Invesco Mortgage Capital Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; the supplied text does not provide a clear standalone fourth-quarter income statement or cash-flow result.
Business context and portfolio
Invesco Mortgage Capital is an externally managed mortgage REIT investing in mortgage-backed securities and related assets. Its objective is to deliver returns primarily through dividends. In response to COVID-19 market disruption, the Company sold substantial mortgage assets in the first half of 2020, reduced leverage, and resumed Agency RMBS purchases in July. At year-end, approximately 98% of the investment portfolio excluding TBAs was in Agency RMBS. TBAs provided an additional means of investing in and financing Agency RMBS.
Key financial metrics
| Metric | FY 2020 / year-end | FY 2019 / year-end |
|---|---|---|
| Interest income | $280.2 million | $778.4 million |
| Net interest income | $197.9 million | $306.0 million |
| Net interest rate margin | 2.36% | 1.26% |
| Net loss attributable to common stockholders | $1.719 billion; diluted loss per share $9.89 | Net income $319.7 million; diluted EPS $2.42 |
| Operating cash flow | $170.5 million | $343.4 million |
| Cash, cash equivalents and restricted cash | $392.6 million | $289.5 million |
| Total assets | $8.633 billion | $22.347 billion |
| Repurchase agreements | $7.229 billion | $17.532 billion |
| Total stockholders’ equity | $1.367 billion | $2.932 billion |
| Book value per common share | $3.86 | $16.29 |
The Company reported a $1.832 billion total other loss, including $961.9 million of investment losses and $851.1 million of derivative losses. Cash from investing activities was $11.6 billion, mainly reflecting $25.0 billion of securities-sale proceeds; financing activities used $11.6 billion, including repayment of borrowings. Year-end GAAP debt-to-equity was 5.3x; economic debt-to-equity, including TBAs at implied cost, was 6.6x. Repo borrowings had a 0.21% weighted-average rate and 14-day weighted-average remaining maturity. The Company also reported $596.8 million of unencumbered investments and $148.0 million of unrestricted cash.
Material changes versus the prior year
- Interest income fell by about 64% as average earning assets contracted from $20.6 billion to $7.9 billion following asset sales. Net interest income declined by about 35%, despite a higher reported net interest margin, reflecting the smaller balance sheet and lower funding costs.
- Investment results swung from $624.5 million of net gains in 2019 to $961.9 million of net losses in 2020. Derivative losses also increased, from $534.8 million to $851.1 million.
- Book value per common share fell 76.3%. The Company attributes the decline primarily to realized and unrealized investment and derivative losses during the pandemic-driven market disruption.
- The portfolio shifted sharply toward Agency RMBS: year-end securities and related assets were $8.2 billion, versus $21.8 billion a year earlier, while TBAs had an implied cost basis of $1.77 billion. The Company sold its Agency CMBS and GSE CRT holdings and substantially reduced non-Agency positions.
- Repurchase and secured-loan borrowings were sharply reduced; all FHLBI secured loans were repaid and that membership was terminated. Common shares outstanding rose from 144.3 million to 203.2 million, reflecting equity issuance and a stock component of the delayed first-quarter dividend.
Outlook, commentary, risks and unusual items
- Management described the 2021 outlook as uncertain, citing the pandemic, recovery pace, vaccine rollout, interest rates, asset spreads and financing conditions. It expected Agency RMBS market support from Federal Reserve purchases but provided no specific earnings, book-value or dividend guidance.
- Management said current cash flow and available borrowing capacity should cover anticipated short-term liquidity needs, but long-term liquidity depends on obtaining additional debt financing. It cautioned that there is no assurance of access to additional financing or sufficient liquidity to meet future margin calls.
- In March 2020, the Company notified financing counterparties it could not fund the volume of margin calls received or anticipated. It sold assets, including securities seized and sold by certain counterparties, and repaid repurchase agreements that may have been in default by May 7. The Company reported it was in compliance with financing covenants at year-end.
- Interest-rate swaps were terminated in March 2020; the Company reported a $904.7 million realized net loss on swaps in the first half, then entered into new swaps as Agency RMBS investment and repo financing resumed. Year-end swap notional was $6.3 billion.
- Common dividends were delayed in 2020 to preserve liquidity. The $0.50-per-share first-quarter dividend was ultimately paid partly in cash and partly in shares; subsequent quarterly common dividends were $0.02, $0.05 and $0.08 per share. Preferred dividends were current at year-end. Future dividends remain at the board’s discretion.
- Key risks include renewed market volatility and margin calls; short-term repo refinancing and counterparty risk; leverage and spread sensitivity; prepayment and extension risk; COVID-related borrower or commercial-property stress; valuation uncertainty; LIBOR transition; REIT and Investment Company Act compliance; and dependence on the external manager.
- After year-end, the Company completed a $103.1 million net common-stock offering in February 2021. It was negotiating an extension of its commercial mezzanine loan, which was due in February 2021, and expected a maturity extension to February 28, 2022.
Most important facts for investors to verify
- Whether liquidity, unencumbered assets and financing capacity remain adequate against repo maturities, margin requirements and the high reported leverage.
- How the materially smaller, Agency-focused portfolio and TBA positions affect sustainable net interest income, earnings and book value.
- Subsequent book value, share-count dilution and the effect of the February 2021 equity offering.
- The status and repayment or extension terms of the commercial mezzanine loan, and performance of remaining non-Agency assets and unconsolidated ventures.
- Future common dividend decisions and the Company’s ability to meet REIT distribution requirements; GAAP loss alone does not determine REIT taxable income.
- Progress on LIBOR-linked contracts and preferred-stock fallback provisions, and any resulting financing, hedging or capital costs.