Form 8-K Invesco Mortgage Capital For: Nov 04
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 8-K
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CURRENT REPORT
Pursuant to Section�13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):�November�4, 2014
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(Exact name of registrant as specified in its charter)
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Maryland | 001-34385 | �26-2749336 | ||
(State�or�other�jurisdiction of�incorporation) | (Commission�File�Number) | (IRS�Employer Identification�No.) | ||
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1555 Peachtree Street, NE, Atlanta, Georgia | 30309 | |
(Address�of�principal�executive�offices) | (Zip�Code) | |
Registrants telephone number, including area code: (404)�892-0896
n/a
(Former name or former address, if changed since last report.)
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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
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o | Written�communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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o | Soliciting�material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
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o | Pre-commencement�communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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o | Pre-commencement�communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
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Item�2.02 | Results of Operations and Financial Condition. |
On November�4, 2014, Invesco Mortgage Capital Inc. (the registrant ) issued a press release announcing its financial results for the quarter ended September�30, 2014 (the Release ).
Pursuant to General Instruction F to the Securities and Exchange Commissions Current Report on Form 8-K, the Release is attached to this Report as Exhibit 99.1 and the information contained in the Release is incorporated into this Item�2.02 by this reference. The information contained in this Item 2.02 is being "furnished" and shall not be deemed "filed" for the purposes of Section�18 of the Securities Exchange Act of 1934, as amended ( Exchange Act ), or otherwise subject to the liabilities of that section. The information in this Item�2.02 shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended, or into any filing or other document pursuant to the Exchange Act, except as otherwise expressly stated in such filing.
Item�9.01 | Financial Statements and Exhibits. |
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(d) | Exhibits. | |
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Exhibit�No. | Description | |
99.1 | Press Release, dated November 4, 2014, issued by Invesco Mortgage Capital Inc. | |
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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Invesco Mortgage Capital Inc.
By: /s/ Richard Lee Phegley, Jr.
Richard Lee Phegley, Jr.
Chief Financial Officer
Date: November�4, 2014
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Exhibit Index
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Exhibit�No. | Description | |
99.1 | Press Release, dated November 4, 2014, issued by Invesco Mortgage Capital Inc. | |
Exhibit 99.1
Press Release For immediate release |
Invesco Mortgage Capital Inc. Reports Third Quarter 2014 Financial Results Generated core earnings of $54.3 million, or $0.44 per share, while continuing to reposition the portfolio and expand our funding sources |
Atlanta November 4, 2014�-- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended September�30, 2014, including core earnings of $0.44 per share. "We believe accumulation of an attractive dividend and long-term stability of book value will reward long-term investors," said Richard King, President and CEO. "Year-to-date, IVR has declared $1.50 per common share of dividends and has grown book value from $17.97 to $19.16 per share." | Third Quarter Highlights | ||
Ÿ | Book value per share ended the quarter at $19.16, down 3.2% from Q2 and up 6.6% YTD | ||
Ÿ | Core earnings of $54.3 million or $0.44 per share reflects higher prepayment speeds which have since declined | ||
Ÿ | GAAP net income after preferred dividends of $31.1 million or $0.25 per share | ||
Ÿ | Comprehensive income (loss) attributable to common shareholders of ($13.6) million or ($0.11) per share for Q3 and $330.1 million or $2.68 per share YTD | ||
Ÿ | Debt to equity ratio declined 0.12x to 6.70x for Q3 primarily due to lower leverage on repurchase agreements | ||
Management of the Company's portfolio reflects initiatives designed to take advantage of opportunities and mitigate risks resulting from structural changes in the financing of real estate in the United States. Additional descriptions of initiatives and rationale are included in the financial results below.
($ in millions, except share amounts) | Q3 14 | Q2 14 | ||||
(unaudited) | (unaudited) | |||||
Average earning assets (at amortized costs) | $19,599.3 | $20,025.9 | ||||
Average borrowed funds | 17,350.8 | 17,546.7 | ||||
Average equity | $2,449.6 | $2,470.9 | ||||
Interest income | $169.4 | $174.5 | ||||
Interest expense | 70.3 | 69.4 | ||||
Net interest income | 99.1 | 105.0 | ||||
Gain (loss) on sale of investments, net | (48.0 | ) | (20.8 | ) | ||
Gain (loss) on derivative instruments, net | (3.7 | ) | (167.8 | ) | ||
Other income (loss), net | 4.2 | |||||
Operating expenses | 13.3 | 13.1 | ||||
Net income (loss) | 34.4 | (92.4 | ) | |||
Dividends to preferred shareholders | 2.7 | 2.7 | ||||
Undeclared cumulative dividends to preferred shareholders | 0.7 | |||||
Net income (loss) after preferred dividends | $31.1 | ($95.1 | ) | |||
Average portfolio yield | 3.46 | % | 3.48 | % | ||
Cost of funds | 1.62 | % | 1.58 | % | ||
Debt to equity ratio | 6.70 | x | 6.82 | x | ||
Return on average equity | 5.18 | % | (15.40 | %) | ||
Book value per common share (diluted) | $19.16 | $19.80 | ||||
Earnings (loss) per common share (basic) | $0.25 | ($0.76 | ) | |||
Dividends declared per common share | $0.50 | $0.50 | ||||
Dividends declared per preferred share on Series A Preferred Stock | $0.4844 | $0.4844 | ||||
Non-GAAP Financial Measures*: | ||||||
Core earnings | $54.3 | $62.1 | ||||
Core earnings per common share | $0.44 | $0.50 | ||||
Effective interest expense | $99.5 | $100.1 | ||||
Effective cost of funds | 2.29 | % | 2.28 | % | ||
Effective net interest income | $69.9 | $74.3 | ||||
Effective interest rate margin | 1.17 | % | 1.20 | % | ||
1
Exhibit 99.1
* Core earnings, effective interest expense (and by calculation, effective cost of funds) and effective net interest income (and by calculation, effective interest rate margin) 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, total interest expense (and by calculation, cost of funds) and net interest income (and by calculation, net interest rate margin).
