Invesco Mortgage Capital Inc. Reports Second Quarter 2015 Financial Results

ATLANTA, Aug. 17, 2015 /PRNewswire/ --

Highlights

• Q2 2015 core earnings* of $50.0 million, core earnings per  common share of $0.41, and a common stock dividend of $0.45 per share 
• YTD core earnings* per common share of $0.91 and YTD common stock dividend of $0.90 per common share
• Q2 2015 book value per diluted common share** was $18.62 vs. $19.37 at Q1 2015 and $18.82 at Q4 2014
• Economic return*** for the three and six months ended June 30, 2015 of -1.5% and 3.7%, respectively
• Portfolio equity allocation strategically positioned for improving real estate fundamentals.
  • Equity allocation: 38% to Agency RMBS, 32% to residential credit and 30% to commercial credit as of June 30, 2015
  • Increased our allocation to Agency Hybrid ARMs in Q2  2015
  • Closed two commercial loans totaling $71 million
• Q2 2015 comprehensive loss attributable to common stockholders was $36.7 million or ($0.30) per common share vs. comprehensive income attributable to common stockholders of $123.1 million or $1.00 per common share for Q1 2015
• Q2 2015 U.S. GAAP net income attributable to common stockholders of $139.9 million or $1.14 basic earnings per common share and $1.04 earnings per diluted common share reflecting a $56.0 million net gain on interest rate hedges

Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended June 30, 2015, reporting core earnings* of $0.41 per common share and book value per diluted common share** of $18.62. Second quarter core earnings reflect lower interest income and contribution to earnings from unconsolidated real estate joint ventures relative to first quarter 2015. Interest income was primarily impacted by faster prepayment speeds, higher amortization, and reinvestment of principal repayments into assets with lower yields.

"Although market conditions weakened in the second quarter, our efforts to moderate risk preserved capital.  Our 1.1% decline in book value per share and 3.7% economic return year to date rank among the best in the industry," said Richard King, President and CEO. During the six months ended June 30, 2015, IVR declared dividends totaling $0.90 per common share and maintained a relatively stable book value of $18.62 per diluted common share versus $19.37 last quarter, $18.82 at year end 2014 and $17.97 at the end of 2013.

During the second quarter of 2015, the Company reinvested cash flow into Agency Hybrid ARMs and closed two commercial real estate loans totaling $71 million. "We believe our company is well positioned for the current market environment and to benefit from improving real estate fundamentals," said Mr. King.

On August 10, 2015, the Company announced the restatement of its financial statements for the years ended 2013 and 2014 and the quarter ended March 31, 2015.  The restatement corrects an error in the U.S. GAAP accounting treatment for credit risk transfer securities issued by government-sponsored enterprises ("GSE CRTs") and interest-only strips of residential mortgage-backed securities that are guaranteed by a U.S. government agency ("Agency MBS IOs"). We determined that these assets include embedded derivatives which should be accounted for under the accounting guidance for derivatives with changes in fair value reflected in the income statement instead of other comprehensive income. Previously reported key metrics such as economic return, book value per share, core earnings per common share and leverage ratios did not change. The changes also have no impact on our taxable income or compliance with REIT tax requirements.

* Core earnings (and by calculation, core earnings per common share), effective interest income (and by calculation, effective yield), 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 income (and by calculation, yield), 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 June 30, 2015 is defined as the change in book value per diluted common share from March 31, 2015 to June 30, 2015 of ($0.75); plus dividends declared of $0.45 per common share; divided by the March 31, 2015 book value per diluted common share of $19.37. Economic return for the six months ended June 30, 2015 is defined as the change in book value per diluted common share from December 31, 2014 to June 30, 2015 of ($0.20); plus dividends declared of $0.90 per common share; divided by the December 31, 2014 book value per diluted common share of $18.82.

Key performance indicators for the quarters ended June 30, 2015 and March 31, 2015 are summarized in the table below.

* Core earnings (and by calculation, core earnings per common share), effective interest income (and by calculation, effective yield), 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 income (and by calculation, yield), 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 June 30, 2015 is defined as the change in book value per diluted common share from March 31, 2015 to June 30, 2015 of ($0.75); plus dividends declared of $0.45 per common share; divided by the March 31, 2015 book value per diluted common share of $19.37. Economic return for the six months ended June 30, 2015 is defined as the change in book value per diluted common share from December 31, 2014 to June 30, 2015 of ($0.20); plus dividends declared of $0.90 per common share; divided by the December 31, 2014 book value per diluted common share of $18.82.

