Invesco Mortgage Capital Inc. Reports Third Quarter 2015 Financial Results

ATLANTA, Nov. 3, 2015 /PRNewswire/ -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended September 30, 2015, reporting core earnings* of $0.40 per common share and book value per diluted common share** of $17.66. Third quarter core earnings were in line with the dividend of $0.40 per share.

During the third quarter of 2015, the Company bought back 3.7 million shares of common stock for $50 million using available cash flow and closed a $34 million commercial real estate loan. "With our equity allocation of 35% to Agency RMBS, 34% to commercial credit and 31% to residential credit as of September 30, 2015, we believe our company is well positioned to benefit from improving real estate fundamentals and interest rate normalization. Stock buybacks continue to be an attractive use of available cash flow at current market pricing," said Richard King, President and CEO.

"While financial conditions weakened for the second straight quarter, our asset quality continues to improve, and we anticipate higher economic returns derived from our liquid, high quality assets. The loans underlying our assets continue to season and benefit from growing borrower equity due to property price appreciation," said Mr. King.

* 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), effective debt-to-equity ratio 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 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 September 30, 2015 is defined as the change in book value per diluted common share from June 30, 2015 to September 30, 2015 of ($0.96); plus dividends declared of $0.40 per common share; divided by the June 30, 2015 book value per diluted common share of $18.62. Economic return for the nine months ended September 30, 2015 is defined as the change in book value per diluted common share from December 31, 2014 to September 30, 2015 of ($1.16); plus dividends declared of $1.30 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 September 30, 2015 and June 30, 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), effective debt-to-equity ratio 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 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 third quarter of 2015, the Company generated $49.2 million in core earnings, a decrease of $0.7 million or 1.5% from the second quarter of 2015. Core earnings were relatively stable during the quarter as slightly higher net interest income was offset by increases in general and administrative expenses. Net interest income benefited from a higher portfolio yield and lower interest expense due to a decline in average borrowings. Net loss attributable to common stockholders for the third quarter of 2015 was $144.6 million, compared to net income attributable to common stockholders of $139.9 million for the second quarter of 2015. The third quarter of 2015 net loss attributable to common stockholders was primarily due to a $220.6 million net loss on interest rate hedges versus a $56.0 million net gain on interest rate hedges in the second quarter of 2015. Book value per diluted common share for the third quarter of 2015 decreased to $17.66 as lower swap yields resulted in a drop in fair value of interest rate hedges. Book value per diluted common share was also modestly impacted by widening real estate credit spreads. Generally weaker market conditions reflected uncertainty regarding slowing global growth prospects, especially in China and other emerging markets, and anticipation of the first increase in the federal funds rate.

For the quarter ended September 30, 2015, average earning assets were $20.2 billion, representing a decrease of $399.9 million from June 30, 2015. The Company's mortgage-backed and credit risk transfer securities portfolio totaled $16.8 billion, a decrease of $380.3 million from June 30, 2015 primarily due to continued paydowns and sales. During the third quarter of 2015, the Company utilized a portion of the proceeds from paydowns and sales of investments to buy back $50 million of common stock and invest in a $34 million commercial real estate loan.

The portfolio generated interest income of $161.4 million during the three months ended September 30, 2015, which reflects an increase of $0.5 million from the three months ended June 30, 2015. The increase in interest income was the result of an increase in average portfolio yield from 3.12% in the second quarter of 2015 to 3.20% for the three months ended September 30, 2015. The higher portfolio yield in the third quarter of 2015 reflects higher yields on 15 year fixed-rate, ARM and Hybrid ARM Agency RMBS.

For the quarter ended September 30, 2015, the Company had average borrowed funds of approximately $18.1 billion and effective interest expense of $100.3 million, compared to $18.3 billion and $100.1 million, respectively, for the second quarter of 2015. The slight decrease in average borrowed funds for the third quarter is due to lower average borrowings for non-Agency RMBS and asset-backed securities issued by securitization trusts. The Company's effective cost of funds was 2.22% and 2.19% for the third quarter and second quarter of 2015, respectively. In the third quarter the Company's leverage increased approximately 0.4 times due to lower equity after the quarterly decline in book value as the Company used cash from principal prepayments and maturities to buy back stock rather than reinvest in unencumbered assets.

Total expenses for the third quarter of 2015 were approximately $14.7 million, compared to $13.6 million for the second quarter of 2015. Expenses include management fees, general and administrative expenses and securitization trust expenses associated with direct operating costs of the Company's consolidated residential loan securitizations. Management fees totaled $10.1 million in the third quarter, up from $9.3 million in the second quarter of 2015 due to a change in the basis of the management fee calculation that was effective at the beginning of the third quarter. General and administrative expenses were $2.5 million in the third quarter of 2015, an increase of $0.6 million from the second quarter of 2015. During the third quarter of 2015, the Company incurred restatement-related expenses of approximately $750,000 for third party consulting, accounting, auditing and legal fees. Third quarter 2015 securitization trust expenses totaled $2.1 million versus $2.3 million in the second quarter of 2015. Securitization trust expenses are primarily a fixed percentage of the unpaid principal balance of residential loans. The ratio of annualized operating expenses to average equity* for the third quarter of 2015 was 2.19%, an increase of 35 basis points from the second quarter of 2015.

In the third quarter of 2015, the Company bought back 3.7 million shares of common stock for $50.0 million. The Company also declared the following dividends: a common stock dividend of $0.40 per share paid on October 27, 2015; a Series A preferred stock dividend of $0.4844 per share paid on October 26, 2015; and a Series B preferred stock dividend of $0.4844 per share that will be paid on December 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 Wednesday, November 4, 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 November 18, 2015 by calling:

866-425-0192 (North America) or 1-203-369-0875 (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), effective debt-to-equity ratio 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 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 embedded derivatives, net; (gain) loss on foreign currency transactions, net; amortization of net deferred swap losses on 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 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 Yield/ 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 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 amortization of net deferred losses on de-designated interest rate swaps that is being amortized into 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 the Company's 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:

Effective Debt-to-Equity Ratio and Repurchase Agreement Debt-to-Equity Ratio

The following tables show the allocation of the Company's equity to its target assets, the Company's debt-to-equity ratio, the Company's effective debt-to-equity ratio, and the Company's repurchase agreement debt-to-equity ratio as of September 30, 2015 and June 30, 2015. The Company presents an effective debt-to-equity ratio that excludes asset-backed securities issued by consolidated securitization trusts from debt because holders of these asset-backed securities do not have recourse to the Company. The Company also presents a repurchase agreement debt-to-equity ratio because the mortgage REIT industry primarily uses repurchase agreements, which typically mature within one year, to finance investments. The Company believes presenting the Company's effective debt-to-equity ratio and repurchase agreement debt-to-equity ratio, non-GAAP financial measures 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 comparable statistics to those other mortgage REITs who do not consolidate variable interest entities and who almost exclusively borrow using short-term repurchase agreements that are subject to refinancing risk.

September 30, 2015

June 30, 2015

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SOURCE Invesco Mortgage Capital Inc.