Financial Summary
During the third quarter of 2014, the Company generated $54.3 million in core earnings. This was accomplished while continuing to reposition the investment portfolio to be less interest rate sensitive. Net income after preferred dividends for the third quarter of 2014 was $31.1 million, compared to net loss after preferred dividends of $95.1 million for the second quarter of 2014. The increase in net income after preferred dividends was primarily due to lower losses on derivative instruments in the third versus second quarter of 2014. Book value declined 3.2% to $19.16 reflecting lower asset prices and wider credit spreads.
The Company made progress on its key initiatives during the quarter by adding two residential loan securitizations, two commercial loans, and additional credit risk transfer securities issued by government-sponsored enterprises ("GSE CRT") to its investment portfolio. As of September�30, 2014, the Company increased its portfolio of residential and commercial loans held for investment to $3.2 billion, an increase of $841.9 million from June 30, 2014. The Companys mortgage-backed securities ("MBS") portfolio totaled $17.3 billion, a decrease of $950.8 million from June 30, 2014. For the quarter ended September�30, 2014, average earning assets were $19.6 billion, representing a decrease of $426.6 million from June 30, 2014. The portfolio generated interest income of $169.4 million during the three months ended September�30, 2014, which reflects a decrease of $5.0 million from the three months ended June 30, 2014. The decrease in interest income was the result of lower average assets during the quarter and faster prepayment speeds on Agency residential mortgage-backed securities ("RMBS").
For the quarter ended September�30, 2014, the Company had average borrowings of approximately $17.4 billion and effective interest expense of $99.5 million, compared to $17.5 billion and $100.1 million, respectively, for the second quarter of 2014. The Company's effective cost of funds was 2.29% and 2.28% for the third quarter and second quarter of 2014, respectively.
Operating expenses for the third quarter of 2014 totaled $13.3 million, compared to $13.1 million for the second quarter of 2014. The ratio of operating expenses to average equity for the third quarter was 2.17%, which was an increase of 5 basis points from the second quarter of 2014. The increase in operating expenses was primarily due to new investments in commercial loans and residential loan securitizations.
The Company declared a common stock dividend of $0.50 per share for the third quarter of 2014. The dividend was paid on October 28, 2014. The Company declared a Series A preferred stock dividend of $0.4844 per share in the third quarter of 2014. The dividend was paid on October 27, 2014.
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In September 2014, the Company completed a public offering of 6,200,000 shares of 7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock (the "Series B Preferred Stock") at the price of $25.00 per share. On November 4, 2014, the Company's Board of Directors declared a cash dividend on its Series B Preferred Stock of $0.57049 per share. The dividend will be paid on December 27, 2014 to shareholders of record on December 5, 2014. The first dividend on the Series B Preferred Stock is more than a full quarter and covers the period from, and including, the date of issuance through but excluding December 27, 2014.
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.
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Exhibit 99.1
Earnings Call
Members of the investment community and the general public are invited to listen to the Companys earnings conference call on Wednesday, November 5, 2014, at 9:00 a.m. ET, by calling one of the following numbers:
North America Toll Free:����888-942-8507
International:��������415-228-4839
Passcode: ��������Invesco
An audio replay will be available until 5:00 pm ET on November 19, 2014 by calling:
866-346-7114 (North America) or 203-369-0015 (International).
The presentation slides that will be reviewed during the call will be available on the Companys 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 statements with respect to the Company's beliefs, plans, objectives, goals, targets, expectations, anticipations, assumptions, estimates, intentions and future performance. In addition, words such as will, anticipates, expects and plans, 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 the Company's expectations. The Company cautions investors not to rely unduly on any forward-looking statements and urges investors to carefully consider the risks identified under the captions Risk Factors, Forward-Looking Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations in the Company's annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commissions website at www.sec.gov.
All written or oral forward-looking statements that the Company makes, or that are attributable to the Company, are expressly qualified by this cautionary notice. The Company expressly disclaims any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.
