Invesco Mortgage Capital Inc. — Q2 2022 Form 10-Q
Business context and reporting period
Invesco Mortgage Capital is an externally managed mortgage REIT investing primarily in agency residential mortgage-backed securities (RMBS), with smaller commercial and non-agency positions. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are to the corresponding 2021 periods unless noted. Per-share figures reflect the one-for-ten reverse stock split effective June 3, 2022.
Financial and operating highlights
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Interest income | $44.6 million | $86.7 million |
| Net interest income | $41.1 million | $85.4 million |
| Net loss | $109.5 million | $338.0 million |
| Net loss attributable to common stockholders | $116.1 million; $3.52 per share | $353.0 million; $10.70 per share |
| Net interest rate margin | 3.48% | 2.93% |
| Earnings available for distribution (non-GAAP) | $46.1 million; $1.40 per share | $84.3 million; $2.55 per share |
At June 30, total assets were $4.30 billion, stockholders’ equity was $959.5 million, and repurchase-agreement borrowings were $3.26 billion. GAAP debt-to-equity was 3.4x and economic debt-to-equity, including TBA financing, was 3.9x. Book value per common share was $16.16, down 44.4% from $29.09 at December 31, 2021.
Cash, cash equivalents and restricted cash totaled $330.8 million, including $202.2 million of unrestricted cash. Management reported approximately $474.9 million of unencumbered investments. Operating activities provided $80.8 million in the first half; investing activities provided $3.48 billion, while financing activities used $3.81 billion. The company paid $75.9 million of dividends in the period.
Changes versus the prior comparable period
- Q2 net loss attributable to common stockholders widened to $116.1 million from $88.3 million; first-half loss widened to $353.0 million from $108.7 million.
- First-half investment losses were $829.3 million, versus $259.2 million in 2021. The 2022 amount included $854.0 million of net realized MBS sale losses, principally associated with selling lower-yielding agency RMBS to rotate into higher-yielding securities.
- Derivative gains partly offset investment losses: $181.7 million in Q2 and $420.6 million in the first half, including $553.2 million of first-half realized gains on interest-rate swaps. TBAs generated a $133.6 million net loss in the first half.
- Net interest income declined to $41.1 million in Q2 from $46.3 million, and to $85.4 million in the first half from $88.0 million. Average earning assets fell materially as the company reduced portfolio size, while yields and reported net interest rate margins increased following portfolio repositioning.
- Repurchase-agreement debt fell to $3.26 billion from $6.99 billion at year-end. Agency RMBS fair value fell to $3.80 billion from $7.70 billion; the total investment portfolio, including TBAs, declined to $4.41 billion from $9.48 billion.
Outlook, commentary and risks
Management described a difficult market environment: rapid Federal Reserve tightening, high inflation, elevated interest-rate volatility and wider mortgage spreads weighed on agency RMBS valuations. It remained cautious on agency RMBS despite cheaper valuations, citing volatility and uncertain market technicals. Management said higher-coupon TBA dollar-roll financing had been attractive, but expected that benefit to diminish as supply conditions changed.
The company reported that it believed available cash flow and borrowing capacity were sufficient for anticipated short-term needs, but said long-term liquidity depends on obtaining additional debt financing. No quantitative earnings or dividend guidance was provided. The common dividend declared for Q2 was $0.90 per share; the filing cautions that earnings available for distribution is a non-GAAP measure, is not taxable income, and does not guarantee dividend capacity.
- Funding and margin risk: Repo borrowings had a weighted-average remaining maturity of 22 days. Collateral pledged equaled 106% of repo debt; declines in asset values, higher haircuts or counterparty actions can prompt margin calls. Management stated there is no assurance liquidity will be sufficient under stress.
- Rate and valuation risk: The filing’s modeled +100-basis-point parallel rate shock estimated a 2.53% decline in projected net interest income and a 0.40% decline in projected portfolio value at June 30, 2022. These are model-based estimates, not forecasts.
- Other exposures: Prepayment and extension assumptions affect asset income and hedge effectiveness; commercial mortgage delinquencies and real-estate values remain risks. A $23.9 million commercial mezzanine loan was extended to September 2022. The company had a $6.2 million potential additional funding commitment to unconsolidated ventures in liquidation.
- Subsequent events: From July 1 through August 4, the company repurchased 1.62 million Series B and 3.06 million Series C preferred shares for $35.0 million and $65.6 million, respectively. On August 3, it reduced authorized common shares from 450 million to 67 million.
Most important facts for investors to verify
- How much of the large investment losses reflect realized sales versus ongoing fair-value movements, and whether portfolio repositioning improves future income.
- Current book value, agency RMBS valuations, and leverage after the sharp first-half decline and subsequent preferred-stock repurchases.
- Repo renewal terms, margin requirements, unencumbered collateral and liquidity capacity under further spread widening or rate volatility.
- Whether recurring earnings and cash generation support the common dividend; do not treat non-GAAP earnings available for distribution as cash flow or a dividend guarantee.
- Repayment or further extension of the commercial loan due September 2022, and the timing and final cost of the ventures’ liquidation commitment.