelerated buy-outs of delinquent loans by Fannie Mae and Freddie Mac reduced interest income by approximately $1.1 million in the quarter due to higher premium amortization.
- Unusual Items: The filing notes that comparisons to 2009 are often not meaningful due to the Company's IPO in July 2009 and subsequent capital raises.
Investor Verification Checklist
- REIT Qualification: Verify the Company's continued compliance with REIT asset and income tests to maintain tax-exempt status.
- Liquidity Position: Assess the adequacy of cash and unpledged securities to meet potential margin calls given the high leverage (11.7x on Agency RMBS).
- Financing Costs: Monitor the weighted average cost of funds (0.87% total) and the impact of rising interest rates on floating-rate repurchase agreements.
- Portfolio Composition: Review the concentration in Non-Agency RMBS (62.9% of equity allocation) and associated credit risks.
- Dividend Coverage: Confirm that net taxable income continues to support the declared dividend rate of $0.74 per share for the quarter.