Contact: Bill Hensel, 404-479-2886
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Exhibit 99.1
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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� | Three Months Ended� �September 30, | Nine Months Ended� �September 30, | |||||||||
In thousands, except share amounts | 2014 | 2013 | 2014 | 2013 | |||||||
Interest Income | |||||||||||
Mortgage-backed securities | 144,043 | 157,539 | 447,702 | 486,619 | |||||||
Residential loans | 22,713 | 13,417 | 60,888 | 20,443 | |||||||
Commercial loans | 2,649 | 372 | 6,329 | 432 | |||||||
Total interest income | 169,405 | 171,328 | 514,919 | 507,494 | |||||||
Interest Expense | |||||||||||
Repurchase agreements | 45,756 | 73,695 | 142,649 | 208,487 | |||||||
Secured loans | 1,223 | 1,399 | |||||||||
Exchangeable senior notes | 5,620 | 5,621 | 16,840 | 12,403 | |||||||
Asset-backed securities | 17,660 | 10,266 | 47,421 | 15,722 | |||||||
Total interest expense | 70,259 | 89,582 | 208,309 | 236,612 | |||||||
Net interest income | 99,146 | 81,746 | 306,610 | 270,882 | |||||||
Provision for loan losses | (209 | ) | 87 | (52 | ) | 751 | |||||
Net interest income after provision for loan losses | 99,355 | 81,659 | 306,662 | 270,131 | |||||||
Other Income (loss) | |||||||||||
Gain (loss) on sale of investments, net | (47,952 | ) | (69,323 | ) | (80,436 | ) | (56,919 | ) | |||
Equity in earnings and fair value change in unconsolidated ventures | 1,145 | 1,422 | 5,480 | 5,169 | |||||||
Gain (loss) on derivative instruments, net | (3,704 | ) | (6,887 | ) | (322,832 | ) | 44,424 | ||||
Realized and unrealized credit default swap income | 247 | 297 | 868 | 828 | |||||||
Other investment income (loss), net | (1,358 | ) | (1,358 | ) | |||||||
Total other income (loss) | (51,622 | ) | (74,491 | ) | (398,278 | ) | (6,498 | ) | |||
Expenses | |||||||||||
Management fee related party | 9,214 | 10,945 | 27,876 | 32,106 | |||||||
General and administrative | 4,079 | 2,259 | 11,014 | 6,845 | |||||||
Total expenses | 13,293 | 13,204 | 38,890 | 38,951 | |||||||
Net income (loss) | 34,440 | (6,036 | ) | (130,506 | ) | 224,682 | |||||
Net income (loss) attributable to non-controlling interest | 394 | (63 | ) | (1,485 | ) | 2,392 | |||||
Net income (loss) attributable to Invesco Mortgage Capital Inc. | 34,046 | (5,973 | ) | (129,021 | ) | 222,290 | |||||
Dividends to preferred shareholders | 2,713 | 2,713 | 8,138 | 8,138 | |||||||
Undeclared cumulative dividends to preferred shareholders | 661 | 661 | |||||||||
Net income (loss) attributable to common shareholders | 30,672 | (8,686 | ) | (137,820 | ) | 214,152 | |||||
Earnings (loss) per share: | |||||||||||
Net income (loss) attributable to common shareholders | |||||||||||
Basic | 0.25 | (0.06 | ) | (1.12 | ) | 1.61 | |||||
Diluted | 0.25 | (0.06 | ) | (1.12 | ) | 1.56 | |||||
Dividends declared per common share | 0.50 | 0.50 | 1.50 | 1.80 | |||||||
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Exhibit 99.1
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three Months Ended� �September 30, | Nine Months Ended� �September 30, | ||||||||||
In thousands except share amounts | 2014 | 2013 | 2014 | 2013 | |||||||
Net income (loss) | 34,440 | (6,036 | ) | (130,506 | ) | 224,682 | |||||
Other comprehensive income (loss): | |||||||||||
Unrealized gain (loss) on mortgage-backed securities | (113,946 | ) | 5,707 | 328,743 | (763,016 | ) | |||||
Reclassification of unrealized loss on sale of mortgage-backed securities to gain (loss) on sales of investments, net | 47,952 | 69,323 | 80,436 | 56,919 | |||||||
Unrealized gain (loss) on derivative instruments | (74,098 | ) | 183,391 | ||||||||
Reclassification of unrealized loss on derivative instruments to gain (loss) on derivatives, net | 43,583 | 116,553 | |||||||||
Reclassification of amortization of repurchase agreements interest expense to repurchase agreements interest expense | 21,227 | 64,055 | |||||||||
Total Other comprehensive income (loss) | (44,767 | ) | 44,515 | 473,234 | (406,153 | ) | |||||
Comprehensive income (loss) | (10,327 | ) | 38,479 | 342,728 | (181,471 | ) | |||||
Less: Comprehensive (income) loss attributable to non-controlling interest | 117 | (402 | ) | (3,919 | ) | 1,856 | |||||
Less: Dividends to preferred shareholders | (2,713 | ) | (2,713 | ) | (8,138 | ) | (8,138 | ) | |||
Less: Undeclared cumulative dividends to preferred shareholders | (661 | ) | (661 | ) | |||||||
Comprehensive income (loss) attributable to common shareholders | (13,584 | ) | 35,364 | 330,010 | (187,753 | ) | |||||
5
Exhibit 99.1
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
�� | As of | ||||
�In thousands except share amounts | September�30, 2014 | December�31, 2013 | |||
� | (Unaudited) | � | |||
ASSETS | |||||
Mortgage-backed securities, at fair value | 17,297,034 | 17,348,657 | |||
Residential loans, held-for-investment (1) | 3,103,434 | 1,810,262 | |||
Commercial loans, held-for-investment | 144,707 | 64,599 | |||
Cash and cash equivalents | 128,944 | 210,612 | |||
Due from counterparties | 28,499 | 1,500 | |||
Investment related receivable | 55,942 | 515,404 | |||
Investments in unconsolidated ventures, at fair value | 42,281 | 44,403 | |||
Accrued interest receivable | 66,295 | 68,246 | |||
Derivative assets, at fair value | 74,421 | 262,059 | |||
Deferred securitization and financing costs | 13,485 | 13,894 | |||
Other investments | 62,500 | 10,000 | |||
Other assets | 1,521 | 1,343 | |||
Total assets (1) | 21,019,063 | 20,350,979 | |||
LIABILITIES AND EQUITY | |||||
Liabilities: | |||||
Repurchase agreements | 13,571,889 | 15,451,675 | |||
Secured loans | 1,250,000 | ||||
Asset-backed securities issued by securitization trusts (1) | 2,745,940 | 1,643,741 | |||
