Invesco Mortgage Capital Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The company is an externally managed mortgage REIT investing primarily in mortgage-backed securities, especially Agency RMBS. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Interest income | $43.2 | $27.4 | $126.3 | $244.3 |
| Net interest income | $46.5 | $28.9 | $134.5 | $159.6 |
| Net income (loss) attributable to common stockholders | $49.3 | $96.9 | $(59.4) | $(1,830.4) |
| Basic earnings (loss) per common share | $0.17 | $0.53 | $(0.23) | $(10.87) |
| Net interest rate margin | 2.15% | 2.79% | 2.01% | 2.46% |
- At September 30, total assets were $9,379.2 million, including $8,828.0 million of mortgage-backed securities. Total liabilities were $7,922.9 million and stockholders’ equity was $1,456.4 million.
- Repurchase-agreement borrowings were $7,873.8 million, at a 0.12% weighted-average rate and 56-day weighted-average remaining maturity. The company reported a 5.4x GAAP debt-to-equity ratio and a 6.5x economic debt-to-equity ratio, which includes TBA exposure.
- Cash, cash equivalents and restricted cash totaled $486.2 million, comprising $189.5 million unrestricted cash and $296.7 million restricted cash. Management said it expected operating cash flow and available borrowing capacity to meet anticipated short-term liquidity needs; long-term needs depend on obtaining additional financing.
- For the first nine months, operating activities provided $110.5 million; investing activities used $797.6 million; financing activities provided $780.8 million. Net cash, cash equivalents and restricted cash increased $93.7 million.
- Book value per common share was $3.25, down 15.8% from $3.86 at December 31, 2020. Common shares outstanding increased from 203.2 million to 311.7 million, primarily reflecting equity issuance.
Changes versus comparable periods
- Q3 net interest income increased from 2020 as the company rebuilt its Agency RMBS portfolio after pandemic-related asset sales in early 2020. Common-stockholder earnings nevertheless declined, reflecting a $16.8 million investment loss versus a $65.1 million gain a year earlier; derivative gains were $35.3 million versus $2.9 million.
- Nine-month 2021 common-stockholder loss narrowed substantially from 2020’s exceptional loss. The comparison reflects 2020’s severe market-disruption losses, including $908.2 million of derivative losses and $996.7 million of investment losses, as well as 2021’s gains on derivatives and lower investment losses.
- Nine-month interest income and net interest income were lower than 2020, while the average earning-asset yield fell to 1.88% from 4.09%. Management attributed this chiefly to portfolio-composition changes following 2020 asset sales and the subsequent concentration in Agency RMBS.
- During the nine months, the company sold $11.8 billion and purchased $13.4 billion of MBS, primarily rotating into higher-yielding Agency RMBS. Agency RMBS represented approximately 84% of the investment portfolio including TBAs at quarter-end.
Outlook, risks and notable items
- No numerical earnings or book-value guidance was provided. Management described itself as cautiously optimistic about near-term economic activity, while noting inflation, supply-chain pressures, COVID-19 uncertainty and the expected Federal Reserve taper as important market considerations.
- Management expected Federal Reserve reductions in Agency MBS purchases to begin in Q4 2021 and net purchases to end around mid-2022. It noted that diminished supply and continued demand could support Agency RMBS valuations, but taper timing and market response remain uncertain.
- Key exposures include interest-rate and spread movements, mortgage prepayments and extension risk, leverage and short-term repo refinancing, collateral haircuts and margin calls, counterparty performance, and credit deterioration. The filing warns that adverse asset-price moves or increased haircuts could require additional collateral or asset sales.
- The quarter’s interest-rate sensitivity analysis estimated that a 100-basis-point rate increase would reduce projected net interest income by 1.53% and increase projected portfolio value by 1.74%; a 100-basis-point decrease would reduce projected net interest income by 27.82% and portfolio value by 2.59%. These are model-based estimates under stated assumptions, not forecasts.
- The company intends to transition LIBOR-indexed swaps to SOFR-indexed swaps beginning in Q4 2021. It cautioned that assets and liabilities may transition on different terms or timelines; Series B and C preferred shares retain LIBOR fallback provisions, and management did not then intend to amend them.
- Q3 common dividend declared was $0.09 per share. The company redeemed all Series A preferred stock for $140.0 million in June, recording $4.7 million of related deemed-dividend costs attributable to common stockholders over the nine-month period. It also issued common shares through public offerings and its equity distribution program.
- At September 30, undrawn commitments to affiliated-manager-sponsored ventures were $6.6 million. The company reported no legal proceedings, no defaults upon senior securities, and no material change to previously disclosed risk factors.
Important facts for investors to verify
- How subsequent Agency MBS spreads, interest rates, prepayment speeds and Federal Reserve tapering affected book value and portfolio returns.
- Whether repo financing remains available on acceptable terms, and the company’s liquidity and collateral capacity under margin-call stress.
- How reported GAAP earnings compare with management’s non-GAAP “earnings available for distribution”; the filing reported $30.4 million, or $0.10 per share, for Q3 and $80.5 million, or $0.31 per share, for the nine months. Management cautions this measure is not GAAP income, cash flow, taxable income or a guarantee of dividends.
- The effects of common-share issuance and potential further issuance on per-share book value, earnings and dividends; management said it intended to register an additional 75 million common shares in November 2021.
- Execution and economic consequences of LIBOR-to-SOFR transitions, including preferred-stock fallback language and any financing or hedging mismatches.