Invesco Mortgage Capital Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The mortgage REIT invests in residential and commercial mortgage-related securities and loans and is externally managed. The filing was delayed because of COVID-19-related operational disruptions and was signed June 22, 2020.
Financial results and position
- Revenue and net interest: Interest income was $186.7 million, little changed from $187.1 million a year earlier. Net interest income rose to $101.0 million from $74.1 million; net interest margin increased to 2.12% from 1.26%.
- Profitability: Net loss was $1.616 billion, versus net income of $138.8 million in Q1 2019. Loss attributable to common stockholders was $1.627 billion, or $10.38 per diluted share, versus earnings of $127.7 million, or $1.05 per diluted share.
- Drivers of loss: Net investment losses were $755.5 million, including $78.8 million of impairment on securities the company intended to sell or was more likely than not required to sell. Derivative losses were $910.8 million; credit derivative losses were $33.1 million. The company also recorded a $4.8 million loss on extinguishment of debt.
- Cash flow: Operating activities provided $110.0 million. Investing activities provided $11.6 billion, primarily from $16.2 billion of MBS and GSE CRT sale proceeds. Financing activities used $11.6 billion, primarily for net repurchase-agreement repayments. Cash, cash equivalents and restricted cash totaled $365.0 million at quarter-end.
- Balance sheet and leverage: Total assets were $9.78 billion, down from $22.35 billion at year-end 2019. Stockholders’ equity fell to $1.41 billion from $2.93 billion. Book value per common share declined 69.2%, to $5.02 from $16.29. Borrowings were $7.64 billion: $6.29 billion under repurchase agreements and $1.35 billion in secured loans.
- Capital: The February offering of 20.7 million common shares generated approximately $347.0 million net proceeds. Common shares outstanding rose to 164.97 million from 144.26 million at year-end.
Material changes versus prior period
- COVID-19-related market dislocation and sharp spread widening drove exceptional margin calls. The company said it could not meet margin calls as of March 23 and was out of compliance with financial covenants under repurchase and secured-loan arrangements at March 31. Some counterparties seized and sold collateral.
- To raise liquidity and reduce leverage, the company sold $16.2 billion of MBS and GSE CRTs and repaid $11.2 billion of repurchase agreements during the quarter. The investment portfolio fell from $21.9 billion at December 31 to $8.1 billion at March 31.
- All interest rate swaps were terminated in March; the company reported a $904.7 million realized net loss on swaps, primarily associated with falling rates. It had no swaps outstanding at March 31.
- Net interest income improved despite lower average earning assets, primarily because borrowing costs declined. However, investment and derivative losses overwhelmed this improvement.
Outlook, risks and subsequent events
- By May 31, the company had sold a further $6.2 billion of securities measured at March 31 fair value for $5.9 billion cash proceeds, and sold its loan participation interest for $21.6 million. Its remaining investment portfolio was approximately $1.6 billion, excluding cash and Agency CMBS purchase commitments; approximately $540 million was unencumbered.
- By May 7, all repurchase agreements had been repaid. The FHLBI modified the secured-loan terms after covenant noncompliance: $512.5 million was repaid by May 31, leaving $837.5 million due by December 2020. Management intended to repay the balance using proceeds from asset sales.
- Management said cash balances and operating cash flow should meet near-term liquidity needs, but long-term liquidity depends on obtaining additional debt financing. It planned to consider new Agency investments with moderate leverage and credit investments less reliant on short-term, mark-to-market financing. No assurance was given that new financing would be available.
- Management expected mortgage REIT market conditions to remain challenging amid uncertainty about the pandemic. Risks include further spread widening, illiquid markets, margin calls, collateral haircuts, counterparty actions, lower asset values, borrower delinquencies and defaults, and uncertainty in commercial property sectors such as lodging and retail.
- Dividends were delayed to preserve liquidity. Preferred dividends in arrears were paid May 22. The declared $0.50 first-quarter common dividend was scheduled for June 30, payable primarily in shares, with cash limited to no more than 10% of the aggregate distribution. A subsequent $0.02 common dividend was declared for July 28.
- The company reported no material change in internal control over financial reporting and concluded disclosure controls were effective. It reported no legal proceedings as of March 31.
Most important facts for investors to verify
- Whether the remaining $837.5 million FHLBI secured loan was repaid by its December 2020 deadline, and what assets or financing supported repayment.
- Subsequent realized proceeds and losses from asset sales, and the value and composition of the remaining portfolio and unencumbered assets.
- Liquidity, covenant compliance, financing access and collateral requirements after the repayment of repurchase agreements.
- Common and preferred dividend payments, including the share component and its dilution effects.
- Whether reported fair values and credit-loss estimates held up as market liquidity and pandemic-related effects evolved.