Financial Summary

During the second quarter of 2015, the Company generated $50.0 million in core earnings, a decrease of $12.0 million from the first quarter of 2015. Lower core earnings were primarily due to lower contribution to earnings from unconsolidated real estate joint ventures and lower net interest income due primarily to faster prepayment speeds and higher amortization on our Agency residential mortgage-backed securities ("Agency RMBS"). Net income attributable to common stockholders for the second quarter of 2015 was $139.9 million, compared to net loss attributable to common stockholders of $17.4 million for the first quarter of 2015. The increase in second quarter of 2015 net income attributable to common stockholders was primarily due to a $56.0 million gain on interest rate hedges during the second quarter versus a $122.7 million loss on interest rate hedges in the first quarter of 2015. Second quarter 2015 book value per diluted common share declined to $18.62 as Agency RMBS and credit spreads widened with generally weaker market conditions due to uncertainty with respect to the crisis in Greece, and in anticipation of the first increase in the federal funds rate.

The Company reduced its holdings in 30 year fixed-rate Agency RMBS by $266.8 million but added $524.4 million Agency Hybrid Adjustable Rate Mortgage (ARM) securities to the investment portfolio in the second quarter of 2015.  The Company's MBS and GSE CRT portfolio totaled $17.2 billion, a decrease of $145.4 million from March 31, 2015. The non-Agency MBS portfolio declined by $147.0 million primarily due to continued paydowns.

For the quarter ended June 30, 2015, average earning assets were $20.6 billion, representing an increase of $147.5 million from March 31, 2015. The portfolio generated interest income of $160.8 million during the three months ended June 30, 2015, which reflects a decrease of $6.9 million from the three months ended March 31, 2015. The decrease in interest income was the result of a decline in average portfolio yield from 3.29% in the first quarter of 2015 to 3.12% for the three months ended June 30, 2015. The lower portfolio yield in the second quarter of 2015 primarily reflects lower yields on Agency RMBS.

For the quarter ended June 30, 2015, the Company had average borrowed funds of approximately $18.3 billion and effective interest expense of $100.1 million, compared to $18.1 billion and $98.7 million, respectively, for the first quarter of 2015. The Company's effective cost of funds was 2.19% for both the second quarter and first quarter of 2015. The slight increase in average borrowed funds for the second quarter is due to higher average borrowings for Agency RMBS.

Total expenses for the second quarter of 2015 were approximately $13.6 million, compared to $13.3 million for the first quarter of 2015. Second quarter 2015 total expenses include $2.3 million of securitization trust expenses associated with direct operating expenses of the Company's consolidated residential loan securitizations versus $2.2 million in the first quarter of 2015. Securitization trust expenses rose slightly in the second quarter due to the full quarter impact of consolidating an additional securitization that closed in March 2015. General and administrative expenses were $2.0 million in the second quarter of 2015, an increase of $0.2 million from the first quarter of 2015. The increase in general and administrative expenses was primarily due to higher tax, legal and other professional fees in the three months ended June 30, 2015. The ratio of annualized operating expenses to average equity* for the second quarter of 2015 was 1.84%, an increase of 2 basis points from the first quarter of 2015.

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

*The ratio of consolidated 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.

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., a leading independent global investment management firm.

Earnings Call

Members of the investment community and the general public are invited to listen to the Company's earnings conference call on Tuesday, August 18, 2015, at 9:00 a.m. ET, by calling one of the following numbers:

An audio replay will be available until 5:00 pm ET on September 1, 2015 by calling:

866-369-3652 (North America) or 203-369-0244 (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, our leverage and equity allocation, and the impact of the restatement of our consolidated financial statements for certain periods and the adequacy of our disclosure controls and procedures and internal controls over financial reporting.  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 income (and by calculation, effective yield), 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 income (and by calculation, yield), 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. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate.

Core Earnings

The Company calculates core earnings as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net (excluding contractual net interest on interest rate swaps); unrealized (gain) loss on derivative instruments, net; realized and unrealized change in fair value of GSE CRT credit derivative income (loss), net; (gain) loss on foreign currency transactions, net; amortization of deferred swap losses from de-designation; and an adjustment attributable to non-controlling interest. The Company records changes in the valuation of its mortgage-backed securities and the valuation assigned to the debt host contract associated with its GSE CRTs 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 as 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 Income/ Effective Interest Expense/Effective Cost of Funds/Effective Net Interest Income/Effective Interest Rate Margin

The Company calculates effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that is recorded in realized and unrealized credit derivative income (loss), net.  The Company adds back GSE CRT embedded derivative coupon interest to its total interest income because the Company considers GSE CRT embedded derivative coupon interest a current component of its total interest income.

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 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 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 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, 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 and GSE CRT embedded derivative coupon interest that is recorded in realized and unrealized credit derivative income (loss), net.

The Company believes the presentation of effective interest income, effective yield, effective interest expense, effective cost 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 our borrowing costs and operating performance.

The following table reconciles total interest income to effective interest income and yield to effective yield for the following periods:

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 June 30, 2015 and March 31, 2015. 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 354 days as of June 30, 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. 

June 30, 2015

March 31, 2015

Mortgage-Backed Securities and Credit Risk Transfer Securities

The following table summarizes certain characteristics of the Company's MBS and GSE CRT portfolio as of June 30, 2015: