Business Context and Reporting Period
Company: Invesco Mortgage Capital Inc. (IVR)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Invesco Mortgage Capital Inc. is an externally managed Maryland corporation that invests in residential and commercial mortgage-backed securities (RMBS, CMBS) and mortgage loans. The company commenced operations in July 2009 following its Initial Public Offering (IPO) and intends to qualify as a Real Estate Investment Trust (REIT) for U.S. federal income tax purposes. It is managed by Invesco Advisers, Inc.
Key Financial Metrics
| Metric | Value (Year Ended Dec 31, 2009) |
|---|---|
| Total Assets | $853.4 million |
| Investment Portfolio (Fair Value) | $802.6 million |
| Interest Income | $23.5 million |
| Interest Expense | $4.6 million |
| Net Interest Income | $18.9 million |
| Net Income | $17.5 million |
| Net Income Attributable to Common Shareholders | $15.1 million |
| Earnings Per Share (Basic/Diluted) | $3.37 |
| Total Debt (Repurchase Agreements + TALF) | $626.4 million |
| Shareholders' Equity | $180.5 million |
| Book Value Per Share | $20.31 |
| Dividends Declared Per Share | $1.66 |
Portfolio Composition (as of Dec 31, 2009)
- Agency RMBS: $556.4 million (69.3% of portfolio)
- Non-Agency RMBS: $115.3 million (14.4% of portfolio)
- CMBS: $101.2 million (12.6% of portfolio)
- CMOs: $29.7 million (3.7% of portfolio)
- PPIP Fund Investment: $4.1 million (called capital)
Material Changes vs. Prior Period
The company was in a development stage prior to July 1, 2009. Consequently, the 2009 results represent the company's first full year of operations following its IPO.
- Revenue Growth: Interest income increased from $0 in 2008 to $23.5 million in 2009.
- Profitability: The company moved from a net loss of $22,000 in 2008 to a net income of $17.5 million in 2009.
- Capitalization: Shareholders' equity increased from a deficit of $21,000 in 2008 to $180.5 million in 2009, driven by net proceeds of approximately $200.9 million from the IPO and private placement.
- Leverage: The company established significant leverage, with total borrowings of $626.4 million (Repurchase agreements of $546.0 million and TALF financing of $80.4 million) compared to zero in 2008.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects to continue paying regular quarterly dividends to maintain REIT qualification. The company plans to deploy proceeds from a follow-on public offering completed in January 2010 ($162.7 million) to acquire additional target assets. The company utilizes leverage to enhance returns, targeting 6-8x leverage for Agency RMBS and 3-5x for CMBS.
Key Risks and Contingencies
- Interest Rate Risk: The company is exposed to mismatches between asset yields and borrowing costs. Rising short-term rates could increase borrowing costs faster than asset yields adjust, compressing net interest margins.
- Liquidity and Financing Risk: Reliance on short-term repurchase agreements (30-90 days) creates refinancing risk. Margin calls could force asset sales at depressed prices if collateral values decline.
- Government Program Dependence: A portion of the portfolio is financed through the Term Asset-Backed Securities Loan Facility (TALF) and the Public-Private Investment Program (PPIP). Changes to or termination of these government programs could adversely affect financing availability.
- Prepayment Risk: Faster-than-expected prepayments on RMBS could accelerate the amortization of purchase premiums, reducing interest income.
- REIT Qualification: Failure to qualify as a REIT would subject the company to corporate income taxes, significantly reducing cash available for distribution.
Unusual Items
- Gain on Sale of Investments: The company realized a $2.0 million gain on the sale of investments in 2009, primarily due to portfolio rebalancing in the fourth quarter.
- Follow-on Offering: A significant capital raise of $162.7 million occurred in January 2010, subsequent to the reporting period.
Investor Verification Checklist
- REIT Status: Verify the company's ongoing compliance with REIT asset and income tests to ensure tax-exempt status is maintained.
- Liquidity Coverage: Assess the company's ability to meet potential margin calls on its $546 million repurchase agreement portfolio given current market volatility.
- Financing Terms: Monitor the renewal terms and interest rates of short-term repurchase agreements and the status of TALF/PPIP financing availability.
- Prepayment Speeds: Review Constant Prepayment Rate (CPR) assumptions versus actuals to evaluate the impact on net interest income and premium amortization.
- Related Party Transactions: Review the management fee structure (1.50% of shareholders' equity) and expense reimbursements to Invesco Advisers, Inc.