Exchangeable senior notes | 400,000 | 400,000 | |||
Derivative liabilities, at fair value | 222,559 | 263,204 | |||
Dividends and distributions payable | 64,976 | 66,087 | |||
Investment related payable | 12,351 | 28,842 | |||
Accrued interest payable | 23,080 | 26,492 | |||
Collateral held payable | 35,446 | 52,698 | |||
Accounts payable and accrued expenses | 2,567 | 4,304 | |||
Due to affiliate | 9,854 | 10,701 | |||
Total liabilities (1) | 18,338,662 | 17,947,744 | |||
Equity: | |||||
Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized: | |||||
7.75% Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding ($140,000 aggregate liquidation preference) | 135,356 | 135,356 | |||
7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares issued and outstanding ($155,000 aggregate liquidation preference) | 149,918 | ||||
Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 123,101,132 and 124,510,246 shares issued and outstanding, respectively | 1,231 | 1,245 | |||
Additional paid in capital | 2,531,914 | 2,552,464 | |||
Accumulated other comprehensive income (loss) | 310,837 | (156,993 | ) | ||
Retained earnings (distributions in excess of earnings) | (477,759 | ) | (155,957 | ) | |
Total shareholders equity | 2,651,497 | 2,376,115 | |||
Non-controlling interest | 28,904 | 27,120 | |||
Total equity | 2,680,401 | 2,403,235 | |||
Total liabilities and equity | 21,019,063 | 20,350,979 | |||
(1) | The consolidated balance sheets include assets of consolidated variable interest entities ( VIEs ) that can only be used to settle obligations and liabilities of the VIEs for which creditors do not have recourse to the Company. As of September�30, 2014 and December�31, 2013, total assets of the consolidated VIEs were $3,118,222 and $1,819,295, respectively, and total liabilities of the consolidated VIEs were $2,754,169 and $1,648,400, respectively. |
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Exhibit 99.1
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," "effective interest expense" (and by calculation, "effective cost of funds") and "effective net interest income (and by calculation, "effective interest rate margin"). The Companys 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 shareholders, total interest expense (and by calculation, cost of funds) and net interest income (and by calculation, net interest rate margin).
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. Additional reconciling items may be added to the non-GAAP measures if deemed appropriate.
The Company calculates core earnings as U.S. GAAP net income attributable to common shareholders adjusted for gain (loss) on sale of investments, net, realized gain on interest rate derivative instruments (excluding contractual net interest on interest rate swaps), unrealized loss on interest rate derivative instruments, amortization of deferred swap losses from de-designation and adjustments attributable to non-controlling interest.
The Company believes the presentation of core earnings allows investors to evaluate and compare the performance of the Company to that of its peers because core earnings measures investment portfolio performance over multiple reporting periods by removing realized and unrealized gains and losses. The Company records changes in the valuation of its investment portfolio, and through December 31, 2013 certain interest rate swaps, in other comprehensive income. Effective December 31, 2013, the Company elected to discontinue hedge accounting for its interest rate swaps. As a result of its election, starting January 1, 2014, the change in market value of its interest rate swaps and the amortization of deferred swap losses remaining in other comprehensive income at December 31, 2013 are included in U.S. GAAP net income. In addition, the Company uses swaptions, invests in to-be-announced securities and U.S. Treasury futures that do not qualify under U.S. GAAP for inclusion in other comprehensive income, and, as such, the changes in valuation are recorded in earnings in the period in which they occur. For internal portfolio analysis, the Companys management deducts these gains and losses from U.S. GAAP net income to provide a consistent view of investment portfolio performance across reporting periods. As such, the Company believes that the disclosure of core earnings is useful and meaningful to its investors.
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.
Effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin include adjustments for the net interest component related to the Company's interest rate swaps and excludes amortization of deferred swap losses from de-designation. Although, as of January 1, 2014 the Company has elected to discontinue hedge accounting for its interest rate swaps, such derivative instruments are viewed by the Company as an economic hedge against increases in future market interest rates on its liabilities and therefore the effective cost of funds reflects interest expense adjusted to include the realized loss (i.e., the interest expense component) for all of its interest rate swaps and add back the unrealized loss from swap losses that were previously recorded in other comprehensive income and is being amortized into interest expense over the remaining swap lives. In addition, the Company views the cost of the associated repurchase agreements and secured loans, borrowing costs on its exchangeable senior notes, and borrowing costs on its asset-backed securities as a component of its effective cost of funds.
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Exhibit 99.1
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, as viewed by the Company.
