Invesco Mortgage Capital Inc. — 2019 Form 10-K
Business and period: Mortgage REIT investing in and financing residential and commercial mortgage-backed securities and related assets. The filing covers the fiscal year ended December 31, 2019; comparative figures are primarily for 2018. The company is externally managed by Invesco Advisers and elected REIT tax treatment.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total interest income | $778.4 million | $643.0 million |
| Net interest income | $306.0 million | $304.1 million |
| Net interest rate margin (GAAP) | 1.26% | 1.39% |
| Net income (loss) | $364.1 million | ($70.5 million) |
| Net income (loss) attributable to common stockholders | $319.7 million; $2.42 per diluted share | ($115.2 million); ($1.03) per diluted share |
| Core earnings attributable to common stockholders (non-GAAP) | $254.6 million; $1.92 per share | $193.0 million; $1.73 per share |
| Operating cash flow | $343.4 million | $304.3 million |
| Common dividends declared per share | $1.85 | $1.68 |
Net income rebounded mainly because investment results shifted to a $624.5 million net gain from a $327.7 million net loss. This was partly offset by a $534.8 million net loss on derivatives, compared with a $5.3 million loss in 2018. Net interest income was nearly flat, while the GAAP net interest margin narrowed. Core earnings, a management-defined non-GAAP measure, increased; it should not be treated as cash flow or as a direct measure of dividend capacity.
At year-end, total assets were $22.35 billion, including $21.77 billion of mortgage-backed and credit risk transfer securities. Total stockholders’ equity was $2.93 billion, compared with $2.29 billion in 2018. Book value per diluted common share was $16.29, up 6.7% from $15.27. Total debt was $19.18 billion: $17.53 billion in repurchase agreements and $1.65 billion in secured loans. The reported debt-to-equity ratio was 6.5x; the repurchase-agreement debt-to-equity ratio was 6.6x.
Cash, cash equivalents and restricted cash totaled $289.5 million, including $117.0 million of restricted cash. Investing activities used $4.32 billion of cash and financing activities provided $4.13 billion. The company reported no loan-loss provision for 2019. Its common-stock dividend was raised from $0.42 per share quarterly in 2018 to $0.45 in the first three quarters of 2019 and $0.50 for the fourth-quarter declaration.
Portfolio, changes and notable items
- Investment portfolio fair value increased to $21.86 billion from $17.51 billion. Agency CMBS grew to $4.77 billion from $1.00 billion, while Agency RMBS was $11.30 billion versus $11.12 billion. Agency CMBS rose to approximately 22% of portfolio value from 6%; 30-year fixed-rate Agency RMBS declined to 48% from 56%.
- Average earning assets increased to $20.6 billion from $18.1 billion, and average earning asset yield rose to 3.78% from 3.55%. Average borrowings rose to $18.75 billion from $15.68 billion; average cost of funds increased to 2.52% from 2.16%.
- Portfolio-wide weighted average CPR rose to 18.1% in the fourth quarter from 7.3% in fourth-quarter 2018, increasing premium-amortization and reinvestment considerations.
- The company issued common stock in two public offerings and through its at-the-market program, raising approximately $508.9 million net during 2019. Shares outstanding increased to 144.3 million from 111.6 million.
- Net derivative losses included $440.6 million realized losses on interest rate swaps and $157.9 million on futures, primarily attributed to falling interest rates. Year-end swaps had $14.0 billion notional, a 1.47% weighted-average fixed pay rate and 5.2-year weighted-average maturity.
- After year-end, the company completed a 20.7-million-share offering on February 6, 2020, with approximately $347 million net proceeds, and repaid $300 million of FHLBI secured loans on February 11, 2020, using cash and additional repo borrowing.
Outlook, risks and contingencies
Management described the U.S. outlook as moderate, though slowing, economic growth with core inflation near the Federal Reserve’s 2% objective. It cited consensus GDP growth estimates of 1.8% for 2020 and 1.9% for 2021. The filing does not provide formal company earnings or dividend guidance. Management said it believed available cash flow and borrowing capacity would meet anticipated short-term liquidity needs, while long-term needs depend on obtaining debt financing.
- Funding and liquidity: Repo agreements are generally short-term and subject to renewal, changing haircuts and margin calls. Falling collateral values, wider spreads or counterparty problems could require additional collateral or forced asset sales. One counterparty held collateral exceeding related borrowings by more than $146.6 million, about 5% of equity.
- Rate, spread and prepayment exposure: Changes in rates and yield curves can compress funding spreads and affect asset values; faster prepayments can accelerate premium amortization, while slower prepayments can extend asset duration. Management’s year-end sensitivity analysis estimated that a parallel 100-basis-point rise would reduce projected net interest income by 4.12% and portfolio value by 2.16%; these are model-based estimates, not forecasts.
- LIBOR transition: The company had material LIBOR-indexed assets, liabilities and derivatives and was assessing mitigation for the expected phaseout or change after 2021. Mismatched transition timing or reference rates could complicate hedging and affect cash flows or valuations.
- Credit and concentration: Non-Agency securities and GSE CRTs retain credit risk; some holdings are concentrated geographically, including California exposure. Certain securities are subordinate or otherwise exposed to property-level losses. Fair values and expected cash flows depend on estimates and assumptions.
- Capital and REIT constraints: The company must satisfy REIT distribution and asset/income tests and maintain its Investment Company Act exclusion. These requirements may limit investment, financing and hedging choices; dividends are discretionary and not guaranteed. The 2019 tax characterization showed $1.35 per common share as return of capital.
- Other disclosures: The company reported no legal proceedings as of year-end. Management and the auditor concluded that internal control over financial reporting was effective; the auditor issued an unqualified opinion. The auditor identified estimated cash flows and effective yields for certain MBS as a critical audit matter. Adoption of the expected-credit-loss standard in 2020 was expected to have no material financial-statement impact.
Investor verification priorities
- Reconcile the sharp GAAP earnings swing with investment fair-value gains and derivative losses; compare GAAP results with core earnings and cash generation.
- Review repo maturities, lender concentration, collateral haircuts, margin-call capacity and the effect of the February 2020 loan repayment and equity offering.
- Assess whether rising CPR, portfolio duration and rate sensitivity could pressure future net interest income, book value or dividends.
- Track the LIBOR-to-alternative-rate transition across assets, borrowings, swaps and preferred-stock terms, including any basis or tax effects.
- Check dividend sustainability against REIT taxable income, cash available after financing needs, and the return-of-capital tax characterization.