Invesco Mortgage Capital Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Invesco Mortgage Capital is an externally managed mortgage REIT whose portfolio is concentrated in Agency residential mortgage-backed securities (RMBS).
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Interest income | $71.4 million | $44.6 million | $140.7 million | $86.7 million |
| Net interest income | $12.4 million | $41.1 million | $32.0 million | $85.4 million |
| Net interest rate margin | 0.48% | 3.48% | 0.78% | 2.93% |
| Net income (loss) attributable to common stockholders | $(1.4) million | $(116.1) million | $14.2 million | $(353.0) million |
| GAAP earnings (loss) per common share | $(0.03) | $(3.52) | $0.35 | $(10.70) |
| Earnings available for distribution per common share, non-GAAP | $1.45 | $1.40 | $2.95 | $2.55 |
- Q2 net income was $4.1 million, but after preferred dividends and other adjustments, common stockholders had a $1.4 million loss. Six-month net income was $25.5 million.
- At June 30, total assets were $5.87 billion, including $5.51 billion of MBS. Agency RMBS made up approximately 98% of the investment portfolio.
- Repurchase-agreement borrowings were $4.96 billion, up from $4.23 billion at year-end 2022. Their weighted-average rate was 5.21%, with 49 days’ average remaining maturity. Debt-to-equity was 5.9x, compared with 5.3x at year-end.
- Stockholders’ equity was $840.9 million. Book value per common share was $11.98, down 6.3% from $12.79 at December 31, 2022.
- Cash, cash equivalents and restricted cash totaled $333.7 million, including $209.0 million unrestricted cash and $124.7 million restricted cash. Management reported approximately $283.3 million of unencumbered investments and unrestricted cash.
- Six-month operating cash flow was $153.7 million; investing activities used $830.0 million and financing activities provided $731.2 million. Financing included $66.8 million net proceeds from common-stock issuance and $53.5 million of dividend payments.
Material changes versus comparable periods
- Interest income rose, supported by higher average asset yields and rotation into higher-yielding Agency RMBS. Average earning-asset yield was 5.41% in Q2 versus 3.82% a year earlier.
- Funding costs rose sharply as interest rates increased: Q2 cost of funds was 4.93% versus 0.34% in Q2 2022. This compressed GAAP net interest income and margin despite higher interest income.
- Q2 investment losses were $99.7 million, chiefly unrealized losses on Agency RMBS as rates rose and spreads widened. Derivative gains of $96.6 million partly offset these losses. Six-month investment losses were $47.7 million and derivative gains were $51.7 million.
- The six-month common-stock result turned positive versus a large loss in 2022, while Q2 remained loss-making. Management’s non-GAAP earnings available for distribution increased, but it cautions this measure is not GAAP income, cash flow, taxable income or a guarantee of dividends.
- Common shares outstanding increased to 44.58 million from 38.71 million at year-end 2022; the company sold 5.82 million shares during the first half for $66.8 million net. This capital raise supports funding but dilutes per-share ownership.
Outlook, risks and contingencies
- No formal earnings or dividend guidance was provided. Management expected the Federal Reserve tightening cycle to conclude by year-end, with one or two further 25-basis-point increases reflected in market expectations. It viewed Agency RMBS valuations and funding conditions as attractive for the rest of 2023.
- Management cited elevated interest-rate volatility, refinancing and margin-call exposure, spread movements, prepayment and extension uncertainty, and availability and terms of short-term financing as key risks. Repurchase agreements are generally short term and are typically refinanced at prevailing market rates.
- At June 30, repurchase collateral was 105% of borrowings. A decline in collateral values or higher lender haircuts could trigger margin calls; the filing states there is no assurance liquidity will always be sufficient to meet them.
- Interest-rate sensitivity estimates for a static portfolio showed that a 100-basis-point increase would reduce projected portfolio value by 1.30%; the estimated impact on projected net interest income was positive 0.05%. A 100-basis-point decrease was estimated to reduce projected net interest income by 0.46% and increase portfolio value by 0.30%. Management warns actual outcomes may differ materially.
- The company has a $2.9 million commitment to fund potential future expenses of an unconsolidated venture in liquidation. It recorded a $169,000 credit-loss provision on one non-Agency CMBS. No material change to previously disclosed risk factors was reported; no legal proceedings were pending, and the company was in compliance with financing covenants.
- The common dividend declared for Q2 was $0.40 per share, payable July 27, compared with $0.90 per share in Q2 2022. Preferred dividends were also declared. REIT distribution requirements are based on taxable income, not GAAP earnings.
Important facts for investors to verify
- Whether net interest income and margins can withstand elevated short-term borrowing costs, and how much protection swaps provide as hedges change or mature.
- Repurchase-agreement renewal terms, counterparty concentration, collateral haircuts and liquidity available for potential margin calls.
- Whether non-GAAP earnings available for distribution support the common dividend; reconcile this measure with GAAP results, cash flows and REIT taxable income.
- The effect of additional common-stock issuance on book value and earnings per share, and the company’s capital-allocation priorities.
- Assumptions behind MBS valuations, prepayment speeds, rate sensitivity and the continuing concentration in Agency RMBS.
- The use and interpretation of reported liquidity figures, including restricted cash, and the remaining $2.9 million venture commitment.