Business Context and Reporting Period
Company: Invesco Mortgage Capital Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Status: Developmental Stage / Pre-Operations
Overview: The Company is a newly formed Maryland corporation focused on investing in residential and commercial mortgage-backed securities (RMBS and CMBS). It is externally managed by Invesco Institutional (N.A.), Inc. As of the reporting date, the Company had not yet commenced full operations, having completed its Initial Public Offering (IPO) on July 1, 2009, immediately following the period end.
Key Financial Metrics
| Metric | Amount ($ in thousands) | Notes |
|---|---|---|
| Total Assets | 359,042 | Includes $183.7M in unsettled securities and $171.5M in subscription receivables. |
| Total Liabilities | 188,289 | Primarily $184.3M payable for unsettled securities. |
| Shareholder's Equity | 170,753 | Includes $171.5M in common stock subscribed. |
| Revenues | 0 | No operating revenue generated during the period. |
| Net Loss (6 months) | (132) | Driven by operating and organizational costs. |
| Cash and Equivalents | 1 | Minimal cash on hand prior to IPO closing. |
| Deferred Offering Costs | 2,414 | Capitalized costs related to the IPO. |
Material Changes vs. Prior Period
- Asset Growth: Total assets increased from $979,000 at December 31, 2008, to $359.0 million at June 30, 2009. This increase is entirely attributable to the execution of the IPO and the purchase of mortgage-backed securities prior to settlement.
- Subscription Receivables: The Company recorded $171.5 million in subscription receivables (including $1.5 million from a related party) representing shares sold but not yet settled as of June 30.
- Unsettled Securities: The Company purchased $183.7 million in mortgage-backed securities which remained unsettled at period end, creating a corresponding liability of $184.3 million.
- Equity Position: Shareholder's equity shifted from a deficit of $21,000 to a positive balance of $170.8 million due to the subscription of 8,575,000 shares at $20 per share.
Outlook, Management Commentary, and Risks
Subsequent Events and IPO Completion
The Company consummated its IPO on July 1, 2009, receiving net proceeds of approximately $195.0 million. On July 27, 2009, the underwriters exercised an over-allotment option, providing an additional $6.1 million in net proceeds. Total net proceeds from the IPO and private placements were approximately $201.1 million.
Investment and Financing Strategy
Following the IPO, the Company rapidly deployed capital. As of July 17, 2009:
- Portfolio: Acquired an investment portfolio of $829.4 million ($711.9M Agency RMBS, $67.8M Non-Agency RMBS, $49.7M CMBS).
- Financing: Entered into repurchase agreements totaling $630.6 million (weighted average rate 0.36%) and secured $40.1 million under the Term Asset-Backed Securities Lending Facility (TALF) at 3.91%.
- Hedging: Entered into interest rate swap agreements with a notional amount of $275.0 million to mitigate interest rate risk on borrowings.
Risk Factors
- REIT Qualification: The Company intends to qualify as a Real Estate Investment Trust (REIT) for the 2009 tax year. Failure to qualify would subject the Company to corporate income taxes.
- Liquidity and Margin Calls: The Company relies heavily on short-term repurchase agreements. Declines in security values could trigger margin calls, requiring immediate cash or collateral. The weighted average "haircut" (margin requirement) was approximately 6%.
- Interest Rate Risk: The Company is exposed to the spread between asset yields and borrowing costs. Rising rates could compress net interest margins and reduce the fair value of fixed-rate assets.
Investor Verification Checklist
- IPO Proceeds Deployment: Verify the actual deployment of the $201.1 million in net proceeds and the composition of the $829.4 million portfolio as of the most recent date.
- REIT Status: Confirm the Company's successful election and qualification as a REIT for the 2009 tax year to ensure tax-exempt status.
- Leverage Ratios: Monitor the Company's leverage levels (targeted 3x to 7x equity) and the stability of its repurchase agreement counterparties.
- Hedging Effectiveness: Assess the performance of the $275 million in interest rate swaps against actual interest rate movements.
- Dividend Policy: Review the Company's ability to generate sufficient taxable income to meet the 90% distribution requirement for REIT qualification.