Business context and reporting period
Invesco Mortgage Capital Inc. (NYSE: IVR) filed its Form 10-K for the fiscal year ended December 31, 2022. The externally managed mortgage REIT invests primarily in mortgage-backed securities; at year-end, Agency RMBS made up 97% of its investment portfolio including TBAs. Its objective is to generate returns primarily through dividends and secondarily through capital appreciation.
Key financial metrics
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Interest income | $194.5 million | $169.2 million |
| Net interest income | $143.0 million | $180.5 million |
| Net interest rate margin | 2.64% | 2.06% |
| Net loss | $402.9 million | $90.0 million |
| Net loss attributable to common stockholders | $417.0 million; $12.21 per share | $132.5 million; $4.82 per share |
| Operating cash flow | $196.1 million | $152.3 million |
| Cash, cash equivalents and restricted cash at year-end | $278.8 million | $577.1 million |
| Repurchase agreement borrowings at year-end | $4.23 billion | $6.99 billion |
| Book value per common share | $12.79 | $29.09 |
The net interest rate margin is the company’s stated measure of asset yield less cost of funds. GAAP net interest income declined despite the wider margin, primarily because higher short-term rates increased financing costs and the average earning-asset base contracted. Cash provided by investing activities was $2.42 billion, largely reflecting asset sales; financing activities used $2.92 billion, principally for net repurchase-agreement repayments. The GAAP debt-to-equity ratio was 5.3x at year-end, versus 5.0x in 2021; the non-GAAP economic ratio was also 5.3x, versus 6.2x, reflecting the much smaller TBA position.
Material changes versus the prior comparable period
- Book value per common share fell 56%, from $29.09 to $12.79, amid sharply higher and volatile interest rates, an inverted yield curve, spread pressures and weaker Agency RMBS valuations.
- The portfolio, including TBAs, declined from $9.48 billion to $4.79 billion. Agency RMBS fair value fell from $7.70 billion to $4.66 billion; the company substantially reduced TBAs, whose implied cost basis was $1.4 million at year-end versus $1.64 billion in 2021.
- Net investment losses increased to $1.08 billion from $366.5 million, including $1.16 billion of realized losses on MBS and GSE CRT sales. Net derivative gains were $559.0 million, compared with $122.6 million in 2021; 2022 included $593.0 million of realized interest-rate-swap gains and $133.0 million of TBA losses.
- Average earning assets fell to $5.14 billion from $8.81 billion, while average earning-asset yield rose to 3.79% from 1.92%. Average cost of funds increased to 1.15% from negative 0.14% (the prior-year figure reflected deferred swap gains).
- The company sold $27.3 billion and purchased $25.7 billion of Agency RMBS, mainly rotating into higher-yielding securities. It also repaid its $23.9 million commercial loan in October 2022.
Outlook, risks and unusual items
Management said it expected further Federal Reserve rate increases in early 2023, while expressing the view that potentially lower rate volatility, compelling valuations and favorable funding conditions could support an attractive Agency RMBS investment environment. This is a view, not quantified earnings or dividend guidance; the filing gives no clear numerical forecast for revenue, earnings, book value or distributions.
Key risks include further rate and spread volatility, refinancing and margin-call exposure, short-term repo funding dependence, prepayment and extension risk, valuation uncertainty, and deterioration in commercial and residential real estate fundamentals. Repo borrowings had a 28-day weighted-average remaining maturity and a 4.24% weighted-average rate at year-end. The company reported $175.5 million of unrestricted cash, approximately $352.9 million of unencumbered investments, and $6.3 million of potential additional funding commitments to unconsolidated ventures. It stated that available liquidity was expected to meet anticipated short-term needs, while longer-term requirements depend on obtaining additional debt financing.
Common dividends were reduced from $0.90 to $0.65 per share per quarter during 2022; the board retains discretion over future distributions, and no minimum dividend is established. The company paid $140.3 million in dividends during 2022 and repurchased $115.1 million of Series B and C preferred stock, recording a $14.2 million gain. A one-for-ten reverse stock split took effect in June; per-share amounts in the filing are generally adjusted for it. The auditor gave unqualified opinions on the financial statements and internal controls; valuation of mortgage-backed securities was identified as a critical audit matter.
Important facts for investors to verify
- How much of the reported investment and derivative results reflects recurring portfolio income versus realized sales, fair-value marks and hedge gains or losses.
- Whether net interest income and dividend capacity can withstand higher repo costs, given the short average borrowing maturity and concentration in fixed-rate Agency RMBS.
- The sustainability of the $0.65 quarterly common dividend, preferred-dividend obligations and REIT taxable income; GAAP net loss and taxable income are not equivalent.
- Current liquidity, collateral haircuts, counterparty concentration and covenant headroom, including potential margin calls and the $6.3 million venture commitment.
- Fair-value assumptions for mortgage-backed securities and the effect of changing rates, spreads, prepayments and real estate credit conditions on book value.