Invesco Mortgage Capital Inc. Reports First Quarter 2015 Financial Results

ATLANTA, May 6, 2015 /PRNewswire/ --

Highlights

• Q1 2015 core earnings* of $61.9 million, core earnings per common share of $0.50, and a common stock dividend of $0.45 per share
• Q1 2015 book value per diluted common share** increased 2.9% to $19.37 vs. $18.82 at year end 2014
• Economic return*** for Q1 2015 of 5.3% compared to 0.6% for Q4 2014
• Q1 2015 comprehensive income attributable to common stockholders rose to $123.1 million or $1.00 per common share vs. $14.7 million or $0.12 per common share for Q4 2014
• Q1 2015 U.S. GAAP net loss attributable to common stockholders of $32.7 million or ($0.27) per common share reflecting a $122.7 million net loss on interest rate hedges
• Portfolio equity allocation positioned to benefit from improving real estate fundamentals and global demand for high quality assets with attractive yields: 34% to commercial credit, 34% to Agency RMBS and 32% to residential credit as of March 31, 2015

Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended March 31, 2015, reporting core earnings* of $0.50 per common share. First quarter results benefited from low volatility in prepayment speeds and a $0.05 per common share contribution from equity in earnings of unconsolidated real estate ventures.

"We seek to provide our stockholders with high income and an enhanced risk/return profile via diversification and prudent investing across the spectrum of potential mortgage finance opportunities," said Richard King, President and CEO. During the quarter ended March 31, 2015, IVR declared a $0.45 per common share dividend and grew book value from $18.82 to $19.37 per diluted common share** for a 5.3% economic return***. "Management believes the Company is positioned to benefit from improving real estate fundamentals and to continue delivering attractive economic return in 2015," said Mr. King.

The Company's first quarter 2015 increase in book value reflects prudent sector allocation, asset selection and interest rate hedging. Approximately two-thirds of equity is allocated to commercial and residential credit assets as of March 31, 2015, which reduces overall interest rate risk. During first quarter 2015, the Company also continued to reduce reliance on repurchase agreement financing. The Company has successfully diversified its funding sources and increased its weighted average remaining maturity of borrowings from 60 days at the end of 2013 to 359 days as of March 31, 2015.

* Core earnings (and by calculation, core earnings per common share), effective interest expense (and by calculation, effective cost of funds), effective net interest income (and by calculation, effective interest rate margin) and repurchase agreement debt-to-equity ratio are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" below for important disclosures and a reconciliation to the most comparable U.S. GAAP measures of net income attributable to common stockholders (and by calculation, basic earnings (loss) per common share), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and total debt-to-equity ratio.

**Book value per diluted common share is calculated as total equity less the liquidation preference of our Series A Preferred Stock ($140.0 million) and Series B Preferred Stock ($155.0 million); divided by total common shares outstanding plus Operating Partnership Units convertible into shares of common stock (1,425,000 shares).

***Economic return for the quarter ended March 31, 2015 is defined as the change in book value per diluted common share from December 31, 2014 to March 31, 2015 of $0.55; plus dividends declared of $0.45 per common share; divided by the December 31, 2014 book value per diluted common share of $18.82. Economic return for the quarter ended December 31, 2014 is defined as the change in book value per diluted common share from September 30, 2014 to December 31, 2014 of ($0.34); plus dividends declared of $0.45 per common share; divided by the September 30, 2014 book value per diluted common share of $19.16.

Key performance indicators for the quarters ended March 31, 2015 and December 31, 2014 are summarized in the table below.

* Core earnings (and by calculation, core earnings per common share), effective interest expense (and by calculation, effective cost of funds), effective net interest income (and by calculation, effective interest rate margin) and repurchase agreement debt-to-equity ratio are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" below for important disclosures and a reconciliation to the most comparable U.S. GAAP measures of net income (and by calculation, basic earnings (loss) per common share), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and total debt-to-equity ratio.

**Book value per diluted common share is calculated as total equity less the liquidation preference of our Series A Preferred Stock ($140.0 million) and Series B Preferred Stock ($155.0 million); divided by total common shares outstanding plus Operating Partnership Units convertible into shares of common stock (1,425,000 shares).

Financial Summary

During the first quarter of 2015, the Company generated $61.9 million in core earnings, an increase of $2.2 million over the fourth quarter of 2014. Higher core earnings were aided by $6.0 million of equity in earnings of unconsolidated real estate ventures.  Excluding the impact of equity in earnings of unconsolidated real estate ventures, first quarter of 2015 core earnings were $2.5 million lower than the fourth quarter of 2014 primarily due to lower net interest income. Net loss attributable to common stockholders for the first quarter of 2015 was $32.7 million, compared to net loss attributable to common stockholders of $79.0 million for the fourth quarter of 2014. The first quarter of 2015 net loss attributable to common stockholders was primarily due to a $122.7 million decline in the valuation of interest rate swaps during the quarter. First quarter 2015 book value per diluted common share rose to $19.37 reflecting prudent sector allocation, asset selection and interest rate hedging.

