Invesco Mortgage Capital Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are with December 31, 2018. The company is an externally managed mortgage REIT investing in residential and commercial mortgage securities and related assets. Unless stated otherwise, financial figures below are in U.S. dollars.
Financial results and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $187.1 million | $153.2 million in Q1 2018 |
| Interest expense | $113.0 million | $68.1 million in Q1 2018 |
| Net interest income | $74.1 million | $85.1 million in Q1 2018 |
| Net interest rate margin | 1.26% | 1.64% in Q1 2018 |
| Net income attributable to common stockholders | $127.7 million; $1.05 basic and diluted EPS | $41.5 million; $0.37 EPS in Q1 2018 |
| Core earnings, non-GAAP | $56.9 million; $0.47 per common share | $50.4 million; $0.45 per common share in Q1 2018 |
| Total assets | $21.50 billion | $17.81 billion at December 31, 2018 |
| Total equity | $2.67 billion | $2.29 billion at December 31, 2018 |
| Book value per common share | $16.29 | $15.27 at December 31, 2018 |
| Total borrowings | $18.47 billion | $15.25 billion at December 31, 2018 |
| Cash, cash equivalents and restricted cash | $83.5 million | $119.5 million at March 31, 2018 |
| Operating cash flow | $68.4 million | $76.8 million in Q1 2018 |
Q1 investing activities used $3.54 billion, principally reflecting $4.34 billion of securities purchases. Financing activities provided $3.42 billion, including common-stock proceeds and net repurchase-agreement borrowings. The common dividend declared was $0.45 per share, payable in April 2019; preferred dividends were also declared.
Material changes versus prior periods
- Common-stockholder net income increased to $127.7 million from $41.5 million, driven mainly by a $268.4 million investment gain versus a $160.4 million loss in Q1 2018. Net derivative results moved the other way: a $201.5 million loss versus a $133.4 million gain.
- Net interest income fell $11.0 million year over year. Higher average asset yields and balances increased interest income, but increased borrowing costs more than offset that benefit. GAAP net interest margin declined to 1.26% from 1.64%; non-GAAP effective margin increased to 1.34% from 1.28%.
- Borrowings rose $3.22 billion from year-end, while securities at fair value grew $3.73 billion. The company issued 16.1 million common shares in a public offering for approximately $249.5 million net and issued additional shares through its at-the-market program.
- Management sold most adjustable-rate and hybrid adjustable-rate securities and reinvested mainly in fixed-rate Agency RMBS and Agency CMBS. Thirty-year fixed-rate Agency RMBS increased to about 60% of the investment portfolio from 56% at year-end.
- Book value per common share increased 6.7% from year-end, which management attributed primarily to tighter spreads in Agency and credit assets.
Outlook, commentary and risks
- Outlook: No specific earnings, margin, book-value or dividend guidance was provided. Management said it expected moderate, slowing U.S. economic growth and inflation near the Federal Reserve’s 2% objective. It described Agency RMBS conditions as mixed: lower volatility and funding costs were supportive, while lower mortgage rates could increase refinancing and prepayment risk. The Federal Reserve’s planned shift toward reinvesting MBS paydowns in Treasuries was identified as a potential sector headwind.
- Leverage and liquidity: Repurchase-agreement debt-to-equity was 7.2x, compared with 7.0x at year-end; total debt-to-equity was 6.9x versus 6.7x. Management said current resources were sufficient for anticipated near-term needs, but noted that liquidity depends on financing availability and may be pressured by margin calls, higher haircuts or falling collateral values. Most repurchase borrowings mature within one year.
- Interest-rate and hedge exposure: The company had $12.9 billion notional of interest-rate swaps. Falling rates contributed to $165.9 million of realized swap losses and $66.7 million of realized futures losses in Q1. Its sensitivity analysis estimated that a 100-basis-point rate increase would reduce projected net interest income 9.13% and portfolio value 1.08%; estimates depend on assumptions and are not forecasts.
- Other risks: Credit and property-value deterioration, prepayment and extension risk, spread widening, counterparty default, refinancing access, and changes in regulation or government policy could affect results. The company had material contracts indexed to USD LIBOR and was assessing the potential transition away from LIBOR after 2021.
- Commitments and contingencies: Unfunded commitments included $21.2 million for a loan participation and $7.6 million for affiliated-manager-sponsored ventures. The filing reported no legal proceedings, no defaults on senior securities and no material change to previously disclosed risk factors. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- Subsequent event: Shareholders approved an amended equity incentive plan on May 3, 2019, extending it ten years and reducing shares available for issuance under the plan to 200,000.
Important facts for investors to verify
- How much of reported earnings and book-value change reflects market-driven fair-value gains rather than recurring net interest income; reconcile GAAP results with non-GAAP core earnings.
- Whether financing costs continue to outpace asset-yield growth, and the effect on net interest income, margins and dividend coverage.
- Current repo maturities, lender concentration, collateral haircuts and available liquidity to meet margin calls under stressed market conditions.
- The portfolio’s concentration in fixed-rate Agency RMBS and the sensitivity of returns to interest rates, spreads, prepayments and refinancing activity.
- How the company manages LIBOR-linked assets, liabilities and derivatives through the benchmark transition, and whether hedge results offset funding and portfolio risks over time.
- Whether common and preferred distributions remain supported by recurring earnings and available cash, rather than requiring asset sales or additional financing.