The table below provides a reconciliation of U.S. GAAP net income attributable to common shareholders to core earnings for the following periods:
� | Three Months Ended | Nine Months Ended | ||||||||||||
$ in thousands, except per share data | September 30, 2014 | June 30, 2014 | September 30, 2013 | September 30, 2014 | September 30, 2013 | |||||||||
Net income (loss) attributable to common shareholders | 30,672 | (94,052 | ) | (8,686 | ) | (137,820 | ) | 214,152 | ||||||
Adjustments: | ||||||||||||||
(Gain) loss on sale of investments, net | 47,952 | 20,766 | 69,323 | 80,436 | 56,919 | |||||||||
Realized (gain) loss on derivative instruments (excluding contractual net interest on interest rate swaps of $50,446, $52,205, $0, $154,092 and $0, respectively) | 1,016 | 15,037 | (39,075 | ) | 34,877 | (66,234 | ) | |||||||
Unrealized (gain) loss on derivative instruments | (47,758 | ) | 100,574 | 45,962 | 133,863 | 21,810 | ||||||||
Loss on foreign currency transactions | 1,479 | 1,479 | ||||||||||||
Amortization of deferred swap losses from de-designation | 21,227 | 21,532 | 64,055 | |||||||||||
Subtotal | 23,916 | 157,909 | 76,210 | 314,710 | 12,495 | |||||||||
Adjustment attributable to non-controlling interest | (274 | ) | (1,807 | ) | (795 | ) | (3,592 | ) | (132 | ) | ||||
Core earnings | 54,314 | 62,050 | 66,729 | 173,298 | 226,515 | |||||||||
Basic earnings (loss) per common share | 0.25 | (0.76 | ) | (0.06 | ) | (1.12 | ) | 1.61 | ||||||
Core earnings per share attributable to common shareholders | 0.44 | 0.50 | 0.49 | 1.41 | 1.70 | |||||||||
The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:
� | Three Months Ended� �September 30, 2014 | Three Months Ended� �June 30, 2014 | Three Months Ended� �September 30, 2013 | ||||||||||||||
$ in thousands | Reconciliation | Cost of Funds / Effective Cost of Funds | Reconciliation | Cost of Funds / Effective Cost of Funds | Reconciliation | Cost of Funds / Effective Cost of Funds | |||||||||||
Total interest expense | 70,259 | 1.62 | �% | 69,437 | 1.58 | �% | 89,582 | 1.97 | % | ||||||||
Less: Amortization of deferred swap losses from de-designation | (21,227 | ) | (0.49 | )% | (21,532 | ) | (0.49 | )% | % | ||||||||
Add: Net interest paid - interest rate swaps | 50,446 | 1.16 | �% | 52,205 | 1.19 | �% | % | ||||||||||
Effective interest expense | 99,478 | 2.29 | �% | 100,110 | 2.28 | �% | 89,582 | 1.97 | % | ||||||||
� | Nine Months Ended� �September 30, 2014 | Nine Months Ended� �September 30, 2013 | |||||||||
$ in thousands | Reconciliation | Cost of Funds / Effective Cost of Funds | Reconciliation | Cost of Funds / Effective Cost of Funds | |||||||
Total interest expense | 208,309 | 1.60 | �% | 236,612 | 1.74 | % | |||||
Less: Amortization of deferred swap losses from de-designation | (64,055 | ) | (0.49 | )% | % | ||||||
Add: Net interest paid - interest rate swaps | 154,092 | 1.18 | �% | % | |||||||
Effective interest expense | 298,346 | 2.29 | �% | 236,612 | 1.74 | % | |||||
8
Exhibit 99.1
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:
� | Three Months Ended� �September 30, 2014 | Three Months Ended� �June 30, 2014 | Three Months Ended� �September 30, 2013 | ||||||||||||||
$ in thousands | Reconciliation | Net Interest Rate Margin / Effective Interest Rate Margin | Reconciliation | Net Interest Rate Margin / Effective Interest Rate Margin | Reconciliation | Net Interest Rate Margin / Effective Interest Rate Margin | |||||||||||
Net interest income | 99,146 | 1.84 | �% | 105,015 | 1.90 | �% | 81,746 | 1.38 | % | ||||||||
Add: Amortization of deferred swap losses from de-designation | 21,227 | 0.49 | �% | 21,532 | 0.49 | �% | % | ||||||||||
Less: Net interest paid - interest rate swaps | (50,446 | ) | (1.16 | )% | (52,205 | ) | (1.19 | )% | % | ||||||||
Effective net interest income | 69,927 | 1.17 | �% | 74,342 | 1.20 | �% | 81,746 | 1.38 | % | ||||||||
� | Nine Months Ended� �September 30, 2014 | Nine Months Ended� �September 30, 2013 | |||||||||
$ in thousands | Reconciliation | Net Interest Rate Margin / Effective Interest Rate Margin | Reconciliation | Net Interest Rate Margin / Effective Interest Rate Margin | |||||||
Net interest income | 306,610 | 1.89 | �% | 270,882 | 1.53 | % | |||||
Add: Amortization of deferred swap losses from de-designation | 64,055 | 0.49 | �% | % | |||||||
Less: Net interest paid - interest rate swaps | (154,092 | ) | (1.18 | )% | % | ||||||
Effective net interest income | 216,573 | 1.20 | �% | 270,882 | 1.53 | % | |||||
Mortgage-Backed Securities
The following table summarizes certain characteristics of the Companys MBS portfolio as of September�30, 2014:
