Invesco Mortgage Capital Inc. Reports Second Quarter 2018 Financial Results

ATLANTA, Aug. 7, 2018 /PRNewswire/ -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended June 30, 2018.

Financial Summary:

• Q2 2018 net income attributable to common stockholders of $80.0 million or $0.72 basic earnings per common share ("EPS") compared to $41.5 million or $0.37 basic EPS in Q1 2018
• Q2 2018 core earnings* of $46.1 million or core EPS of $0.41 compared to $50.4 million or core EPS of $0.45 in Q1 2018
• Q2 2018 book value per diluted common share** of $17.06 compared to $17.16 at Q1 2018
• Economic return*** of 1.9% for the quarter, (2.5%) year to date
• Q2 2018 debt-to-equity ratio of 6.1x compared to 6.2x at Q1 2018
• Q2 2018 common stock dividend maintained at $0.42 per share

"We are pleased to announce core earnings of $0.41 per share for the second quarter, an economic return of 1.9% for the quarter, and continued book value stability. Despite the rise in interest rates, a flattening yield curve and further Federal Reserve balance sheet reduction in the quarter, we continued to benefit from our diversified investment strategy. Credit spreads have remained in a relatively narrow range in the current market environment, even as Agency RMBS spreads weakened. While our decline in core earnings was substantially attributable to a higher cost of funds, our disciplined approach to actively maintaining our equity duration target helped mitigate the pressure from headwinds during the second quarter," said John Anzalone, Chief Executive Officer.  "We remain confident about our ability to capture attractive returns in Agency RMBS and CMBS."

Key performance indicators for the quarters ended June 30, 2018 and March 31, 2018 are summarized in the table below.

Financial Summary

Net income attributable to common stockholders for the second quarter of 2018 was $80.0 million compared to $41.5 million for the first quarter of 2018.  Higher net income attributable to common stockholders was primarily driven by a $124.0 million decrease in losses on investments that was partially offset by a $66.2 million decrease in gains on derivative instruments.  Losses on investments primarily consist of unrealized losses on the Company's mortgage-backed securities accounted for under the fair value option.  Net income attributable to common stockholders was also impacted by an $11.4 million decrease in net interest income. Book value per diluted common share for the second quarter of 2018 decreased by 0.6% to $17.06.

During the second quarter of 2018, the Company generated $46.1 million in core earnings, a decrease of $4.3 million or 8.5% from the first quarter of 2018.  Core earnings decreased in the second quarter primarily due to a $2.5 million increase in effective interest expense and a $1.7 million decrease in effective interest income.  Effective interest expense rose due to a 12 basis point increase in effective cost of funds reflecting increases in the federal funds rate since December 2017.  Effective interest expense includes contractual interest expense on interest rate swaps and excludes amortization of net deferred gains on designated interest rate swaps.  Lower effective interest income was driven by a slight decrease in average earning assets  to $17.7 billion from $18.1 billion during the first quarter following repayment of the Company's exchangeable senior notes in March 2018.

Total interest income for the second quarter of 2018 was $151.6 million compared to $153.2 million for the first quarter of 2018.  Lower total interest income reflects a $0.4 billion decrease in average earnings assets that was partially offset by a 4 basis point increase in average earning asset yields from 3.38% to 3.42%.  Average earning asset yields benefited from higher index rates on floating and adjustable rate non-Agency RMBS and GSE CRT securities and commercial loans.

The Company decreased its average borrowings by $0.4 billion (2.4%) in the second quarter of 2018 to $15.3 billion compared to average borrowings of $15.7 billion in the first quarter.  Total interest expense was $77.9 million compared to total interest expense of $68.1 million during the first quarter of 2018.  Total interest expense rose during the second quarter due to a 30 basis point increase in cost of funds to 2.04% from 1.74% in the first quarter.

The Company's debt-to-equity ratio decreased to 6.1x as of June 30, 2018 from 6.2x as of March 31, 2018 and its repurchase agreement debt-to-equity ratio decreased to 6.5x as of June 30, 2018 from 6.8x as of March 31, 2018.

Total expenses include management fees and general and administrative expenses primarily consisting of directors and officers insurance, legal costs, accounting, auditing and tax services and miscellaneous general and administrative costs.  Total expenses for the second quarter of 2018 were approximately $11.6 million compared to $12.0 million for the first quarter of 2018.  The ratio of annualized total expenses to average equity ⁽¹⁾ decreased to 2.22% compared to 2.26% for the first quarter due to lower total expenses.

As previously announced, the Company declared the following dividends on June 15, 2018: a common stock dividend of $0.42 per share paid on July 26, 2018 and a Series A preferred stock dividend of $0.4844 per share paid on July 25, 2018.  The Company declared the following dividends on its Series B and Series C Preferred Stock on August 2, 2018 to its stockholders of record as of September 5, 2018: a Series B Preferred Stock dividend of $0.4844 per share payable on September 27, 2018 and a Series C Preferred Stock dividend of $0.46875 per share payable on September 27, 2018.

About Invesco Mortgage Capital Inc.

Invesco Mortgage Capital Inc. is a real estate investment trust that primarily 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 registered investment adviser and an indirect, wholly-owned 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, August 8, 2018, at 9:00 a.m. ET, by calling one of the following numbers:

North America Toll Free: 800-857-7465
International: 1-312-470-0052
Passcode: Invesco

An audio replay will be available until 5:00 pm ET on August 22, 2018 by calling:

800-819-5739 (North America) or 1-203-369-3350 (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, 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

The Company uses the following non-GAAP financial measures to analyze its operating results and believes these financial measures are useful to investors in assessing the Company's performance as further discussed 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.

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 yields),
• total interest expense (and by calculation, cost of funds),
• net interest income (and by calculation, net interest rate margin); and
• debt-to-equity ratio.

The non-GAAP financial measures used by the Company's management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures.  In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of its peer companies.

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; net loss on extinguishment of debt; and cumulative adjustments attributable to non-controlling interest. The Company may add and has added additional reconciling items to its core earnings calculation as appropriate.

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 excludes the impact of gains and losses because gains and losses are not accounted for consistently under U.S. GAAP.  Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income.  For example, the majority of the Company's mortgage-backed securities are classified as available-for-sale securities, and changes in the valuation of these securities are recorded in other comprehensive income on its condensed consolidated balance sheet.  The Company elected the fair value option for its mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in the condensed consolidated statement of operations.  In addition, certain gains and losses represent one-time events.

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 as realized and unrealized credit derivative income (loss), net.  The Company includes its GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest is not accounted for consistently under U.S. GAAP.  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 contractual 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 contractual 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 tables reconcile 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 table reconciles 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 June 30, 2018 and March 31, 2018. The Company's debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt (sum of repurchase agreements and secured loans and exchangeable senior notes) to total equity.  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 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.

June 30, 2018

March 31, 2018

Average Asset Balances

The table below presents information related to the Company's average earning assets for the following periods.