Invesco Mortgage Capital Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company is an externally managed mortgage REIT focused primarily on mortgage-backed securities. Unless noted otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2021 / June 30, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net loss attributable to common stockholders | $88.3 million; diluted loss per share $0.34 | Q2 2020: $299.9 million loss; $1.80 per share |
| Six-month net loss attributable to common stockholders | $108.7 million; diluted loss per share $0.45 | First half 2020: $1.927 billion loss; $11.91 per share |
| Net interest income | Q2: $46.3 million; first half: $88.0 million | Q2 2020: $29.7 million; first half 2020: $130.7 million |
| Net interest rate margin | Q2: 2.12%; first half: 1.95% | Q2 2020: 6.15%; first half 2020: 2.42% |
| Effective net interest income and margin (non-GAAP) | Q2: $36.3 million and 1.62%; first half: $68.1 million and 1.46% | Q2 2020: $26.4 million and 4.56%; first half 2020: $133.9 million and 2.48% |
| Earnings available for distribution (non-GAAP) | Q2: $25.0 million, or $0.10 per share; first half: $50.1 million, or $0.21 per share | The company did not present this measure for 2020 |
| Total assets / stockholders’ equity | $9.277 billion / $1.373 billion | December 31, 2020: $8.633 billion / $1.367 billion |
| Repurchase agreement borrowings | $7.851 billion; weighted average rate 0.10%, remaining maturity 52 days | December 31, 2020: $7.229 billion; 0.21%, 14 days |
| Book value per common share | $3.21 | December 31, 2020: $3.86, a 16.8% decrease |
Q2 GAAP investment gains of $72.6 million were outweighed by derivative losses of $186.3 million. For the first half, investment losses were $259.2 million, partly offset by derivative gains of $100.7 million. Reported negative interest expense reflects amortization of deferred gains on discontinued hedges; it should not be read as the company receiving net interest on its borrowings.
At quarter-end, the investment portfolio including TBAs was $10.313 billion; approximately 84% was 30-year fixed-rate Agency RMBS. The GAAP debt-to-equity ratio was 5.7x and the company’s non-GAAP economic debt-to-equity ratio, including TBAs at implied cost, was 6.8x. Agency RMBS collateral coverage on repurchase agreements was 105%.
Cash, cash equivalents and restricted cash totaled $488.1 million, including $134.7 million of unrestricted cash and $353.4 million of restricted cash. The company also reported approximately $516.5 million of unencumbered investments. First-half operating cash flow was $73.5 million; investing activities used $704.1 million and financing activities provided $726.1 million.
Material changes and capital actions
- The company continued rebuilding its Agency RMBS portfolio after selling substantial MBS and GSE CRT holdings in the first half of 2020 during pandemic-related market disruption. First-half 2021 purchases of MBS and CRTs were $11.0 billion, versus $9.8 billion of sales.
- Compared with Q2 2020, Q2 2021 net loss narrowed, supported by higher net interest income and a shift to investment gains. However, the derivative loss was substantially larger. First-half results also improved sharply from 2020’s exceptional losses, but net interest income and net interest margin were lower.
- The company issued common shares in February and June and through its at-the-market program, raising approximately $307.6 million in total during the first half. Common shares outstanding rose to 289.7 million from 203.2 million at year-end, diluting per-share book value and earnings.
- On June 16, the company redeemed all Series A preferred stock for $140.0 million plus accrued dividends. The redemption generated $4.7 million of deemed-dividend costs attributable to common stockholders.
- The company declared a common dividend of $0.09 per share for Q2, payable July 27, 2021. It declared Series B and C preferred dividends in August for payment in September.
Outlook, risks and unusual items
- Management expressed cautious optimism about economic activity as reopening continued, while noting uncertainty from COVID-19 variants, inflation, Federal Reserve policy and the timing of any taper in MBS purchases. No specific earnings or book-value guidance was provided.
- Management said near-term liquidity requirements were expected to be met through operating cash flow and available borrowing capacity, but long-term liquidity depends on obtaining additional debt financing. The filing cautions that margin calls, higher collateral haircuts, counterparty actions or disrupted financing could force asset sales and impair results.
- Market risks include interest-rate and spread movements, prepayments and extension risk, leverage, and the effectiveness of hedges. The company’s sensitivity analysis estimated that a parallel 100-basis-point rate increase would reduce projected portfolio value by 2.55% and projected net interest income by 3.60%; a 100-basis-point decrease would reduce them by 1.82% and 22.88%, respectively. These are model-based estimates, not forecasts.
- The company has material LIBOR-linked contracts and warned that differing transition timing or fallback rates could impair hedging or affect asset and liability economics. It did not plan to amend Series B or C preferred-stock LIBOR fallback language at the time of filing.
- A commercial loan’s maturity was extended to February 2022 at the borrower’s request; the borrower was current on interest and provided additional cash reserves. The company also had $6.7 million of undrawn commitments to affiliated-manager-sponsored ventures.
- The company reported compliance with repurchase-agreement financial covenants at June 30, 2021, effective disclosure controls, and no material change to previously disclosed risk factors. It reported no legal proceedings as of quarter-end.
Important facts for investors to verify
- Reconcile GAAP losses with non-GAAP earnings available for distribution, and review the company’s stated limitations on using that measure as a proxy for taxable income, cash flow or dividend capacity.
- Track book value per share, share issuance and dilution, and the effect of portfolio marks and hedge performance on common equity.
- Assess leverage, short repurchase-agreement maturities, collateral haircuts, unencumbered liquidity and exposure to margin calls and counterparties.
- Monitor Agency RMBS spreads, prepayment speeds, the Federal Reserve’s MBS purchase policy and LIBOR-to-SOFR transition terms.
- Confirm future dividend declarations and the company’s capacity to fund distributions while meeting debt service and REIT requirements.