$ in thousands | Principal Balance | Unamortized Premium (Discount) | Amortized Cost | Unrealized Gain/ (Loss), net | Fair Value | Net Weighted Average Coupon�(1) | Period- end Weighted Average Yield (2) | Quarterly Weighted Average Yield (3) | |||||||||||||||
Agency RMBS: | |||||||||||||||||||||||
15 year fixed-rate | 1,299,392 | 64,705 | 1,364,097 | 25,856 | 1,389,953 | 4.05 | % | 2.55 | % | 2.59 | % | ||||||||||||
30 year fixed-rate | 4,583,250 | 308,930 | 4,892,180 | 8,936 | 4,901,116 | 4.30 | % | 2.90 | % | 2.95 | % | ||||||||||||
ARM* | 519,631 | 8,752 | 528,383 | 4,497 | 532,880 | 2.85 | % | 2.31 | % | 2.30 | % | ||||||||||||
Hybrid ARM | 2,596,919 | 38,712 | 2,635,631 | 14,690 | 2,650,321 | 2.77 | % | 2.39 | % | 2.35 | % | ||||||||||||
Total Agency pass-through | 8,999,192 | 421,099 | 9,420,291 | 53,979 | 9,474,270 | 3.74 | % | 2.67 | % | 2.70 | % | ||||||||||||
Agency-CMO(4) | 1,876,484 | (1,413,263 | ) | 463,221 | (9,473 | ) | 453,748 | 2.42 | % | 4.42 | % | 3.03 | % | ||||||||||
Non-Agency RMBS(5)(6) | 3,805,256 | (603,732 | ) | 3,201,524 | 100,556 | 3,302,080 | 3.68 | % | 3.92 | % | 4.44 | % | |||||||||||
GSE CRT(7) | 570,500 | 26,549 | 597,049 | 13,277 | 610,326 | 4.82 | % | 4.02 | % | 3.91 | % | ||||||||||||
CMBS(8) | 3,300,260 | 56,880 | 3,357,140 | 99,470 | 3,456,610 | 4.82 | % | 4.48 | % | 4.50 | % | ||||||||||||
Total | 18,551,692 | (1,512,467 | ) | 17,039,225 | 257,809 | 17,297,034 | 3.78 | % | 3.82 | % | 3.40 | % | |||||||||||
* | Adjustable-rate mortgage ("ARM") |
(1) | Net weighted average coupon ( WAC ) as of September�30, 2014 is presented net of servicing and other fees. |
(2) | Period-end weighted average yield is based on amortized cost as of September�30, 2014 and incorporates future prepayment and loss assumptions. |
(3) | Quarterly weighted average portfolio yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the Company's average of the amortized cost of the investments. All yields are annualized. |
9
Exhibit 99.1
(4) | Agency collateralized mortgage obligations ("Agency-CMO") include interest-only securities which represent 28.7% of the balance based on fair value. |
(5) | Non-Agency RMBS held by the Company is 55.9% variable rate, 37.2% fixed rate, and 6.9% floating rate based on fair value. |
(6) | Of the total discount in non-Agency RMBS, $387.2 million is non-accretable. |
(7) | GSE CRT are general obligations of Fannie Mae or Freddie Mac that are structured to provide credit protection to the GSE issuer with respect to defaults and other credit events within reference pools of residential mortgage loans that collateralize MBS issued and guaranteed by such GSE. |
(8) | Commercial mortgage-backed securities ("CMBS") include commercial real estate mezzanine loan pass-through certificates which represent 1.4% of the balance based on fair value. |
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 12.1 and 10.0 for the three months ended September 30, 2014 and June 30, 2014, respectively. The table below shows the three month CPR for the Company's RMBS compared to bonds with similar characteristics ( Cohorts ):
�
� | September 30, 2014 | June 30, 2014 | |||||||||
� | Company | Cohorts | Company | Cohorts | |||||||
15 year Agency RMBS | 12.9 | 14.8 | 12.3 | 13.3 | |||||||
30 year Agency RMBS | 12.0 | 12.8 | 9.4 | 9.8 | |||||||
Agency Hybrid ARM RMBS | 13.0 | NA | 9.4 | NA | |||||||
Non-Agency RMBS | 11.9 | NA | 11.2 | NA | |||||||
GSE CRT | 8.2 | NA | 4.5 | NA | |||||||
Weighted average CPR | 12.1 | NA | 10.0 | NA | |||||||
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 Companys borrowings at September�30, 2014 and December�31, 2013:
�
$ in thousands | September 30, 2014 | December 31, 2013 | |||||||||||||||
� | Amount Outstanding | Weighted Average Interest Rate | Weighted Average Remaining Maturity (Days) | Amount Outstanding | Weighted Average Interest Rate | Weighted Average Remaining Maturity (Days) | |||||||||||
Repurchase Agreements: | |||||||||||||||||
Agency RMBS | 8,693,555 | 0.32 | % | 18 | 10,281,154 | 0.38 | % | 19 | |||||||||
Non-Agency RMBS | 2,830,368 | 1.52 | % | 26 | 3,066,356 | 1.55 | % | 33 | |||||||||
GSE CRT | 463,828 | 1.53 | % | 39 | 21,708 | 1.50 | % | 42 | |||||||||
CMBS | 1,584,138 | 1.29 | % | 24 | 2,082,457 | 1.39 | % | 23 | |||||||||
Secured Loans | 1,250,000 | 0.38 | % | 3,564 | % | ||||||||||||
Exchangeable Senior Notes | 400,000 | 5.00 | % | 1,262 | 400,000 | 5.00 | % | 1,535 | |||||||||
Total | 15,221,889 | 0.81 | % | 345 | 15,851,675 | 0.86 | % | 60 | |||||||||
The Company finances its residential loans held-for-investment through asset-backed securities issued by securitization trusts.
