Invesco Mortgage Capital Inc. — Q3 2022 Form 10-Q
Business context and reporting period. The company is an externally managed mortgage REIT investing primarily in mortgage-backed securities (MBS), financed largely through short-term repurchase agreements. This unaudited filing covers the quarter and nine months ended September 30, 2022; comparisons are with the 2021 periods unless otherwise noted. Per-share amounts reflect the one-for-ten reverse stock split effective June 3, 2022.
Key financial metrics
| Metric | Q3 2022 / September 30, 2022 | Comparison or context |
|---|---|---|
| Interest income | $49.7 million | Q3 2021: $43.2 million |
| Net interest income | $31.7 million; net interest margin 2.51% | Q3 2021: $46.5 million and 2.15% |
| Net loss attributable to common stockholders | $94.6 million; loss of $2.78 per share | Q3 2021: income of $49.3 million; $1.66 per share |
| Nine-month net loss attributable to common stockholders | $447.6 million; loss of $13.42 per share | Nine months 2021: loss of $59.4 million; $2.28 per share |
| Earnings available for distribution (non-GAAP) | $47.4 million; $1.39 per share | Q3 2021: $30.4 million; $1.02 per share |
| Total assets / stockholders’ equity | $4.69 billion / $761.2 million | December 31, 2021: $8.44 billion / $1.40 billion |
| Repurchase-agreement debt | $3.89 billion; average rate 3.27%; 60-day weighted-average remaining maturity | December 31, 2021 debt: $6.99 billion; average rate 0.14% |
| Cash, cash equivalents and restricted cash | $264.4 million | Unrestricted cash: $163.6 million |
| Book value per common share | $12.80 | December 31, 2021: $29.09, a 56.0% decline |
For the nine months, operating activities provided $126.8 million of cash and investing activities provided $2.85 billion; financing activities used $3.29 billion. The company reported a 5.1x debt-to-equity ratio and 5.3x economic debt-to-equity ratio, compared with 5.0x and 6.2x, respectively, at year-end 2021.
Material changes versus comparable periods
- Q3 investment losses were $260.8 million, versus $16.8 million in Q3 2021; nine-month investment losses were $1.09 billion, versus $276.1 million. These included realized losses on MBS sales and fair-value losses amid rising rates and wider spreads.
- Derivative gains partly offset investment losses: $133.5 million in Q3 and $554.2 million for the nine months, including $625.1 million of realized interest-rate-swap gains in the nine-month period. TBA losses were $139.2 million for the nine months.
- Net interest income fell despite higher asset yields: higher repo borrowing costs more than offset the benefit of rotating into higher-yielding Agency RMBS. Reported Q3 net interest margin improved year over year, while management’s non-GAAP effective margin was 5.10% versus 1.65%.
- The investment portfolio, including TBAs at implied cost, contracted to $4.53 billion from $9.48 billion at year-end 2021. Agency RMBS remained the dominant exposure; 30-year fixed-rate Agency RMBS were about 94% of the portfolio, including TBAs.
- Preferred-stock repurchases reduced Series B and C shares outstanding; the company recorded a $12.7 million Q3 gain attributable to common stockholders from the retirements. It also issued 2.33 million common shares for net proceeds of $38.6 million during Q3.
Outlook, commentary, and risks
- Management cited rapid Federal Reserve tightening, elevated inflation and volatility, wider spreads, poor liquidity, and weak Agency MBS relative performance. It described valuations as historically attractive but remained cautious given policy uncertainty and geopolitical risks.
- Management said it believed available cash flow and borrowing capacity would meet anticipated short-term liquidity needs, including margin requirements and dividends. Long-term liquidity depends on obtaining debt financing; refinancing availability and terms are not assured.
- Repo lenders may demand additional collateral or cash as asset values fall. The company said it could not assure sufficient liquidity for margin calls; it reported collateral coverage of 104% and an average Agency RMBS haircut of 4.7% at quarter-end.
- Interest-rate, spread, prepayment, extension, leverage, counterparty, financing and real-estate credit risks may affect asset values, earnings and liquidity. The filing’s static sensitivity analysis estimated that a parallel 100-basis-point rate increase would reduce projected portfolio value by 1.44% and projected net interest income by 2.26%; actual results may differ materially.
- The company declared a Q3 common dividend of $0.65 per share, down from $0.90 in each of the first two 2022 quarters. Dividends depend on cash availability, debt service and board decisions; earnings available for distribution is not a guarantee of dividends or taxable income.
- Subsequent events: the $23.9 million commercial loan was repaid in full in October 2022. In November, the company declared Series B and C preferred dividends payable December 27, 2022. It had a $6.0 million potential additional funding commitment to unconsolidated ventures in liquidation.
Most important facts for investors to verify
- Whether book value and MBS valuations stabilize, and how further rate or spread changes affect equity and liquidity.
- Whether repo facilities can be refinanced on acceptable terms and whether available liquidity can withstand margin calls; review short maturities, haircuts and counterparty exposure.
- The sustainability of common dividends relative to taxable income, cash needs and the decline in the quarterly dividend to $0.65 per share.
- How much reported and non-GAAP earnings depend on swap gains and adjustments; earnings available for distribution is a company-defined non-GAAP measure, not a substitute for GAAP results or cash flow.
- Preferred-stock repurchase activity, common-share issuance and the remaining $6.0 million venture funding commitment.