Invesco Mortgage Capital Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are with December 31, 2022 unless noted. The company is an externally managed mortgage REIT focused primarily on mortgage-backed securities (MBS), especially Agency residential MBS.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $69.3 million | $42.2 million in Q1 2022 |
| Net interest income | $19.6 million; 1.08% net interest rate margin | $44.3 million; 2.55% in Q1 2022 |
| Net income (loss) | $21.5 million; $0.39 per diluted common share | $(228.4) million; $(7.18) per diluted share in Q1 2022 |
| Net income attributable to common stockholders | $15.6 million | $(236.8) million in Q1 2022 |
| Earnings available for distribution (non-GAAP) | $59.3 million; $1.50 per common share | $38.1 million; $1.16 per share in Q1 2022 |
| Operating cash flow | $67.2 million provided | $40.1 million provided in Q1 2022 |
| Total assets / MBS | $5.71 billion / $5.45 billion | $5.10 billion / $4.79 billion at December 31, 2022 |
| Repurchase agreement borrowings | $4.81 billion; weighted-average rate 4.91%; 52-day weighted-average remaining maturity | $4.23 billion; 4.24%; 28 days at December 31, 2022 |
| Cash, cash equivalents and restricted cash | $228.9 million | $278.8 million at December 31, 2022 |
| Book value per common share | $12.61 | $12.79 at December 31, 2022 |
| Debt-to-equity ratio | 5.8x | 5.3x at December 31, 2022 |
Material changes and operating drivers
- Net income swung to a profit from a large year-ago loss, principally as investment results improved: Q1 2023 recorded $52.0 million of net investment gains versus $504.4 million of losses in Q1 2022. Derivative results moved the other way, with a $44.9 million loss versus a $238.9 million gain.
- Net interest income fell by $24.7 million year over year. Average borrowing costs increased as the Federal Reserve raised rates, compressing the GAAP net interest margin; management reported average cost of funds of 4.20% versus negative 0.14% in Q1 2022. Higher-yielding Agency MBS and swap receipts supported non-GAAP effective net interest income, which rose to $69.5 million from $40.4 million.
- The portfolio was $5.45 billion in MBS at quarter-end, approximately 98% of the investment portfolio including TBAs in 30-year fixed-rate Agency RMBS. The company bought $1.4 billion and sold $783.9 million of Agency MBS during the quarter.
- Repurchase borrowings rose $579.9 million from year-end. GAAP debt-to-equity increased to 5.8x from 5.3x. Approximately 95% of equity was allocated to Agency RMBS.
- Common shares outstanding rose to 41.65 million from 38.71 million, following issuance of 2.93 million shares for $35.8 million net proceeds. Book value per share declined 1.4% during the quarter, which management attributed to modest underperformance in higher-coupon Agency MBS.
Outlook, risks and other notable items
- Management said market pricing indicated one or two additional Federal Funds rate increases in Q2 2023. It viewed the eventual end of monetary tightening, potentially lower rate volatility, compelling valuations and favorable funding conditions as supportive of Agency MBS investment conditions in 2023. No specific earnings or dividend guidance was provided.
- Key risks include interest-rate and spread volatility, changes in mortgage prepayments and asset duration, short-term repo refinancing and counterparty exposure, margin calls, leverage, and the possibility that hedges do not offset asset or funding movements. Management stated that liquidity should meet anticipated short-term needs but cautioned that sufficient liquidity to meet margin calls is not assured; long-term liquidity depends on obtaining additional debt financing.
- At March 31, $5.1 billion of Agency securities secured repo borrowings, with collateral equal to 106% of repo debt. Unencumbered investments were approximately $362.1 million, in addition to $101.8 million of unrestricted cash. The company reported compliance with repo financial covenants.
- Interest-rate swaps totaled $8.125 billion notional. Net swap losses were $44.5 million in Q1, primarily attributed to changes in forward-rate expectations. A further $5.9 million of deferred hedge gains was expected to reduce repo interest expense through December 15, 2023.
- The company declared a $0.40 per-share common dividend for Q1, payable April 27, 2023, and declared Q2 Series B and Series C preferred dividends payable June 27, 2023. The filing notes that REIT distribution requirements are based on taxable income, not GAAP income or non-GAAP earnings available for distribution.
- A remaining unconsolidated venture in liquidation may require up to $2.9 million of additional capital for future expenses. No legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective as of quarter-end.
Important facts for investors to verify
- Reconcile GAAP earnings with the company’s non-GAAP earnings available for distribution, including the treatment of derivative and investment gains and losses; the latter is not a measure of cash available for dividends.
- Track repo refinancing terms, borrowing costs, haircuts, collateral values and available liquidity, particularly under adverse rate or spread movements.
- Assess how swap positions and mortgage prepayment or extension behavior affect earnings, book value and margin-call exposure.
- Monitor common-share issuance and dilution, book value per share, and dividend coverage relative to taxable income and cash needs.
- Review the filing’s assumptions behind its interest-rate sensitivity analysis: a 100-basis-point rate increase was estimated to reduce projected net interest income by 0.92% and portfolio value by 1.02% at March 31, 2023; actual outcomes may differ.