Invesco Mortgage Capital Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise stated. The company is an externally managed mortgage REIT focused primarily on mortgage-backed securities and related assets.
Financial performance and position
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $42.2 | $40.0 in Q1 2021 |
| Net interest income | $44.3 | $41.7 in Q1 2021 |
| Net loss | $228.4 | $9.3 in Q1 2021 |
| Net loss attributable to common stockholders; loss per share | $236.8; $0.72 | $20.4; $0.09 in Q1 2021 |
| Earnings available for distribution, a non-GAAP measure; per common share | $38.1; $0.12 | $25.2; $0.11 in Q1 2021 |
| Net interest rate margin; effective interest rate margin, non-GAAP | 2.55%; 2.30% | 1.80%; 1.32% in Q1 2021 |
| Total assets | $7,082.6 | $8,443.8 at December 31, 2021 |
| Repurchase agreement borrowings | $5,837.4 | $6,987.8 at December 31, 2021 |
| Total stockholders’ equity | $1,127.9 | $1,402.1 at December 31, 2021 |
| Book value per common share | $2.08 | $2.91 at December 31, 2021; down 28.5% |
| Cash, cash equivalents and restricted cash | $497.5 | $577.1 at December 31, 2021 |
GAAP interest expense was negative $2.1 million, reflecting $5.2 million of amortization of deferred gains on de-designated swaps. The company reported a 0.11% effective cost of funds (non-GAAP). Repurchase agreements had a 0.37% weighted-average interest rate and 28-day weighted-average remaining maturity at quarter-end. GAAP debt-to-equity was 5.2x and economic debt-to-equity, including TBA financing, was 6.5x.
Cash flows were $40.1 million provided by operating activities, $1,069.8 million provided by investing activities and $1,189.5 million used in financing activities. The resulting net decrease in cash, cash equivalents and restricted cash was $79.5 million. Investing cash inflows included $8.8 billion of MBS sale proceeds; financing cash outflows included $1.2 billion of net repurchase-agreement repayments and $38.1 million of dividends paid.
Material changes and drivers
- Net loss attributable to common stockholders widened to $236.8 million from $20.4 million. Net investment losses were $504.4 million, compared with $331.9 million in Q1 2021; derivative gains were $238.9 million, versus $287.0 million.
- Investment losses included $319.0 million of realized MBS sale losses, $165.5 million of unrealized MBS losses and $19.8 million of unrealized losses on newly acquired U.S. Treasury securities. Management attributed MBS valuation pressure principally to wider interest-rate spreads and weaker demand for specified-pool prepayment protection.
- Despite average earning assets falling to $7.0 billion from $9.3 billion, average asset yield rose to 2.41% from 1.72%, which management attributed mainly to rotating into higher-yielding Agency RMBS. Net interest income increased by $2.6 million.
- The portfolio, including TBAs at implied cost, declined to $8.1 billion from $9.5 billion at year-end. Agency RMBS represented about 73% of the portfolio, including TBAs, versus 81% at year-end; U.S. Treasuries were about 6% versus none.
- Management reported a $343.3 million realized gain on interest-rate swaps, primarily due to rising rates, while TBAs recorded $94.5 million of net realized and unrealized losses. The company sold $8.8 billion and purchased $7.6 billion of Agency RMBS during the quarter, primarily to rotate toward higher yields.
Outlook, risks and notable items
- Management described a cautious outlook for Agency RMBS, citing increased rate volatility, Federal Reserve balance-sheet normalization and weaker technical conditions. It expected the benefit from attractive TBA dollar-roll financing to diminish in coming quarters as higher-coupon production increased.
- Management stated that current liquidity and borrowing capacity were expected to cover anticipated short-term requirements, including investment activity, distributions and expenses. This is not a guarantee: the company relies on short-term repurchase financing, and falling collateral values, wider spreads or higher haircuts can prompt margin calls or forced asset sales. Long-term liquidity depends on access to additional financing.
- Interest-rate, spread, prepayment and extension risks may affect asset values, earnings and hedge effectiveness. The company also cited counterparty, credit, real-estate, foreign-exchange and market-liquidity risks. Its 10-Q reports compliance with repurchase-agreement financial covenants at quarter-end and no material change to previously disclosed risk factors.
- The company had $251.7 million of unrestricted cash and approximately $413 million of unencumbered investments at March 31. Repurchase agreements totaled $5.8 billion and generally require refinancing at maturity. The company reported $6.5 million of potential additional funding commitments to unconsolidated ventures in liquidation.
- In May 2022, the board approved a preferred-stock repurchase plan authorizing repurchases of up to 3 million Series B and 5 million Series C shares, and a one-for-ten common-stock reverse split expected to take effect after June 3, 2022. These were subsequent events, not Q1 transactions. No common shares were repurchased during Q1.
- The company declared a $0.09-per-share common dividend for Q1, payable April 27, 2022, and reported $29.7 million of common dividends payable at quarter-end. Its REIT status generally requires distribution of at least 90% of REIT taxable income; GAAP net loss does not by itself determine taxable income or future dividends. No specific earnings or book-value guidance was provided.
Important facts for investors to verify
- How much of the $504.4 million investment loss reflects realized sales versus fair-value changes, and how those amounts affect future earnings and book value.
- Whether the $38.1 million of non-GAAP earnings available for distribution is sustainable, and how it compares with taxable income, cash generation and declared common dividends.
- Exposure to short-term refinancing and margin calls, including the 28-day average repo maturity, collateral haircuts and availability of unencumbered liquidity.
- Whether interest-rate hedges and TBA positions adequately offset portfolio exposure as rates and spreads change; the reported sensitivity analysis assumes a static portfolio and specified market conditions.
- Implementation and effects of the subsequent preferred-stock repurchase plan and reverse stock split, as well as the status of the $6.5 million venture funding commitment and commercial loan due in June 2022.