During the first quarter of 2015, the Company added one residential loan securitization and several 15 year fixed-rate agency residential mortgage-backed securities to its investment portfolio. As of March 31, 2015, the Company increased its portfolio of residential loans held for investment to $3.6 billion, an increase of $232.1 million from December 31, 2014. The Company's mortgage-backed securities ("MBS") portfolio totaled $17.3 billion, an increase of $91.7 million from December 31, 2014. For the quarter ended March 31, 2015, average earning assets were $20.4 billion, representing an increase of $144.7 million from December 31, 2014. The portfolio generated interest income of $173.5 million during the three months ended March 31, 2015, which reflects a decrease of $5.5 million from the three months ended December 31, 2014. The decrease in interest income was the result of a decline in average portfolio yield from 3.53% in the fourth quarter of 2014 to 3.40% for the three months ended March 31, 2015. The lower portfolio yield in the first quarter of 2015 primarily reflects lower yields on non-Agency residential mortgage-backed securities ("non-Agency RMBS").  Yields on non-Agency RMBS declined from 3.70% in the fourth quarter of 2014 to 3.55% in the first quarter of 2015 reflecting slower prepayment speeds and lower discount accretion.  In addition, many of our non-Agency RMBS had coupons reset lower in the first quarter of 2015.

For the quarter ended March 31, 2015, the Company had average borrowed funds of approximately $18.1 billion and effective interest expense of $98.7 million, compared to $18.0 billion and $98.2 million, respectively, for the fourth quarter of 2014. The Company's effective cost of funds was 2.19% and 2.18% for the first quarter of 2015 and fourth quarter of 2014, respectively. The slight increase in average borrowed funds is due to asset-backed security balances associated with the consolidation of one additional residential loan securitization during the quarter.

Total expenses for the first quarter of 2015 were approximately $13.3 million, compared to $14.0 million for the fourth quarter of 2014. First quarter 2015 total expenses include $2.2 million of securitization trust expenses associated with direct operating expenses of the Company's consolidated residential loan securitizations versus $2.0 million in the fourth quarter of 2014. Securitization trust expenses rose in the first quarter of 2015 due to the consolidation of an additional securitization that closed in March 2015. General and administrative expenses were $1.7 million in the first quarter of 2015, a decrease of $0.6 million from the fourth quarter of 2014. The decrease in general and administrative expenses was primarily due to lower tax, legal and other professional fees in the three months ended March 31, 2015. The ratio of operating expenses to average equity* for the first quarter of 2015 was 1.82%, a decrease of 18 basis points from the fourth quarter of 2014.

In the first quarter of 2015, the Company declared the following dividends: a common stock dividend of $0.45 per share paid on April 28, 2015; a Series A preferred stock dividend of $0.4844 per share paid on April 27, 2015; and a Series B preferred stock dividend of $0.4844 per share that will be paid on June 29, 2015.

About Invesco Mortgage Capital Inc.

Invesco Mortgage Capital Inc. is a real estate investment trust that focuses on financing and managing residential and commercial mortgage-backed securities and mortgage loans. Invesco Mortgage Capital Inc. is externally managed and advised by Invesco Advisers, Inc., a subsidiary of Invesco Ltd. (NYSE: IVZ), a leading independent global investment management firm.

*The ratio of operating expenses to average equity is calculated as the annualized sum of management fees plus general and administrative expenses divided by average equity. Average equity is calculated based on a weighted balance basis. The Company excludes expenses of consolidated securitization trusts from this calculation to facilitate comparison of the Company's operating expenses to peers.

Earnings Call

Members of the investment community and the general public are invited to listen to the Company's earnings conference call on Thursday, May 7, 2015, at 9:00 a.m. ET, by calling one of the following numbers:

North America Toll Free:    888-942-8507International:                     415-228-4839Passcode:                        487

An audio replay will be available until 5:00 pm ET on May 21, 2015 by calling:

888-562-2797 (North America) or 1-203-369-3747 (International).

The presentation slides that will be reviewed during the call will be available on the Company's website at www.invescomortgagecapital.com.

Cautionary Notice Regarding Forward-Looking Statements

This press release, the related presentation and comments made in the associated conference call, may include statements and information that constitute "forward-looking statements" within the meaning of the U.S. securities laws as defined in the Private Securities Litigation Reform Act of 1995, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements include our views on the risk positioning of our portfolio, domestic and global market conditions (including the residential and commercial real estate market), the market for our target assets, mortgage reform programs, our financial performance, including our core earnings, economic return, comprehensive income and changes in our book value, our ability to continue performance trends, the stability of portfolio yields, interest rates, credit spreads, prepayment trends, financing sources, cost of funds, and our leverage and equity allocation.  In addition, words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "projects," "forecasts," and future or conditional verbs such as "will," "may," "could," "should," and "would" as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions "Risk Factors," "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission's website at www.sec.gov.