10
Exhibit 99.1
Interest Rate Swaps
As of September�30, 2014, the Company had the following interest rate swaps outstanding:
$ in thousands Counterparty | � | � | Notional | Maturity�Date | Fixed�Interest�Rate in Contract | |||||||
Deutsche Bank AG | 200,000 | 1/15/2015 | 1.08 | % | ||||||||
Deutsche Bank AG | 250,000 | 2/15/2015 | 1.14 | % | ||||||||
Credit Suisse International | 100,000 | 2/24/2015 | 3.26 | % | ||||||||
Credit Suisse International | 100,000 | 3/24/2015 | 2.76 | % | ||||||||
Wells Fargo Bank, N.A. | 100,000 | 7/15/2015 | 2.85 | % | ||||||||
Wells Fargo Bank, N.A. | 50,000 | 7/15/2015 | 2.44 | % | ||||||||
Morgan Stanley Capital Services, LLC | 300,000 | 1/24/2016 | 2.12 | % | ||||||||
The Bank of New York Mellon | 300,000 | 1/24/2016 | 2.13 | % | ||||||||
Morgan Stanley Capital Services, LLC | 300,000 | 4/5/2016 | 2.48 | % | ||||||||
Credit Suisse International | 500,000 | 4/15/2016 | 2.27 | % | ||||||||
The Bank of New York Mellon | 500,000 | 4/15/2016 | 2.24 | % | ||||||||
JPMorgan Chase Bank, N.A. | 500,000 | 5/16/2016 | 2.31 | % | ||||||||
Goldman Sachs Bank USA | 500,000 | 5/24/2016 | 2.34 | % | ||||||||
Goldman Sachs Bank USA | 250,000 | 6/15/2016 | 2.67 | % | ||||||||
Wells Fargo Bank, N.A. | 250,000 | 6/15/2016 | 2.67 | % | ||||||||
JPMorgan Chase Bank, N.A. | 500,000 | 6/24/2016 | 2.51 | % | ||||||||
Citibank, N.A. | 500,000 | 10/15/2016 | 1.93 | % | ||||||||
Deutsche Bank AG | 150,000 | 2/5/2018 | 2.90 | % | ||||||||
ING Capital Markets LLC | 350,000 | 2/24/2018 | 0.95 | % | ||||||||
Morgan Stanley Capital Services, LLC | 100,000 | 4/5/2018 | 3.10 | % | ||||||||
ING Capital Markets LLC | 300,000 | 5/5/2018 | 0.79 | % | ||||||||
JPMorgan Chase Bank, N.A. | 200,000 | 5/15/2018 | 2.93 | % | ||||||||
UBS AG | 500,000 | 5/24/2018 | 1.10 | % | ||||||||
ING Capital Markets LLC | 400,000 | 6/5/2018 | 0.87 | % | ||||||||
The Royal Bank of Scotland Plc | 500,000 | 9/5/2018 | 1.04 | % | ||||||||
Citibank, N.A. CME Clearing House | (3 | ) | (4) | 300,000 | 2/5/2021 | 2.50 | % | |||||
The Royal Bank of Scotland Plc CME Clearing House | (3 | ) | (4) | 300,000 | 2/5/2021 | 2.69 | % | |||||
Wells Fargo Bank, N.A. | 200,000 | 3/15/2021 | 3.14 | % | ||||||||
Citibank, N.A. | 200,000 | 5/25/2021 | 2.83 | % | ||||||||
HSBC Bank USA, National Association | (1 | ) | 550,000 | 2/24/2022 | 2.45 | % | ||||||
The Royal Bank of Scotland Plc | (2 | ) | 400,000 | 3/15/2023 | 2.39 | % | ||||||
UBS AG | (2 | ) | 400,000 | 3/15/2023 | 2.51 | % | ||||||
HSBC Bank USA, National Association | 250,000 | 6/5/2023 | 1.91 | % | ||||||||
The Royal Bank of Scotland Plc | 500,000 | 8/15/2023 | 1.98 | % | ||||||||
Goldman Sachs Bank USA CME Clearing House | (4 | ) | 600,000 | 8/24/2023 | 2.88 | % | ||||||
UBS AG | 250,000 | 11/15/2023 | 2.23 | % | ||||||||
HSBC Bank USA, National Association | 500,000 | 12/15/2023 | 2.20 | % | ||||||||
Total | 12,150,000 | 2.13 | % | |||||||||
�
(1) | Forward start date of February 2015 |
(2) | Forward start date of March 2015 |
(3) | Forward start date of February 2016 |
(4) | Beginning June�10, 2013, regulations promulgated under The Dodd-Frank Wall Street Reform and Consumer Protection Act mandate that the Company clear new interest rate swap transactions through a central counterparty. Transactions that are centrally cleared result in the Company facing a clearing house, rather than a swap dealer, as counterparty. Central clearing requires the Company to post collateral in the form of initial and variation margin to the clearing house which reduces default risk. |
11
Exhibit 99.1
Average Balances
The table below presents certain information for the Company's portfolio for the three and nine month periods ending September�30, 2014 and 2013.
