Invesco Mortgage Capital (IVR) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements The financial statements for the period ended June 30, 2020, reflect a material adverse change, with total assets plummeting to $1.9 billion and a net loss of $1.9 billion due to the COVID-19 pandemic Condensed Consolidated Balance Sheet Summary (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $1,949,472 | $22,346,545 | | Mortgage-backed securities, at fair value | $1,584,158 | $21,771,786 | | Cash and cash equivalents | $270,161 | $172,507 | | Total Liabilities | $791,680 | $19,414,646 | | Repurchase agreements | $— | $17,532,303 | | Secured loans | $740,000 | $1,650,000 | | Total Stockholders' Equity | $1,157,792 | $2,931,899 | Condensed Consolidated Statements of Operations Summary (in thousands) | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Total Interest Income | $216,872 | $389,295 | | Total Interest Expense | $86,130 | $242,255 | | Net Interest Income | $130,742 | $147,040 | | Total Other Loss | ($2,007,846) | $33,247 | | Net Income (Loss) | ($1,905,031) | $157,126 | | Net Income (Loss) Attributable to Common Stockholders | ($1,927,244) | $134,913 | | Diluted EPS | ($11.91) | $1.08 | - The company experienced unprecedented market conditions due to the COVID-19 pandemic, resulting in a net loss of $1.9 billion for the six months ended June 30, 2020. Stockholders' equity declined from $2.9 billion at the end of 2019 to $1.2 billion[23] - To generate liquidity and reduce leverage amidst an unusually high number of margin calls, the company sold $23.1 billion of MBS and GSE CRTs and repaid $17.5 billion of repurchase agreements and $910.0 million of secured loans during the first six months of 2020. The investment portfolio shrank from $21.9 billion to $1.6 billion[24] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the severe impact of the COVID-19 pandemic, leading to forced deleveraging, $23.1 billion in asset sales, and an 80.5% drop in book value per share - Due to the COVID-19 pandemic, the company was unable to fund margin calls starting March 23, 2020. This prompted massive asset sales of $23.1 billion to generate liquidity, which were used to repay $17.5 billion of repurchase agreements and $910.0 million of secured loans[168] - As of July 31, 2020, the company had resumed investing in Agency securities. The total investment portfolio was approximately $3.3 billion, consisting of 68% Agency RMBS, 30% commercial credit, and 2% residential credit. Total debt included $2.1 billion in repurchase agreements and $305.0 million in secured loans[170] Book Value Per Common Share | Date | Total Adjusted Equity (in thousands) | Common Stock Outstanding (in thousands) | Book Value Per Share | | :--- | :--- | :--- | :--- | | June 30, 2020 | $575,292 | 181,327 | $3.17 | | December 31, 2019 | $2,349,399 | 144,256 | $16.29 | - Book value per common share decreased by 80.5% to $3.17 as of June 30, 2020, from $16.29 at the end of 2019. This was primarily due to significant realized and unrealized losses on derivatives and investments resulting from the market disruption[210] Results of Operations For the six months ended June 30, 2020, the company reported a net loss of $1.9 billion, driven by significant losses on investments and derivative instruments Key Operational Results (Six Months Ended June 30) | Metric (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net Interest Income | $130,742 | $147,040 | | Gain (loss) on investments, net | ($1,061,849) | $570,564 | | Gain (loss) on derivative instruments, net | ($911,122) | ($546,193) | | Net Income (Loss) | ($1,905,031) | $157,126 | - Realized net losses on investment sales for the first six months of 2020 were $409.0 million, largely due to involuntary liquidations by repurchase agreement counterparties at distressed prices after the company was unable to meet margin calls[238] - The company realized a net loss of $904.7 million on the termination of interest rate swaps during the first six months of 2020, as it terminated all outstanding swaps in March in response to market conditions and its reduced portfolio size[206][247] Liquidity and Capital Resources The company's liquidity was severely impacted by the COVID-19 crisis, leading to forced asset sales, with $271.6 million in cash and $554.3 million in unencumbered investments as of June 30, 2020 - Financing activities used a net $18.2 billion in cash for the first six months of 2020, primarily due to the net repayment of $17.5 billion in repurchase agreements and $910.0 million in secured loans[277][278] - As of June 30, 2020, the company held $271.6 million in cash and had $554.3 million of unencumbered investments. The company resumed investing in Agency RMBS in July 2020, financed with a moderate amount of new repurchase agreement borrowings[275][280] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces significant interest rate, prepayment, and market value risks, amplified by COVID-19, with no interest rate hedges as of June 30, 2020, but resumed hedging in July - The company had no interest rate hedges in place as of June 30, 2020, due to limited interest rate sensitivity after its portfolio repositioning. It resumed using interest rate swaps in July 2020 to hedge new Agency RMBS purchases[296][297] Interest Rate Sensitivity Analysis (as of June 30, 2020) | Change in Interest Rates | Percentage Change in Projected Net Interest Income | Percentage Change in Projected Portfolio Value | | :--- | :--- | :--- | | +1.00% | (1.93)% | (2.88)% | | +0.50% | (1.00)% | (1.47)% | | -0.50% | 1.54% | 0.90% | | -1.00% | 1.12% | 1.12% | - Credit risk has increased due to the COVID-19 pandemic. The significant decrease in economic activity could adversely affect the value of mortgage assets, and borrowers may experience difficulties meeting obligations, leading to increased delinquencies and defaults[319] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal controls - Based on an evaluation as of June 30, 2020, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[322] - No changes occurred in the company's internal control over financial reporting during the quarter ended June 30, 2020, that have materially affected or are reasonably likely to materially affect internal controls[324] PART II OTHER INFORMATION Item 1. Legal Proceedings As of June 30, 2020, the company was not involved in any material legal proceedings arising in the ordinary course of business - The company reports no involvement in any material legal proceedings as of June 30, 2020[327] Item 1A. Risk Factors The COVID-19 pandemic significantly amplified risk factors, including funding access, margin calls, dividend payments, and fair value determination amid market volatility - The COVID-19 pandemic has caused severe volatility and forced sales of securities, leading to higher than historical levels of margin calls and potentially unfavorable sale terms[330] - The inability to renew or roll repurchase agreements on acceptable terms could force the company to dispose of assets at significantly lower prices, causing significant losses. This risk is heightened by market volatility from the pandemic[333] - Significant margin calls resulting from counterparties marking down asset values have had, and could continue to have, a material adverse effect on results, liquidity, and the ability to make distributions[335] - The company's ability to pay dividends has been and may continue to be adversely affected. The board reduced the quarterly common stock dividend in Q2 2020 to enhance liquidity[336] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any shares of its common stock during the three months ended June 30, 2020 - No common stock was repurchased during the second quarter of 2020[347]