All written or oral forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice.  We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

 

 

 

 

 

Non-GAAP Financial Measures

In addition to the results presented in accordance with U.S. GAAP, this release contains the non-GAAP financial measures of "core earnings," (and by calculation, "core earnings per common share"), "effective interest expense" (and by calculation, "effective cost of funds"), "effective net interest income" (and by calculation, "effective interest rate margin") and "repurchase agreement debt-to-equity ratio." The Company's management uses these non-GAAP financial measures in its internal analysis of results and believes these measures are useful to investors for the reasons explained below. The most directly comparable U.S. GAAP measures are net income attributable to common stockholders (and by calculation basic earnings (loss) per common share), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and total debt-to-equity ratio.

These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP and may not be comparable to other similarly titled measures of other companies. An analysis of any non-GAAP financial measure should be made in conjunction with results presented in accordance with U.S. GAAP.

Core Earnings

The Company calculates core earnings as U.S. GAAP net income attributable to common stockholders adjusted for (gain) loss on sale of investments, net; realized (gain) loss on derivative instruments, net (excluding contractual net interest on interest rate swaps); unrealized (gain) loss on derivative instruments, net; (gain) loss on foreign currency transactions, net; reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense; and an adjustment attributable to non-controlling interest. The Company records changes in the valuation of its mortgage-backed securities in other comprehensive income on its condensed consolidated balance sheets. The Company believes the presentation of core earnings provides a consistent measure of operating performance by excluding the impact of gains and losses described above from operating results.

The Company believes that providing transparency into core earnings enables its investors to consistently measure, evaluate  and compare its operating performance to that of its peers over multiple reporting periods. However, the Company cautions that core earnings should not be considered as an alternative to net income (determined in accordance with U.S. GAAP), or an indication of the Company's cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of the Company's liquidity, or an indication of amounts available to fund its cash needs, including its ability to make cash distributions.

The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to core earnings for the following periods:

 

Effective Interest Expense/Effective Cost of Funds/Effective Net Interest Income/Effective Interest Rate Margin

The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for net interest paid on its interest rate swaps that is recorded in gain (loss) on derivative instruments and the reclassification of amortization of net deferred swap losses on de-designated interest rate swaps that is being amortized into interest expense over the remaining lives of the swaps. The Company calculates effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for net interest paid on its interest rate swaps that is recorded in gain (loss) on derivative instruments  and the reclassification of amortization of net deferred losses on de-designated interest rate swaps that is being amortized into repurchase agreements interest expense over the remaining lives of the swaps. The Company views its interest rate swaps as an economic hedge against increases in future market interest rates on its floating rate borrowings. The Company adds back the net payments it makes on its interest rate swap agreements to its total U.S. GAAP interest expense because the Company uses interest rate swaps to add stability to interest expense.  The Company subtracts the amortization of net deferred losses on de-designated interest rate swaps because the Company does not consider the amortization a current component of its borrowing costs.

The Company believes the presentation of effective interest expense, effective costs of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provide information that is useful to investors in understanding the Company's borrowing costs and operating performance.

The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:

 

The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:

 

Repurchase Agreement Debt-to-Equity Ratio

The following tables show the allocation of the Company's equity to its target assets, the Company's total debt-to-equity ratio, and the Company's repurchase agreement debt-to-equity ratio as of March 31, 2015 and December 31, 2014. The mortgage REIT industry primarily uses repurchase agreements, which typically mature within one year, to finance investments. Improving the Company's balance sheet by diversifying the Company's liabilities away from repurchase agreements has been a focus of management over the past two years. Since the Company began using other longer-term means of financing its investments, such as exchangeable senior notes, asset-backed securities issued by consolidated securitization trusts, and secured loans, the Company has reduced its reliance on repurchase agreements. The Company's weighted average remaining maturity on borrowings has increased from 60 days as of December 31, 2013 to 359 days as of March 31, 2015.The Company believes presenting repurchase agreement debt-to-equity ratio, a non-GAAP financial measure of leverage, when considered together with U.S. GAAP financial measures, provides information that is useful to investors in understanding the Company's refinancing risks, and gives investors a comparable statistic to those other mortgage REITs who almost exclusively borrow using short-term repurchase agreements that are subject to refinancing risk. 

March 31, 2015

 

December 31, 2014

 

Mortgage-Backed Securities

The following table summarizes certain characteristics of the Company's MBS portfolio as of March 31, 2015:

 

Constant Prepayment Rates ("CPR")

The CPR of the Company's portfolio impacts the amount of premium and discount on the purchase of securities that is recognized into income. The Company's Agency, non-Agency RMBS and GSE CRT had a weighted average CPR of 11.4 and 12.0 for the three months ended March 31, 2015 and December 31, 2014, respectively. The table below shows the three month CPR for the Company's RMBS compared to bonds with similar characteristics ("Cohorts"):

 

Borrowings

The Company has entered into repurchase agreements, secured loans and issued exchangeable senior notes to finance the majority of its portfolio of investments. The following table summarizes certain characteristics of the Company's borrowings at March 31, 2015 and December 31, 2014:

 

The Company finances its residential loans held-for-investment through asset-backed securities issued by securitization trusts.

Interest Rate Swaps

As of March 31, 2015, the Company had the following interest rate swaps outstanding:

 

Average Balances

The table below presents certain information for the Company's portfolio for the three months ended March 31, 2015 and 2014.

 

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SOURCE Invesco Mortgage Capital Inc.