Invesco Mortgage Capital Inc. Reports Fourth Quarter 2016 Financial Results

ATLANTA, Feb. 21, 2017 /PRNewswire/ -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended December 31, 2016, reporting basic earnings of $2.42 per common share, core earnings* of $0.36 per common share and book value per diluted common share** of $17.48.

Interest rates rose sharply and credit spreads tightened during the fourth quarter as risk appetite improved following the U.S. Presidential election and subsequent action taken by the Federal Reserve to raise the Federal Funds rate. While tighter credit spreads benefited the Company's high quality credit portfolio during the quarter, the impact of higher rates on the Company's Agency RMBS portfolio resulted in book value per diluted common share** declining by 3.3% for the quarter. "During the fourth quarter and throughout 2016 we increased our allocation to lower duration Agency RMBS, reduced leverage, and held higher levels of cash in order to reduce book value volatility and protect the future earnings stream.  The reduction in risk led to lower core earnings in the fourth quarter, but positions us well to capitalize on future improvements in investment returns and improve core earnings," said Richard King, President and CEO.

The Company delivered an 11.3% economic return*** for the year ended December 31, 2016 to its shareholders.

Highlights

• Q4 2016 net income attributable to common stockholders of $270.1 million or $2.42 basic earnings per common share or $2.15 diluted earnings per common share
• Q4 2016 core earnings* of $39.8 million, core earnings per common share* of $0.36, and a common stock dividend of $0.40 per share
• Q4 2016 book value per diluted common share** of $17.48 vs. $18.08 at 9/30/2016 and $17.14 at 12/31/2015
• Economic return*** for the three months and year ended December 31, 2016 of -1.1% and 11.3%, respectively
• Q4 2016 comprehensive loss attributable to common stockholders was ($22.7) million or ($0.20) basic comprehensive loss per common share vs. comprehensive income attributable to common stockholders of $155.8 million or $1.40 basic comprehensive income per common share for Q3 2016
• YTD 2016 comprehensive income attributable to common stockholders was $205.7 million or $1.84 basic comprehensive income per common share vs. comprehensive loss attributable to common stockholders of ($40.4) million or ($0.33) basic comprehensive loss per common share for 2015

* Core earnings (and by calculation, core earnings per common share) are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" for important disclosures and a reconciliation to the most comparable U.S. GAAP measures.

**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 December 31, 2016 is defined as the change in book value per diluted common share from September 30, 2016 to December 31, 2016 of ($0.60); plus dividends declared of $0.40 per common share; divided by the September 30, 2016 book value per diluted common share of $18.08. Economic return for the twelve months ended December 31, 2016 is defined as the change in book value per diluted common share from December 31, 2015 to December 31, 2016 of $0.34; plus dividends declared of $1.60 per common share; divided by the December 31, 2015 book value per diluted common share of $17.14.

Key performance indicators for the quarters ended December 31, 2016 and September 30, 2016 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" for important disclosures and a reconciliation to the most comparable U.S. GAAP measures of net income (loss) 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

Net income attributable to common stockholders for the fourth quarter of 2016 was $270.1 million, compared to  $129.2 million for the third quarter. The improvement in fourth quarter net income attributable to common stockholders was primarily due to a $230.7 million net gain on interest rate hedges versus a $35.4 million net gain in the third quarter. Book value per diluted common share as of December 31, 2016 decreased to $17.48 compared to $18.08 as of September 30, 2016 due to higher interest rates and larger declines in the value of the Company's residential mortgage-backed securities ("RMBS") versus increases in the value of the corresponding hedges.

The Company reduced its leverage to 5.8x as of December 31, 2016 and held higher levels of cash contributing to lower core earnings for the fourth quarter of 2016.  During the fourth quarter, the Company generated $39.8 million in core earnings compared to $46.2 million in the third quarter. The decrease in core earnings was primarily driven by lower net interest income during the fourth quarter and a one-time reduction of management fees in the third quarter.  The Company's net interest rate margin decreased from 2.00% in the third quarter to 1.95% in the fourth quarter.

For the quarter ended December 31, 2016, the Company had average earning assets of $15.5 billion, compared to $16.1 billion for the third quarter and interest income of $114.6 million for the fourth quarter compared to $118.1 million during the third quarter.  During the fourth quarter, the Company primarily used proceeds from paydowns and sales of investments to purchase 15 year fixed-rate Agency RMBS and GSE CRTs and to repay debt. Average earning asset yield rose from 2.94% in the third quarter to 2.96% in the fourth quarter reflecting the change in asset mix.  The Company shifted its equity allocation slightly toward residential credit assets following the December increase in the Federal Funds rate and U.S. Presidential election.  As of December 31, 2016, equity was allocated 59% to residential and commercial credit assets and 41% to Agency RMBS.

