Invesco Mortgage Capital Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet figures are as of March 31, 2021. Amounts below are in U.S. dollars unless noted. The company is an externally managed mortgage REIT focused primarily on mortgage-backed securities (MBS), financed largely through repurchase agreements.
Financial results and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $40.0 million | $186.7 million in Q1 2020 |
| Net interest income | $41.7 million | $101.0 million in Q1 2020 |
| GAAP net loss attributable to common stockholders | $20.4 million; loss of $0.09 per share | $1.627 billion; loss of $10.38 per share in Q1 2020 |
| Management-reported core earnings (non-GAAP) | $25.2 million; $0.11 per share | Not presented for Q1 2020 |
| Operating cash flow | $34.5 million | $110.0 million in Q1 2020 |
| Investing cash flow | $(986.3) million | $11.553 billion provided in Q1 2020 |
| Financing cash flow | $1.138 billion provided | $11.588 billion used in Q1 2020 |
| Total assets / stockholders’ equity | $9.763 billion / $1.482 billion | $8.633 billion / $1.367 billion at December 31, 2020 |
| MBS at fair value / repurchase agreements | $9.100 billion / $8.241 billion | $8.172 billion / $7.229 billion at December 31, 2020 |
| Cash, cash equivalents and restricted cash | $579.0 million, including $198.4 million unrestricted cash | $392.6 million at December 31, 2020 |
GAAP net interest margin was 1.80%, compared with 2.12% in Q1 2020; effective net interest margin, a non-GAAP measure, was 1.32%, versus 2.27%. Reported cost of funds was negative 0.08%, reflecting $5.4 million of amortization of deferred swap gains; effective cost of funds was 0.40% after the company’s adjustments. The company reported a $331.9 million net investment loss, partly offset by $287.0 million of derivative gains.
At quarter-end, debt-to-equity was 5.6x and economic debt-to-equity, which includes TBA exposure, was 6.6x. The company reported book value per common share of $3.65, down 5.4% from $3.86 at year-end. Its portfolio was concentrated in 30-year fixed-rate Agency RMBS; these represented approximately 84% of the investment portfolio including TBAs.
Material changes and management commentary
- Compared with Q1 2020, interest income and net interest income fell substantially, mainly because the company sold a large portion of its portfolio in the first half of 2020 and Q1 2021 average earning assets and yields were lower. Average earning assets were $9.3 billion versus $17.8 billion; average earning-asset yield was 1.72% versus 4.19%.
- In Q1 2021, the company bought $7.0 billion of MBS and sold $5.5 billion, rotating out of lower-yielding Agency RMBS into higher-yielding securities as rates rose and valuations fell. It resumed Agency RMBS investment in July 2020 following pandemic-related portfolio sales and deleveraging.
- Net derivative results improved markedly from Q1 2020, when falling rates produced substantial swap losses. In Q1 2021, rising rates contributed to $327.5 million of realized net gains on swaps, while Agency RMBS and TBA marks and sales still weighed on investment results.
- Common equity issuance provided $161.4 million during the quarter: a February offering of 27.6 million shares generated approximately $103.1 million net, and ATM sales of 15.55 million shares generated $57.8 million net. Shares outstanding rose to 246.4 million from 203.2 million at year-end.
- The company declared a $0.09 per-share common dividend for Q1, payable in April. Preferred dividends declared totaled $11.1 million. The company states that REIT distribution requirements are based on taxable income, not GAAP income.
Outlook, risks and unusual items
- Management expressed cautious optimism about near-term economic activity amid vaccine rollout and expected stimulus, while noting inflation concerns, rising long-term rates, market volatility and uncertainty about the recovery. It gave no quantified earnings or book-value guidance.
- Management believed available operating cash flow and borrowing capacity would meet anticipated short-term liquidity needs, but said longer-term requirements depend on obtaining additional debt financing. It cautioned that liquidity may not be sufficient to meet future margin calls.
- Repurchase financing was $8.241 billion, with an 18-day weighted-average remaining maturity and 0.15% weighted-average interest rate. Agency RMBS collateral coverage was 105%; the average Agency repo haircut was 4.9%. Falling collateral values or higher haircuts could trigger margin calls, forced asset sales or financing stress. The company said it was compliant with repo covenants at quarter-end.
- Interest-rate sensitivity estimates, based on a static portfolio and stated assumptions, showed that a +100-basis-point parallel shift would reduce projected net interest income by 2.31% and portfolio value by 3.00%; a −100-basis-point shift would reduce projected net interest income by 23.89% and portfolio value by 0.36%. The filing cautions that actual results may differ materially.
- COVID-19-related risks remain relevant, including commercial property tenant stress, borrower delinquencies, credit losses, market illiquidity and financing availability. The company also identified prepayment and extension risk, spread widening, counterparty exposure, derivative effectiveness, and the transition of LIBOR-indexed assets, liabilities and preferred securities to replacement rates.
- Unusual historical context: in Q1 2020, the company could not meet certain repo margin calls, was out of compliance with some financing covenants, and counterparties seized and sold collateral. It reported that potentially defaulted repos had been repaid by May 7, 2020; it was compliant with covenants at March 31, 2021.
- A commercial loan’s maturity was extended to February 2022 at the borrower’s request; the borrower was current on interest and posted additional cash reserves. Undrawn commitments to affiliate-sponsored investment ventures were $6.7 million. No legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of the $25.2 million of core earnings is recurring, and how its non-GAAP adjustments compare with GAAP results and cash generation.
- Whether rising rates, spread widening, prepayment behavior and TBA exposure continue to pressure book value and portfolio returns.
- Repo renewal terms, collateral haircuts, counterparty concentration and available unrestricted liquidity relative to potential margin calls.
- The impact of common-share issuance and dividend policy on per-share book value, leverage and distributions.
- LIBOR fallback terms and the timing and economics of benchmark transition for swaps, financing and Series B and C preferred stock.