Invesco Mortgage Capital Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. The company is an externally managed mortgage REIT investing in residential and commercial mortgage-backed securities and mortgage loans.
Key financial results
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Interest income | $173.5 million | $171.1 million |
| Interest expense | $72.3 million | $68.6 million |
| Net interest income | $101.2 million | $102.4 million |
| GAAP net loss attributable to common stockholders | $32.7 million; $0.27 loss per share | $74.4 million; $0.60 loss per share |
| Core earnings, non-GAAP | $61.9 million; $0.50 per share | $56.9 million; $0.46 per share |
| GAAP net interest margin | 1.80% | 1.92% |
| Effective cost of funds, non-GAAP | 2.19% | 2.31% |
| Effective interest-rate margin, non-GAAP | 1.21% | 1.21% |
The smaller GAAP loss mainly reflected lower realized and unrealized derivative losses. Net derivative losses were $122.7 million, versus $151.3 million in Q1 2014; interest-rate-swap fair-value losses were $56.0 million, compared with $90.2 million. The company also reported $157.6 million of other comprehensive income, principally from unrealized MBS gains, producing comprehensive income of $130.3 million.
Operating cash flow was $87.4 million, investing cash flow was negative $214.8 million, and financing cash flow was positive $120.2 million. Cash and cash equivalents ended the quarter at $157.0 million.
Balance sheet, leverage, and portfolio
- Total assets were $21.55 billion and total equity was $2.71 billion at March 31, 2015.
- MBS fair value was $17.34 billion; residential loans held for investment were $3.60 billion; commercial loans were $146.2 million.
- Borrowings included $13.33 billion of repurchase agreements, $1.55 billion of secured loans, $3.13 billion of securitization ABS, and $400 million of exchangeable senior notes. Total debt-to-equity was 6.8x, down from 6.9x at year-end; repurchase-agreement debt-to-equity was 5.2x versus 5.4x.
- Weighted-average remaining borrowing maturity was 359 days. Repurchase agreements had a 111% collateral ratio; the company reported compliance with financing covenants.
- Book value per diluted common share rose to $19.37 from $18.82, primarily reflecting investment valuation gains recorded in other comprehensive income.
Changes and management commentary
- Compared with Q1 2014, average earning assets increased to $20.4 billion from $19.4 billion, largely due to growth in consolidated residential-loan securitizations. Average portfolio yield declined to 3.40% from 3.52%; management attributed this to portfolio mix and lower reinvestment yields.
- Net interest income decreased modestly, while GAAP net interest margin fell from 1.92% to 1.80%, reflecting lower asset yields and higher average borrowings. Effective cost of funds improved from 2.31% to 2.19%, mainly due to lower net interest paid on swaps.
- The company added one residential-loan securitization during the quarter, bringing the total to 11. It increased residential loans and GSE credit-risk-transfer holdings and continued reallocating some Agency exposure from 30-year fixed-rate securities toward 15-year and hybrid adjustable-rate securities.
- Management described Q1 as a period of falling interest rates and a flatter yield curve. It cited improving housing and commercial real estate markets, while noting weaker-than-expected economic measures and potential global and policy-related headwinds.
Outlook, risks, and unusual items
- No specific earnings or dividend guidance was provided. Management said it believed current cash flow and borrowing capacity would meet anticipated short-term liquidity needs, but noted long-term funding depends on obtaining additional financing.
- The company declared a $0.45 common dividend per share, down from $0.50 in Q1 2014. It stated an intention to continue regular quarterly distributions, subject to operating needs, debt service, and REIT requirements.
- Key exposures include interest rates, prepayments and extension risk, credit and real-estate values, financing availability, counterparty performance, and margin calls. Management cautioned that liquidity may not be sufficient under adverse conditions. Its sensitivity analysis estimated that a 100-basis-point rate increase would reduce projected portfolio value by 1.20% but increase projected net interest income by 12.91%; a 100-basis-point decrease would reduce projected net interest income by 54.61%. The estimates rely on assumptions and a 0% interest-rate floor.
- Unfunded commitments to affiliated-manager-sponsored investment ventures were $27.8 million; commercial-loan commitments were $1.6 million. The company reported no material legal proceedings, no defaults on senior securities, and no material change in previously disclosed risk factors.
- Accounting presentation changed in 2015 under ASU 2014-11 for repurchase financings; management reported no transition adjustment. The filing also identified forthcoming consolidation and debt-issuance-cost accounting guidance whose effects were still under evaluation.
Investor facts to verify
- Whether positive non-GAAP core earnings of $0.50 per share can be sustained despite the GAAP loss and material derivative volatility; review the company’s reconciliation and definitions.
- Whether book-value gains and MBS valuations persist, including assumptions behind fair values and impairment assessments.
- Ability to meet repo margin calls and refinance short-term borrowings, considering leverage, collateral haircuts, and liquidity beyond the reported $157.0 million of cash.
- Performance and geographic concentration of credit exposures: California represented 53.5% of residential loans held for investment, and 42.6% of non-Agency RMBS underlying collateral.
- Coverage and sustainability of common and preferred dividends, including the REIT distribution requirement and the lower common dividend versus the prior-year quarter.