Invesco Mortgage Capital Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing; quarterly figures below are unaudited. The company is an externally managed mortgage REIT investing in Agency and non-Agency RMBS, CMBS, and residential and commercial mortgage loans. Its stated objective is to provide returns primarily through dividends.
Financial results and position
| Metric | 2013 | 2012 |
|---|---|---|
| Interest income | $682.4 million | $566.8 million |
| Net interest income | $350.1 million | $329.4 million |
| Net interest margin | 1.48% | 1.79% |
| Net income attributable to common shareholders | $130.8 million | $334.5 million |
| Basic and diluted EPS | $0.99 | $2.89 |
| Common dividends declared per share | $2.30 | $2.60 |
| Operating cash flow | $490.5 million | $427.5 million |
| Cash and cash equivalents at year-end | $210.6 million | $286.5 million |
- At year-end, total assets were $20.35 billion, total liabilities $17.95 billion, and total equity $2.40 billion. Book value per common share was $17.97, down from $20.83.
- Repurchase agreements were $15.45 billion; the company also had $1.64 billion of asset-backed securities (ABS) and $400 million of 5.00% exchangeable senior notes due 2018. Total debt-to-equity was 7.3x, versus 6.1x.
- Investing activities used $2.30 billion; financing activities provided $1.74 billion. The company reported a $884,000 loan-loss provision and no loan charge-offs.
Material changes and unusual items
- Common net income fell substantially, chiefly because the company sold mortgage-backed securities at a net loss of $199.4 million in 2013, compared with gains in 2012. The fourth-quarter loss on investment sales was $142.5 million; Q4 net loss attributable to common shareholders was $83.4 million, or $0.63 per share. Q3 common-shareholder loss was $8.7 million.
- Interest income and net interest income increased with a larger average portfolio, but average portfolio yield declined to 3.32% from 3.47%, while average hedged funding cost rose to 1.84% from 1.68%. The net interest margin narrowed.
- The company repositioned the portfolio after 2013 interest-rate increases: it reduced fixed-rate Agency RMBS, increased credit assets, and expanded hedging. Interest-rate swap notional rose to $12.8 billion from $8.0 billion. Management said book value improved 1.9% in Q4 and believed portfolio rate sensitivity had been reduced.
- New activity included five residential-loan securitizations, GSE risk-sharing investments, and the launch of commercial real-estate lending. Residential and commercial loans were $1.81 billion and $64.6 million, respectively, at year-end.
- On December 31, the company discontinued hedge accounting for interest-rate swaps. The hedges remained in place, but subsequent fair-value changes and net settlements would flow through earnings, increasing reported GAAP earnings volatility.
- The company raised approximately $359 million net from a common-stock offering and $387.7 million net from the exchangeable-note issue. It repurchased 10.72 million common shares for a net $160.5 million, at an average $14.97 per share.
Outlook, risks, and contingencies
- Management expected to pursue more commercial mortgage loans, subordinate interests in residential securitizations, and GSE risk-sharing transactions in 2014. No numerical earnings, book-value, or dividend guidance is provided.
- Management cited Federal Reserve tapering as a potential source of further Agency RMBS valuation pressure and said future asset-sale losses could exceed portfolio earnings. Its liquidity assessment was that resources were sufficient for anticipated short-term needs, while noting that margin calls could not be assured of being met in all conditions.
- Key exposures include interest-rate and yield-curve changes, prepayment and extension risk, credit and real-estate losses, repo refinancing and collateral calls, counterparty risk, and the high leverage inherent in the strategy. Repo borrowings generally had short remaining maturities; the weighted-average remaining maturity was 60 days overall.
- Residential-loan collateral was geographically concentrated, with California representing 49.8% of principal balance. Derivative agreements include collateral and financial-condition triggers; the company reported compliance with applicable provisions at year-end.
- The company reported no material legal proceedings as of year-end. The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
Most important facts for investors to verify
- Whether the 2013 portfolio repositioning and additional hedges actually stabilize book value and net interest income as rates and Federal Reserve policy change.
- The impact of 7.3x debt-to-equity, short-term repo maturities, collateral haircuts, and potential margin calls on liquidity under stressed market conditions.
- Whether the $2.30 common dividend is supported by recurring earnings and taxable income; GAAP earnings, taxable income, and cash available for distribution can differ.
- The assumptions and realized performance underlying mortgage-security valuations, loan-loss reserves, and the concentrated residential-loan exposure.
- The effect of the $400 million exchangeable notes and consolidated ABS obligations, including their refinancing, cash-flow, and potential dilution implications.