Business Context and Reporting Period
Company: Invesco Mortgage Capital Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: The Company is a Maryland corporation focused on investing in, financing, and managing residential and commercial mortgage-backed securities (MBS). It is externally managed by Invesco Institutional (N.A.), Inc. and intends to qualify as a Real Estate Investment Trust (REIT) commencing with the taxable year ending December 31, 2009. The Company completed its Initial Public Offering (IPO) on July 1, 2009, transitioning from a development stage enterprise to active operations.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | As of Sep 30, 2009 |
|---|---|---|---|
| Total Assets | — | — | $906.1 million |
| Investment Portfolio (Fair Value) | — | — | $881.9 million |
| Net Interest Income | $8.9 million | $8.9 million | — |
| Net Income (Consolidated) | $7.2 million | $7.0 million | — |
| Net Income (Attributable to Common Shareholders) | $6.2 million | $6.1 million | — |
| Earnings Per Share (Basic) | $0.70 | Not Meaningful | — |
| Total Liabilities | — | — | $690.6 million |
| Repurchase Agreements (Debt) | — | — | $615.0 million |
| TALF Financing (Debt) | — | — | $64.8 million |
| Cash and Restricted Cash | — | — | $14.8 million |
| Shareholders' Equity | — | — | $185.0 million |
| Book Value Per Share | — | — | $20.82 |
Material Changes vs. Prior Period
- Operational Status: The Company was in a development stage prior to July 1, 2009. The nine-month period includes pre-IPO losses of $10,000 for the period from inception (June 5, 2008) to September 30, 2008, contrasted with significant profitability post-IPO.
- Capital Raise: The Company raised approximately $201.1 million in net proceeds from its IPO and related private placements in July 2009. This capital was deployed into an $881.9 million investment portfolio by September 30, 2009.
- Leverage: The Company moved from no debt to significant leverage, utilizing $615.0 million in repurchase agreements and $64.8 million in TALF financing to fund its portfolio. The debt-to-equity ratio stood at 7.8 times as of September 30, 2009.
- Portfolio Composition: The portfolio consists of 78.7% Agency RMBS, 11.8% Non-Agency RMBS, and 9.5% CMBS.
Guidance, Outlook, and Risks
- Dividend Policy: The Company intends to distribute at least 90% of its REIT taxable income annually. A dividend of $0.61 per share was declared on October 13, 2009, payable November 12, 2009.
- Investment Strategy: Management plans to leverage Agency RMBS 6 to 8 times and Non-Agency RMBS 0 to 2 times. CMBS investments are financed via TALF with leverage of 3 to 5 times.
- Hedging: The Company has entered into interest rate swaps with a notional amount of $375.0 million to mitigate interest rate risk on a portion of its repurchase agreements. An unrealized loss of $13,000 was recognized in earnings due to hedge ineffectiveness.
- Risk Factors:
- Liquidity and Margin Calls: Declines in portfolio value could trigger margin calls. The weighted average haircut on repurchase agreements is 5.5%.
- Commitment Risk: The Company has committed up to $25.0 million to the Invesco Mortgage Recovery Feeder Fund, L.P., but has not yet funded this commitment. Failure to meet a call could force asset sales at depressed prices.
- Interest Rate Risk: Rising rates could narrow net interest margins and reduce the fair value of fixed-rate assets.
Investor Verification Checklist
- REIT Qualification: Verify the Company's ability to meet the 90% distribution requirement and asset/income tests to maintain tax-exempt status.
- Liquidity Position: Assess the adequacy of unpledged assets and cash ($14.8 million) to meet potential margin calls given the 7.8x leverage ratio.
- Portfolio Valuation: Confirm the fair value of the $881.9 million portfolio, noting that $104.4 million is in Non-Agency RMBS and $83.4 million in CMBS, which carry higher credit risk than Agency securities.
- Related Party Transactions: Review the management fee structure (1.50% of equity annually) and expense reimbursements to the Manager, Invesco Institutional (N.A.), Inc.
- Commitment Funding: Monitor the status of the $25.0 million commitment to the PPIF and the potential impact on liquidity if called.