QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34385
Invesco Mortgage Capital Inc.
(Exact Name of Registrant as Specified in Its Charter)
_______________________________________________
Maryland
26-2749336
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
1555 Peachtree Street, N.E., Suite 1800,
Atlanta,
Georgia
30309
(Address of Principal Executive Offices)
(Zip Code)
(404) 892-0896
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
IVR
New York Stock Exchange
7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock
IVR PrB
New York Stock Exchange
7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock
IVR PrC
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-Accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of July 31, 2022, there were 33,024,318 outstanding shares of common stock of Invesco Mortgage Capital Inc.
Mortgage-backed securities, at fair value (including pledged securities of $3,467,386 and $7,326,175, respectively)
3,915,165
7,804,259
Cash and cash equivalents
202,182
357,134
Restricted cash
128,604
219,918
Due from counterparties
10,231
7,985
Investment related receivable
15,996
16,766
Derivative assets, at fair value
4,289
270
Other assets
27,964
37,509
Total assets
4,304,431
8,443,841
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Repurchase agreements
3,262,530
6,987,834
Derivative liabilities, at fair value
37,284
14,356
Dividends payable
29,722
29,689
Accrued interest payable
1,807
1,171
Collateral held payable
5,728
280
Accounts payable and accrued expenses
1,919
1,887
Due to affiliate
5,978
6,489
Total liabilities
3,344,968
7,041,706
Commitments and contingencies (See Note 14):
Stockholders' equity:
Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized:
7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,156,180 and 6,200,000 shares issued and outstanding, respectively ($153,905 and $155,000 aggregate liquidation preference, respectively)
148,801
149,860
7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 10,879,859 and 11,500,000 shares issued and outstanding, respectively ($271,996 and $287,500 aggregate liquidation preference, respectively)
263,111
278,108
Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 33,024,318 and 32,987,478 shares issued and outstanding, respectively
330
330
Additional paid in capital
3,819,670
3,819,375
Accumulated other comprehensive income
22,749
37,286
Retained earnings (distributions in excess of earnings)
(3,295,198)
(2,882,824)
Total stockholders’ equity
959,463
1,402,135
Total liabilities and stockholders' equity
4,304,431
8,443,841
The accompanying notes are an integral part of these condensed consolidated financial statements.
(Increase) decrease in provision for credit losses
—
830
—
1,768
Equity in earnings (losses) of unconsolidated ventures
(352)
331
(281)
237
Gain (loss) on derivative instruments, net
181,742
(186,284)
420,602
100,677
Other investment income (loss), net
(11)
16
44
—
Total other income (loss)
(143,497)
(112,487)
(408,899)
(156,555)
Expenses
Management fee – related party
4,619
5,455
9,893
10,339
General and administrative
2,519
2,147
4,543
4,140
Total expenses
7,138
7,602
14,436
14,479
Net income (loss)
(109,535)
(73,758)
(337,957)
(83,033)
Dividends to preferred stockholders
(8,100)
(9,900)
(16,494)
(21,007)
Gain on repurchase and retirement of preferred stock
1,491
—
1,491
—
Issuance and redemption costs of redeemed preferred stock
—
(4,682)
—
(4,682)
Net income (loss) attributable to common stockholders
(116,144)
(88,340)
(352,960)
(108,722)
Earnings (loss) per share:
Net income (loss) attributable to common stockholders
Basic
(3.52)
(3.40)
(10.70)
(4.49)
Diluted
(3.52)
(3.40)
(10.70)
(4.49)
(1)Negative interest expense on repurchase agreements in 2021 is due to amortization of net deferred gains on de-designated interest rate swaps that exceeds current period interest expense on repurchase agreements. For further information on amortization of amounts classified in accumulated other comprehensive income before we discontinued hedge accounting, see Note 8 - "Derivatives and Hedging Activities" and Note 12 - "Stockholders' Equity".
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Organization and Business Operations
Invesco Mortgage Capital Inc. (the “Company” or “we”) is a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities ("MBS”) and other mortgage-related assets.
We invest in:
•Residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S. government agency such as the Government National Mortgage Association (“Ginnie Mae”), or a federally chartered corporation such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively “Agency RMBS”);
•Commercial mortgage-backed securities (“CMBS”) that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS”);
•RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency RMBS”);
•Commercial mortgage loans,
•U.S. Treasury securities; and
•Other real estate-related financing agreements.
We conduct our business through IAS Operating Partnership L.P. (the “Operating Partnership”) and have one operating segment. We are externally managed and advised by Invesco Advisers, Inc. (our “Manager”), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. (“Invesco”), a leading independent global investment management firm.
We elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain our REIT qualification, we are generally required to distribute at least 90% of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the “Investment Company” definition under the Investment Company Act of 1940, as amended (the “1940 Act”).
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
For all periods presented, common shares and per common share amounts have been adjusted on a retroactive basis to reflect our one-for-ten reverse stock split, which was effected following the close of business on June 3, 2022.
Certain disclosures included in our Annual Report on Form 10-K are not required to be included on an interim basis in our quarterly reports on Form 10-Q. We have condensed or omitted these disclosures. Therefore, this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2021.
Our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") and consolidate the financial statements of the Company and its controlled subsidiaries. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement of our financial condition and results of operations for the periods presented.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income on mortgage-backed securities and allowances for credit losses. Actual results may differ from those estimates.
There have been no changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2021 other than as detailed below.
U.S. Treasury Securities
U.S. Treasury securities are classified as trading securities and reported at fair value on our condensed consolidated balance sheets. Purchases of U.S. Treasury Securities are recorded on the trade date. Changes in the fair value of U.S. Treasury securities are recognized within gain (loss) on investments, net in our condensed consolidated statements of operations. Coupon interest income is accrued based on the outstanding principal balance of the securities and their contractual terms. Interest income on U.S. Treasury securities is recognized within mortgage-backed and other securities interest income on our condensed consolidated statements of operations.
Note 3 – Variable Interest Entities ("VIEs")
Our maximum risk of loss in VIEs in which we are not the primary beneficiary at June 30, 2022 is presented in the table below.
$ in thousands
Carrying Amount
Company's Maximum Risk of Loss
Non-Agency CMBS
43,644
43,644
Non-Agency RMBS
8,262
8,262
Investments in unconsolidated ventures
3,622
3,622
Total
55,528
55,528
Refer to Note 4 - "Mortgage-Backed Securities" and Note 5 - "Other Assets" for additional details regarding these investments.
Note 4 – Mortgage-Backed Securities
The following tables summarize our MBS portfolio by asset type as of June 30, 2022 and December 31, 2021.
June 30, 2022
$ in thousands
Principal/ Notional Balance
Unamortized Premium (Discount)
Amortized Cost
Unrealized Gain/ (Loss), net
Fair Value
Period-
end
Weighted
Average
Yield (1)
Agency RMBS:
30 year fixed-rate
3,870,377
(62,776)
3,807,601
(5,150)
3,802,451
4.07
%
Total Agency RMBS pass-through
3,870,377
(62,776)
3,807,601
(5,150)
3,802,451
4.07
%
Agency-CMO (2)
427,319
(369,955)
57,364
3,444
60,808
9.29
%
Non-Agency CMBS
44,652
(2,084)
42,568
1,076
43,644
8.44
%
Non-Agency RMBS (3)(4)(5)
330,051
(321,699)
8,352
(90)
8,262
8.58
%
Total
4,672,399
(756,514)
3,915,885
(720)
3,915,165
4.21
%
(1)Period-end weighted average yield is based on amortized cost as of June 30, 2022 and incorporates future prepayment and loss assumptions.
(3)Non-Agency RMBS is 65.7% fixed rate, 33.4% variable rate, and 0.9% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying hybrid adjustable-rate mortgage (“ARM”) loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index.
(4)Of the total discount in non-Agency RMBS, $2.1 million is non-accretable calculated using the principal/notional balance and based on estimated future cash flows of the securities.
(5)Non-Agency RMBS includes interest-only securities ("non-Agency IO") which represent 97.3% of principal/notional balance, 43.8% of amortized cost and 25.7% of fair value.
(1)Period-end weighted average yield is based on amortized cost as of December 31, 2021 and incorporates future prepayment and loss assumptions.
(2)All Agency-CMO are Agency IO.
(3)Non-Agency RMBS is 63.5% fixed rate, 35.6% variable rate and 0.9% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying hybrid adjustable-rate mortgage (“ARM”) loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index.
(4)Of the total discount in non-Agency RMBS, $2.1 million is non-accretable calculated using the principal/notional balance and based on estimated future cash flows of the securities.
(5)Non-Agency RMBS includes non-Agency IO which represent 97.7% of principal/notional balance, 44.8% of amortized cost and 19.9% of fair value.
The following table presents the fair value of our available-for-sale securities and securities accounted for under the fair value option by asset type as of June 30, 2022 and December 31, 2021. We have elected the fair value option for all of our RMBS interest-only securities and our MBS purchased on or after September 1, 2016. As of June 30, 2022 and December 31, 2021, approximately 99% of our MBS are accounted for under the fair value option.
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