For the quarter ended December 31, 2016, the Company had average borrowed funds of approximately $13.6 billion compared to $14.2 billion for the third quarter and interest expense of $34.4 million compared to $33.3 million during the third quarter. The Company's cost of funds was 1.01% and 0.94% for the fourth quarter and third quarter, respectively.  The Company's total interest expense and cost of funds rose during the fourth quarter primarily due to higher market pricing of repurchase agreement borrowings in anticipation of the December increase in the Federal Funds borrowing rate. The Company's fourth quarter repurchase agreement interest expense benefited from higher amortization of net deferred gains on the Company's de-designated interest rate swaps totaling $6.2 million compared to $4.8 million in the third quarter.   Amortization of net deferred gains on the Company's de-designated interest rate swaps is recorded as a reduction in repurchase agreement interest expense under U.S. GAAP.  During the next 12 months, the Company estimates that $25.5 million of net deferred gains on de-designated interest rate swaps currently included in other comprehensive income will be reclassified as a reduction to repurchase agreement interest expense.

Total expenses for the fourth quarter were approximately $10.7 million compared to $8.6 million for the third quarter. Total expenses were higher in the fourth quarter primarily due to a cumulative one-time reduction of management fees in the third quarter totaling $2.3 million that related to a prior accounting adjustment for the amortization of premiums and discounts associated with non-Agency RMBS not of high credit quality. The ratio of annualized total expenses to average equity* for the fourth quarter was 2.06%. Excluding the cumulative one-time adjustment to management fees, the ratio of annualized total expenses to average equity* was 2.03% for the third quarter.

The Company declared the following dividends during the fourth quarter: a common stock dividend of $0.40 per share paid on January 26, 2017; a Series A preferred stock dividend of $0.4844 per share paid on January 25, 2017; and a Series B preferred stock dividend of $0.4844 per share that will be paid on March 27, 2017.

*The ratio of annualized total 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 weighted month-end balances.

About Invesco Mortgage Capital Inc.

Invesco Mortgage Capital Inc. is a real estate investment trust that focuses on investing in, 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, February 22, 2017, 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 March 8, 2017 by calling:

866-480-3545 (North America) or 1-203-369-1549 (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. 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 (loss) attributable to common stockholders (and by calculation basic earnings (loss) per common share), total interest income (and by calculation, earning asset 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. Certain prior period U.S. GAAP and non-GAAP financial measures have been revised to correct immaterial errors in accounting for premiums and discounts on non-Agency RMBS not of high credit quality.  For further information, see Note 17 of the Company's consolidated financial statements filed in Item 15 of the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

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; unrealized (gain) loss on derivative instruments, net; realized and unrealized (gain) loss on GSE CRT embedded derivatives, net; (gain) loss on foreign currency transactions, net; amortization of net deferred (gain) loss on de-designated interest rate swaps; and cumulative adjustments attributable to non-controlling interest. The Company records changes in the valuation of its mortgage-backed securities, excluding securities for which the Company elected the fair value option 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:

 

(1) U.S. GAAP gain (loss) on derivative instruments, net on the consolidated statements of operations includes the following components:

 

(2) U.S. GAAP realized and unrealized credit derivative income (loss), net on the consolidated statements of operations includes the following components:

 

(3) U.S. GAAP other investment income (loss), net on the consolidated statements of operations includes the following components:

 

(4) U.S. GAAP repurchase agreements interest expense on the consolidated statements of operations includes the following components:

 

(5) Core earnings per share attributable to common stockholders is equal to core earnings divided by the basic weighted average number of common shares outstanding.

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 recorded as realized and unrealized credit derivative income (loss), net. The Company accounts for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but has elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP, coupon interest on GSE CRTs accounted for using the fair value option is recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments is recorded as realized and unrealized credit derivative income (loss). 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 irrespective of whether the Company has elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.

The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for net interest expense on its interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. 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 excludes the amortization of net deferred gains (losses) on de-designated interest rate swaps from its calculation of effective interest expense 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 expense on its interest rate swaps that is recorded as gain (loss) on derivative instruments, amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that is recorded as 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:

 

 

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, and the Company's repurchase agreement debt-to-equity ratio as of December 31, 2016 and September 30, 2016.  The Company presents a repurchase agreement debt-to-equity ratio, a non-GAAP financial measure of leverage, 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 repurchase agreement debt-to-equity ratio when considered together with its U.S. GAAP financial measure of debt-to-equity ratio, 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.

December 31, 2016

 

September 30, 2016

 

 

Average Balances

The table below presents certain information for the Company's portfolio for the following periods.

 

 

 

 

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SOURCE Invesco Mortgage Capital Inc.