Invesco Mortgage Capital (US:IVR)2025-05-07 21:19PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents Invesco Mortgage Capital Inc.'s unaudited condensed consolidated financial statements and detailed notes on accounting policies, investments, and equity changes Unaudited Condensed Consolidated Balance Sheets | Metric ($ in thousands) | March 31, 2025 | December 31, 2024 | Change | | :---------------------- | :------------- | :---------------- | :----- | | Total Assets | 6,158,764 | 5,688,034 | +470,730 | | Mortgage-backed securities, at fair value | 5,945,789 | 5,445,508 | +500,281 | | Total Liabilities | 5,399,598 | 4,957,305 | +442,293 | | Repurchase agreements | 5,354,561 | 4,893,958 | +460,603 | | Total Stockholders' Equity | 759,166 | 730,729 | +28,437 | Unaudited Condensed Consolidated Statements of Operations | Metric ($ in thousands, except EPS) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change (YoY) | | :---------------------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Interest income | 73,846 | 68,583 | +5,263 | | Interest expense | 55,025 | 61,580 | -6,555 | | Net interest income | 18,821 | 7,003 | +11,818 | | Gain (loss) on investments, net | 82,158 | (66,153) | +148,311 | | Gain (loss) on derivative instruments, net | (76,679) | 93,161 | -169,840 | | Total other income (loss) | 5,479 | 26,776 | -21,297 | | Total expenses | 4,659 | 4,657 | +2 | | Net income (loss) | 19,641 | 29,122 | -9,481 | | Net income (loss) attributable to common stockholders | 16,289 | 23,730 | -7,441 | | Basic EPS | 0.26 | 0.49 | -0.23 | | Diluted EPS | 0.26 | 0.49 | -0.23 | Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric ($ in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change (YoY) | | :---------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net income (loss) | 19,641 | 29,122 | -9,481 | | Other comprehensive income (loss) | 616 | (163) | +779 | | Comprehensive income (loss) | 20,257 | 28,959 | -8,702 | | Comprehensive income (loss) attributable to common stockholders | 16,905 | 23,567 | -6,662 | Unaudited Condensed Consolidated Statements of Stockholders' Equity | Metric ($ in thousands) | As of March 31, 2025 | As of December 31, 2024 | Change | | :---------------------- | :------------------- | :---------------------- | :----- | | Total Stockholders' Equity | 759,166 | 730,729 | +28,437 | | Net income (loss) | 19,641 | N/A | N/A | | Other comprehensive income (loss) | 616 | N/A | N/A | | Proceeds from issuance of common stock, net | 35,956 | N/A | N/A | | Common stock dividends | (22,420) | N/A | N/A | | Preferred stock dividends | (3,341) | N/A | N/A | Unaudited Condensed Consolidated Statements of Cash Flows | Metric ($ in thousands) | Three Months Ended March 31, 2025 | Three Months Ended March 31, 2024 | Change (YoY) | | :---------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Net cash provided by (used in) operating activities | 19,346 | 57,499 | -38,153 | | Net cash provided by (used in) investing activities | (516,499) | 37,111 | -553,610 | | Net cash provided by (used in) financing activities | 467,777 | (92,742) | +560,519 | | Net change in cash, cash equivalents and restricted cash | (29,376) | 1,868 | -31,244 | | Cash, cash equivalents and restricted cash, end of period | 181,505 | 200,505 | -19,000 | Notes to Condensed Consolidated Financial Statements - Invesco Mortgage Capital Inc. primarily invests in, finances, and manages mortgage-backed securities (MBS) and other mortgage-related assets, including Agency RMBS, Agency CMBS, and non-Agency RMBS, operating as a REIT and externally managed by Invesco Advisers, Inc212324 - As of March 31, 2025, the total MBS portfolio fair value was $5,945,789 thousand, up from $5,445,508 thousand at December 31, 2024, with approximately 99.9% of MBS accounted for under the fair value option, and the company sold its remaining non-Agency CMBS investment during Q1 2025313235 - Repurchase agreements increased to $5,354,561 thousand as of March 31, 2025, from $4,893,958 thousand as of December 31, 2024, with a weighted average interest rate of 4.47% (down from 4.80%)5557 - Total collateral pledged increased to $5,755,736 thousand as of March 31, 2025, from $5,267,544 thousand as of December 31, 2024, maintaining a ratio of total repurchase agreements collateral pledged to total repurchase agreements outstanding at 105% for both periods586062 - The notional amount of interest rate swaps increased to $3,640,000 thousand (from $3,265,000 thousand), while futures contracts decreased to $902,500 thousand (from $1,402,000 thousand) as of March 31, 2025, resulting in a net loss of $(76,679) thousand on derivative instruments in Q1 2025, compared to a net gain of $93,161 thousand in Q1 2024677071 - Management fees paid to Invesco Advisers, Inc. were $2,996 thousand for Q1 2025, up from $2,861 thousand in Q1 20249394 - The company repurchased and retired 90,146 shares of Series C Preferred Stock in Q1 2025, and common stock sales under equity distribution agreements generated net proceeds of $35,956 thousand from 4,212,057 shares sold in Q1 2025, significantly up from $3,318 thousand from 365,838 shares in Q1 202498103 - Basic and diluted EPS were $0.26 for Q1 2025, down from $0.49 for Q1 2024108 - On May 6, 2025, a Series C Preferred Stock dividend of $0.46875 per share was declared, payable on June 27, 2025110 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and Q1 2025 results, covering macroeconomic factors, investment portfolio, financing, capital, and risk exposures Executive Summary - Invesco Mortgage Capital Inc. primarily invests in, finances, and manages mortgage-backed securities (MBS) and other mortgage-related assets, aiming for attractive risk-adjusted returns primarily through dividends114 - As of March 31, 2025, the company's investments included Agency RMBS, Agency CMBS, and non-Agency RMBS114117 - The company operates as a REIT for U.S. federal income tax purposes, requiring distribution of at least 90% of REIT taxable income annually116 Market Conditions and Impacts - Financial conditions tightened in Q1 2025 due to potential U.S. fiscal and trade policy changes, leading to a 4.6% decline in the S&P 500 and a 10.4% fall in NASDAQ119 - Inflation remained above the Federal Reserve's 2% target, with headline CPI at 2.4% year-over-year, while employment data showed a slowing labor market (152,000 jobs/month in Q1 vs. 209,000 in Q4)120 - Interest rates dropped across the maturity spectrum in Q1 2025 (e.g., 10-year Treasury yield decreased 34 basis points to 4.24%), while short-dated interest rate volatility increased122124 - Agency RMBS performance was consistent with Treasuries, with higher coupons outperforming, supported by subdued originations and net additions by market participants123 Outlook - The company remains cautious on the near-term outlook for Agency RMBS due to proposed U.S. fiscal and trade policy changes, which could lead to slower economic growth, higher inflation, and market volatility126 - The long-term outlook for Agency RMBS is favorable, anticipating improved demand for higher coupons, eventual decline in interest rate volatility, and a steeper yield curve126 - Agency CMBS risk premiums may stay elevated, but limited issuance, strong fundamentals, and stable cash flows are expected to provide support126 Investment Activities | Investment Type ($ in thousands) | March 31, 2025 | December 31, 2024 | March 31, 2024 | | :------------------------------- | :------------- | :---------------- | :------------- | | Agency RMBS: 30 year fixed-rate pass-through | 4,974,663 | 4,541,525 | 4,649,052 | | Agency CMO | 73,539 | 70,776 | 74,701 | | Agency CMBS | 890,372 | 816,147 | 265,512 | | Non-Agency CMBS | — | 9,836 | 10,188 | | Non-Agency RMBS | 7,215 | 7,224 | 7,651 | | Total investment portfolio | 5,945,789 | 5,445,508 | 5,007,104 | - Total investment portfolio increased to $5,945,789 thousand as of March 31, 2025, from $5,445,508 thousand as of December 31, 2024127128 - Holdings of 30-year fixed-rate Agency RMBS constituted approximately 84% of the total portfolio as of March 31, 2025, up from 83% at December 31, 2024128 - The company sold its remaining non-Agency CMBS investment in Q1 2025, reducing non-Agency securities to less than 1% of the portfolio132 Financing and Other Liabilities - Collateralized borrowings under repurchase agreements increased to $5,354,561 thousand as of March 31, 2025, from $4,893,958 thousand as of December 31, 2024134135 - The average quarterly balance of repurchase agreements for Q1 2025 was $4,930,237 thousand, up from $4,865,582 thousand in Q4 2024135 Hedging Instruments - The company uses interest rate swap agreements to mitigate interest rate changes, paying fixed rates and receiving floating rates indexed to SOFR137 - In Q1 2025, the company entered into $725.0 million in new interest rate swaps and terminated $350.0 million, increasing the notional amount138 - Futures contracts are also used for interest rate mitigation; in Q1 2025, $1.4 billion in new contracts were entered, and $1.9 billion were terminated139 Capital Activities - Net proceeds from common stock sales under equity distribution agreements were $35,956 thousand in Q1 2025 (4,212,057 shares), a significant increase from $3,318 thousand in Q1 2024 (365,838 shares)141142 - The company repurchased and retired 90,146 shares of Series C Preferred Stock in Q1 2025144 Capital Metrics | Metric ($ in thousands, except per share) | March 31, 2025 | December 31, 2024 | Change | | :---------------------------------------- | :------------- | :---------------- | :----- | | Total equity | 759,166 | 730,729 | +28,437 | | Liquidation preference of Series C Preferred Stock | (177,913) | (180,166) | +2,253 | | Total adjusted equity | 581,253 | 550,563 | +30,690 | | Common stock outstanding (shares) | 65,942 | 61,730 | +4,212 | | Book value per common share | 8.81 | 8.92 | -0.11 | - Book value per common share decreased by 1.2% to $8.81 as of March 31, 2025, from $8.92 as of December 31, 2024, primarily due to losses on derivative instruments, dividends, and expenses, partially offset by net interest income and investment gains146 Results of Operations - Total average earning assets increased by $450.3 million (YoY) to $5,422,552 thousand in Q1 2025, with average earning asset yields decreasing by 7 basis points to 5.45% (YoY), leading to interest income increasing to $73,846 thousand in Q1 2025 from $68,583 thousand in Q1 2024 due to higher average earning assets151152153154 - Net discount accretion decreased in Q1 2025 compared to Q1 2024, as the portfolio shifted to higher coupon securities that have higher amortized costs relative to principal value157 - Total average borrowings increased by $510.5 million (YoY) to $4,930,237 thousand in Q1 2025, with the average cost of funds decreasing by 111 basis points to 4.46% (YoY) due to a lower Federal Funds target rate, resulting in interest expense decreasing to $55,025 thousand in Q1 2025 from $61,580 thousand in Q1 2024159160161 - Net interest income increased to $18,821 thousand in Q1 2025 from $7,003 thousand in Q1 2024, and net interest rate margin improved to 0.99% from (0.05)%, primarily due to a lower cost of funds164165 - The company reported net unrealized gains on MBS of $87.6 million in Q1 2025, a significant reversal from net unrealized losses of $62.5 million in Q1 2024, driven by a sharp decline in interest rates, with total gain on investments, net being $82,158 thousand in Q1 2025, compared to a loss of $(66,153) thousand in Q1 2024166167169 - Net losses on derivative instruments were $(76,679) thousand in Q1 2025, a substantial shift from net gains of $93,161 thousand in Q1 2024, primarily due to changes in interest rate expectations173175176 - Net income attributable to common stockholders decreased to $16.3 million ($0.26 EPS) in Q1 2025 from $23.7 million ($0.49 EPS) in Q1 2024, influenced by the interplay of investment gains and derivative losses184 Non-GAAP Financial Measures - Earnings Available for Distribution (EAD) decreased to $40,047 thousand ($0.64 per common share) in Q1 2025 from $41,816 thousand ($0.86 per common share) in Q1 2024, primarily due to lower effective net interest income, partially offset by increased TBA dollar roll income and lower preferred dividends193195196 - Effective interest expense increased in Q1 2025 due to a decrease in contractual net interest income on interest rate swaps and higher average borrowings, partially offset by a lower Federal Funds target rate201202 - Effective net interest income decreased in Q1 2025 compared to Q1 2024 due to a decrease in contractual net interest income on interest rate swaps, partially offset by a lower Federal Funds target rate204205 Non-GAAP Financial Metrics | Metric ($ in thousands, except per share) | March 31, 2025 | December 31, 2024 | Change | | :---------------------------------------- | :------------- | :---------------- | :----- | | Repurchase agreements | 5,354,561 | 4,893,958 | +460,603 | | Total stockholders' equity | 759,166 | 730,729 | +28,437 | | Debt-to-equity ratio | 7.1 | 6.7 | +0.4 | | Economic debt-to-equity ratio | 7.1 | 6.7 | +0.4 | - The economic debt-to-equity ratio remained stable at 7.1 as of March 31, 2025, compared to 6.7 as of December 31, 2024, reflecting the impact of off-balance sheet TBA financing206207208 Liquidity and Capital Resources - Cash, cash equivalents, and restricted cash decreased to $181.5 million as of March 31, 2025, from $200.5 million as of March 31, 2024213 - Operating activities provided $19.3 million in net cash in Q1 2025, down from $57.5 million in Q1 2024213 - Investing activities used $516.5 million in net cash in Q1 2025, a significant shift from providing $37.1 million in Q1 2024, driven by increased MBS purchases and derivative settlements214 - Financing activities provided $467.8 million in net cash in Q1 2025, reversing from using $92.7 million in Q1 2024, primarily due to net proceeds from repurchase agreements and common stock issuance215 - The average margin requirement (haircut) under repurchase agreements was 4.5% for Agency RMBS and 4.8% for Agency CMBS as of March 31, 2025216 - The company believes it has sufficient short-term liquidity and capital resources, but long-term needs depend on obtaining additional debt financing or equity/debt offerings223224 Exposure to Financial Counterparties - As of March 31, 2025, one counterparty held collateral exceeding borrowed amounts by over $38.0 million, or 5% of stockholders' equity226 - The company has repurchase agreement financing with 21 counterparties across North America, Asia, and Europe, totaling $5,354,561 thousand227 Dividends - To maintain REIT qualification, the company must distribute at least 90% of its REIT taxable income annually228 - Distribution requirements are based on REIT taxable income, which differs from U.S. GAAP net income due to unrealized gains/losses on investments and derivatives, and temporary differences in premium/discount amortization229 Other Matters - The company believes it satisfied all REIT asset tests for the period ended March 31, 2025, and intends to maintain REIT qualification for the full year 2025231 - The company conducts its business to avoid registration as an investment company under the 1940 Act, relying on specific exclusions (e.g., Section 3(c)(5)(C) for real estate-related assets)232 Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to interest rate, prepayment, and market value risks, outlining management strategies and providing sensitivity analysis Interest Rate Risk - The company is exposed to interest rate risk from its investments and short-term repurchase agreements, which are periodically refinanced at current market rates235 - Interest rate risk is mitigated using derivative contracts, primarily interest rate swap agreements and futures contracts235 - Rising interest rates can increase borrowing costs, narrowing net interest spread and potentially leading to losses, while also increasing defaults and credit losses236 - Hedging effectiveness can be reduced if actual prepayment speeds differ from assumptions, potentially causing losses237 Interest Rate Effects on Fair Value - Changes in interest rates affect the market value of assets and liabilities, including hedging instruments, potentially at different rates238 - Interest rate risk is assessed by estimating the duration of assets and liabilities, which measures market price volatility239 - Volatility in fair value can increase significantly with material changes in interest rates, and other factors like yield curve shape and market expectations also impact fair value240 Spread Risk - Spread risk, the difference between investment interest rates and risk-free rates, is managed through asset selection, sector allocation, portfolio value-at-risk regulation, and maintaining adequate liquidity241 - Changes in spreads impact book value and liquidity, potentially forcing asset sales or strategy changes241 Prepayment Risk - Prepayment risk affects interest income through the amortization of premiums and accretion of discounts on investments242 - Increased prepayment rates accelerate premium amortization (reducing interest income) and discount accretion (increasing interest income)242 - Uncertainty in inflation, fiscal/monetary policy, and interest rate volatility makes prepayment prediction difficult, potentially leading to material differences from expectations243 Extension Risk - If prepayment rates decrease in a rising interest rate environment, the life of fixed-rate assets can extend beyond the term of hedging instruments, negatively impacting results as borrowing costs become unfixed while asset income remains fixed245 - This situation can cause asset market values to decline without offsetting hedging gains, potentially forcing asset sales and incurring