Invesco Mortgage Capital (IVR) - 2023 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements The report includes unaudited condensed consolidated financial statements as of September 30, 2023 Unaudited Condensed Consolidated Balance Sheets Total assets grew to $5.83 billion, while stockholders' equity slightly decreased to $785 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $5,831,343 | $5,097,395 | | Mortgage-backed securities, at fair value | $5,443,928 | $4,791,893 | | Cash and cash equivalents | $173,921 | $175,535 | | Total Liabilities | $5,046,318 | $4,293,320 | | Repurchase agreements | $4,987,006 | $4,234,823 | | Total Stockholders' Equity | $785,025 | $804,075 | Unaudited Condensed Consolidated Statements of Operations The company reported a Q3 2023 net loss of $68.6 million, an improvement from the prior year Statements of Operations Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $9,431 | $31,720 | $41,398 | $117,098 | | Gain (loss) on investments, net | ($224,897) | ($260,837) | ($272,620) | ($1,090,101) | | Gain (loss) on derivative instruments, net | $151,689 | $133,549 | $203,418 | $554,151 | | Net Income (Loss) | ($68,599) | ($101,428) | ($43,058) | ($439,385) | | Net Income (Loss) Attributable to Common Stockholders | ($74,024) | ($94,602) | ($59,821) | ($447,562) | | Basic EPS | ($1.62) | ($2.78) | ($1.40) | ($13.42) | Unaudited Condensed Consolidated Statements of Cash Flows Net cash from operations was $206.1 million for the nine months ended September 30, 2023 Cash Flow Summary (Nine Months Ended Sep 30, in thousands) | Cash Flow Category | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $206,115 | $126,784 | | Net cash provided by (used in) investing activities | ($899,785) | $2,845,711 | | Net cash provided by (used in) financing activities | $774,634 | ($3,285,182) | | Net change in cash, cash equivalents and restricted cash | $80,964 | ($312,687) | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, the Agency RMBS portfolio, and financing via repurchase agreements - The company primarily focuses on investing in, financing, and managing mortgage-backed securities (MBS), with a significant concentration in Agency RMBS[23][28] Mortgage-Backed Securities Portfolio (Fair Value, in thousands) | Security Type | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | 30 year fixed-rate Agency RMBS | $5,331,969 | $4,661,737 | | Agency-CMO | $78,007 | $84,956 | | Non-Agency CMBS | $25,987 | $36,787 | | Non-Agency RMBS | $7,965 | $8,413 | | Total | $5,443,928 | $4,791,893 | - The company finances the majority of its portfolio through repurchase agreements, with the outstanding amount increasing to $4.99 billion as of September 30, 2023, from $4.23 billion at year-end 2022[58][60] - As of September 30, 2023, the company held interest rate swaps with a total notional amount of $6.85 billion to hedge against interest rate risk[69][70] - During the nine months ended September 30, 2023, the company sold 9.7 million shares of common stock for net proceeds of $109.1 million under its equity distribution agreement[111] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses market challenges impacting Agency RMBS and the resulting 22% decline in book value - Q3 2023 was marked by restrictive financial conditions, widening credit spreads, and higher interest rates and volatility, leading to a sharp underperformance of Agency RMBS relative to Treasuries[133][134] - The company's investment portfolio is predominantly composed of 30-year fixed-rate Agency RMBS, which constituted approximately 98% of the total investment portfolio as of September 30, 2023[140] Book Value Per Common Share | Date | Total Equity (thousands) | Adjusted Equity (thousands) | Common Shares Outstanding (thousands) | Book Value Per Share | | :--- | :--- | :--- | :--- | :--- | | Sep 30, 2023 | $785,025 | $481,360 | 48,461 | $9.93 | | Dec 31, 2022 | $804,075 | $495,222 | 38,711 | $12.79 | - Book value per common share decreased by 22% from December 31, 2022, to September 30, 2023, primarily due to the sharp underperformance of Agency RMBS amid elevated interest rate volatility and higher rates[158] - Net interest income for Q3 2023 was $9.4 million, a significant decrease from $31.7 million in Q3 2022, primarily due to a higher cost of funds, which rose to 5.36% from 1.84% year-over-year, outpacing the increase in asset yields[175][176][181] Reconciliation to Earnings Available for Distribution (EAD) | ($ in thousands, except per share) | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net income (loss) attributable to common stockholders | ($74,024) | ($94,602) | | Adjustments (net) | $143,177 | $142,049 | | Earnings available for distribution | $69,153 | $47,447 | | EAD per common share | $1.51 | $1.39 | - The company's economic debt-to-equity ratio increased to 6.4x as of September 30, 2023, from 5.3x at the end of 2022[233][236] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate, spread, prepayment, and credit risk - The primary components of market risk are identified as interest rate, principal prepayment, market value, spread, and credit risk[261][269][282] - The company mitigates interest rate risk on its short-term repurchase agreement financing by using derivative contracts, primarily interest rate swaps[263] Interest Rate Sensitivity Analysis (as of Sep 30, 2023) | Change in Interest Rates | Percentage Change in Projected Net Interest Income | Percentage Change in Projected Portfolio Value | | :--- | :--- | :--- | | +1.00% | (0.07)% | (0.36)% | | +0.50% | (0.12)% | (0.11)% | | -0.50% | 0.28% | (0.09)% | | -1.00% | 0.56% | (0.45)% | Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[286] - No changes in internal control over financial reporting occurred during the quarter ended September 30, 2023, that materially affected, or are reasonably likely to materially affect, internal controls[288] PART II OTHER INFORMATION Legal Proceedings The company was not involved in any material legal proceedings as of September 30, 2023 - The company reports no involvement in material legal proceedings as of September 30, 2023[291] Risk Factors No material changes to previously disclosed risk factors were reported during the quarter - No material changes to risk factors were reported for the period covered by this quarterly report[292] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased shares of its Series B and Series C Preferred Stock during Q3 2023 Preferred Stock Repurchases (Q3 2023) | Series | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Series B | 34,432 | $22.12 | | Series C | 92,563 | $21.20 | - The share repurchase program, approved in May 2022, allows for the repurchase of up to 3,000,000 Series B shares and 5,000,000 Series C shares with no expiration date[295] Exhibits This section indexes the exhibits filed with the Form 10-Q, including required certifications