Three Months Ended� �September 30, | Nine Months Ended� �September 30, | ||||||||||
$ in thousands | 2014 | 2013 | 2014 | 2013 | |||||||
Average Balances*: | |||||||||||
Agency RMBS: | |||||||||||
15 year fixed-rate, at amortized cost | 1,397,663 | 1,849,443 | 1,494,733 | 1,947,324 | |||||||
30 year fixed-rate, at amortized cost | 5,134,370 | 9,679,520 | 6,040,458 | 10,894,824 | |||||||
ARM, at amortized cost | 536,670 | 102,828 | 451,129 | 89,832 | |||||||
Hybrid ARM, at amortized cost | 2,602,008 | 578,696 | 2,304,997 | 518,079 | |||||||
MBS-CMO, at amortized cost | 463,742 | 494,089 | 481,800 | 500,781 | |||||||
Non-Agency RMBS, at amortized cost | 3,177,041 | 3,662,796 | 3,313,231 | 3,574,810 | |||||||
GSE CRT, at amortized cost | 544,057 | 426,611 | |||||||||
CMBS, at amortized cost | 3,084,169 | 2,533,174 | 2,814,581 | 2,362,370 | |||||||
Residential loans, at amortized cost | 2,536,820 | 1,538,830 | 2,256,634 | 793,814 | |||||||
Commercial loans, at amortized cost | 122,803 | 13,312 | 96,819 | 8,971 | |||||||
Average MBS and Loans portfolio | 19,599,343 | 20,452,688 | 19,680,993 | 20,690,805 | |||||||
Average Portfolio Yields (1): | |||||||||||
Agency RMBS: | |||||||||||
15 year fixed-rate | 2.59 | % | 2.35 | % | 2.66 | % | 2.23 | % | |||
30 year fixed-rate | 2.95 | % | 2.84 | % | 3.05 | % | 2.82 | % | |||
ARM | 2.30 | % | 2.41 | % | 2.31 | % | 2.31 | % | |||
Hybrid ARM | 2.35 | % | 2.19 | % | 2.30 | % | 2.30 | % | |||
MBS - CMO | 3.03 | % | 2.31 | % | 3.54 | % | 1.87 | % | |||
Non-Agency RMBS | 4.44 | % | 4.63 | % | 4.44 | % | 4.60 | % | |||
GSE CRT | 3.91 | % | % | 4.17 | % | % | |||||
CMBS | 4.50 | % | 4.60 | % | 4.51 | % | 4.68 | % | |||
Residential loans | 3.61 | % | 3.46 | % | 3.60 | % | 3.31 | % | |||
Commercial loans | 8.44 | % | 10.76 | % | 8.62 | % | 10.97 | % | |||
Average MBS and Loans portfolio | 3.46 | % | 3.35 | % | 3.49 | % | 3.27 | % | |||
Average Borrowings*: | |||||||||||
Agency RMBS (2) | 9,078,815 | 11,378,486 | 9,603,237 | 12,502,114 | |||||||
Non-Agency RMBS | 2,780,808 | 2,990,502 | 2,857,548 | 2,776,819 | |||||||
GSE CRT | 425,374 | 315,826 | |||||||||
CMBS�(2) | 2,437,566 | 1,963,525 | 2,171,806 | 1,876,043 | |||||||
Exchangeable senior notes | 400,000 | 400,000 | 400,000 | 294,815 | |||||||
Asset-backed securities issued by securitization trusts | 2,228,234 | 1,418,084 | 1,989,656 | 727,533 | |||||||
Total borrowed funds | 17,350,797 | 18,150,597 | 17,338,073 | 18,177,324 | |||||||
Maximum borrowings during the period (3) | 17,967,829 | 18,460,059 | 17,967,829 | 19,710,901 | |||||||
12
Exhibit 99.1
Average Cost of Funds (4): | |||||||||||
Agency RMBS (2) | 0.33 | % | 0.39 | % | 0.34 | % | 0.40 | % | |||
Non-Agency RMBS | 1.53 | % | 1.58 | % | 1.53 | % | 1.61 | % | |||
GSE CRT | 1.51 | % | % | 1.49 | % | % | |||||
CMBS (2) | 0.98 | % | 1.47 | % | 1.19 | % | 1.46 | % | |||
Exchangeable senior notes | 5.62 | % | 5.62 | % | 5.61 | % | 5.61 | % | |||
Asset-backed securities issued by securitization trusts | 3.17 | % | 2.90 | % | 3.18 | % | 2.88 | % | |||
Unhedged cost of funds (5) | 1.13 | % | 1.01 | % | 1.11 | % | 0.88 | % | |||
Hedged / Effective cost of funds (non-GAAP measure) | 2.29 | % | 1.97 | % | 2.29 | % | 1.74 | % | |||
Average Equity (6): | 2,449,611 | 2,426,259 | 2,419,017 | 2,636,580 | |||||||
Average debt/equity ratio (average during period) | 7.08x | 7.48x | 7.17x | 6.89x | |||||||
Debt/equity ratio (as of period end) | 6.70x | 6.94x | 6.70x | 6.95x | |||||||
* | Average amounts for each period are based on weighted month-end balances; all percentages are annualized. For the three and nine months ended September�30, 2014, the average balances are presented on an amortized cost basis. |
(1) | Average portfolio yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the Company's average of the amortized cost of the investments. All yields are annualized. |
(2) | Agency RMBS and CMBS average borrowing and cost of funds include borrowings under repurchase agreements and secured loans. |
(3) | Amount represents the maximum borrowings at month-end during each of the respective periods. |
(4) | Average cost of funds is calculated by dividing annualized interest expense by the Company's average borrowings. |
(5) | Excludes amortization of deferred swap losses from de-designation. |
(6) | Average equity is calculated based on a weighted balance basis. |
13