losses245 Market Value Risk - Available-for-sale securities' fair value fluctuates with interest rates; generally decreasing in a rising rate environment and increasing in a falling one246 - Crises can cause extreme volatility and illiquidity in fixed income markets, elevating margin call risk and materially impacting operating results and financial condition247 Interest Rate Sensitivity Analysis | Change in Interest Rates | As of March 31, 2025 | As of December 31, 2024 | | :----------------------- | :------------------- | :---------------------- | | | % Change in Projected Net Interest Income | % Change in Projected Portfolio Value | % Change in Projected Net Interest Income | % Change in Projected Portfolio Value | | +1.00% | (6.08)% | (0.75)% | (0.16)% | (0.59)% | | +0.50% | (2.68)% | (0.25)% | 0.02% | (0.21)% | | -0.50% | 2.01% | (0.13)% | (0.48)% | (0.05)% | | -1.00% | 3.65% | (0.77)% | (1.30)% | (0.47)% | - A sensitivity analysis shows that a +1.00% change in interest rates could lead to a (6.08)% decrease in projected net interest income and a (0.75)% decrease in projected portfolio value as of March 31, 2025248249 Real Estate Risk - Residential and commercial property values are volatile and can be adversely affected by economic conditions, local real estate markets, and demographic factors252 - Decreases in property values reduce collateral value and borrower repayment capacity, potentially leading to losses for the company252 Credit Risk - The company retains credit loss risk on residential mortgage investments, managed through pre-acquisition due diligence and regular re-evaluation based on macroeconomic and loan-specific metrics253 - Deteriorating fundamentals and tightening lending conditions can increase loan delinquencies and defaults, impacting MBS performance and potentially leading to downgrades by rating agencies254 Risk Management - The company manages risk exposure by monitoring and adjusting reset indices and interest rates on assets and financings255257 - Strategies include structuring financing with diverse maturities, terms, and adjustment periods, exploring non-marked-to-market financing, and using hedging instruments like interest rate swaps and financial futures257 Item 4. Controls and Procedures Management assessed the effectiveness of disclosure controls and procedures as of March 31, 2025, concluding they were effective, with no material changes in internal control over financial reporting Effectiveness of Disclosure Controls and Procedures - As of March 31, 2025, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective256 - These controls provide reasonable assurance that information required for SEC reports is recorded, processed, summarized, and reported timely256 - Acknowledged inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures258 Changes in Internal Control over Financial Reporting - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2025259 PART II OTHER INFORMATION Item 1. Legal Proceedings The company was not involved in any material legal proceedings as of March 31, 2025 - The company was not involved in any legal proceedings as of March 31, 2025261 Item 1A. Risk Factors No material changes to risk factors were reported compared to the Annual Report on Form 10-K for December 31, 2024 - No material changes to risk factors were reported during the period covered by this Quarterly Report compared to the Annual Report on Form 10-K for December 31, 2024262 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2025, the company repurchased and retired 90,146 shares of Series C Preferred Stock at an average price of $24.29 per share - The company repurchased and retired 90,146 shares of Series C Preferred Stock during Q1 2025 at an average price of $24.29 per share263264 - As of March 31, 2025, 616,513 additional shares of Series C Preferred Stock remained authorized for repurchase under the program264 Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - No defaults upon senior securities were reported265 Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable266 Item 5. Other Information No other information was reported under this item - No other information was reported267 Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, preferred stock articles, and certifications - The exhibit index includes Articles of Amendment and Restatement, Articles Supplementary for Preferred Stock, Certifications (31.1, 31.2, 32.1, 32.2), and XBRL Taxonomy documents274