Invesco Mortgage Capital (IVR) - 2023 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for the quarter ended March 31, 2023 Condensed Consolidated Balance Sheet Highlights ($ in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $5,707,372 | $5,097,395 | | Mortgage-backed securities, at fair value | $5,447,143 | $4,791,893 | | Cash and cash equivalents | $101,834 | $175,535 | | Total Liabilities | $4,873,257 | $4,293,320 | | Repurchase agreements | $4,814,700 | $4,234,823 | | Total Stockholders' Equity | $834,115 | $804,075 | Condensed Consolidated Statements of Operations Highlights ($ in thousands) | Account | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total interest income | $69,287 | $42,174 | | Total interest expense | $49,726 | $(2,104) | | Net interest income | $19,561 | $44,278 | | Gain (loss) on investments, net | $51,956 | $(504,388) | | Gain (loss) on derivative instruments, net | $(44,895) | $238,860 | | Net income (loss) | $21,463 | $(228,422) | | Net income (loss) attributable to common stockholders | $15,601 | $(236,816) | | Diluted EPS | $0.39 | $(7.18) | - The company's primary business is investing in, financing, and managing mortgage-backed securities (MBS) and other mortgage-related assets, with a significant focus on Agency RMBS[23][28] - As of March 31, 2023, approximately 99% of the company's Mortgage-Backed Securities (MBS) portfolio was accounted for under the fair value option[38] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the company's financial performance and condition for Q1 2023, covering market conditions, investment strategy, and capital management Executive Summary, Market Conditions, and Outlook Q1 2023 performance was impacted by interest rate hikes and banking stress, with Agency MBS underperforming, but an attractive investment environment is anticipated - Key market factors in Q1 2023 included interest rate volatility following regional bank failures, two Federal Funds target rate increases, and underperformance of Agency MBS relative to Treasuries[136] - The company's outlook suggests that a potential end to the FOMC's tightening cycle, reduced interest rate volatility, and favorable funding conditions could create an attractive investment environment for Agency RMBS in 2023[138] Investment and Financing Activities The investment portfolio grew to $5.45 billion, primarily 30-year fixed-rate Agency RMBS, financed mainly through increased repurchase agreements Investment Portfolio Composition ($ in thousands) | Asset Class | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | 30 year fixed-rate Agency RMBS | $5,320,942 | $4,661,737 | | Agency CMO | $81,258 | $84,956 | | Non-Agency CMBS | $36,624 | $36,787 | | Non-Agency RMBS | $8,319 | $8,413 | | Total Investment Portfolio | $5,448,576 | $4,793,882 | - The company's holdings of 30-year fixed-rate Agency RMBS shifted significantly, with the portfolio as of March 31, 2023, concentrated in coupons ranging from 4.0% to 5.5%, compared to a concentration in 2.0% to 3.0% coupons a year prior[142] Repurchase Agreements Activity ($ in thousands) | Quarter Ended | Quarter-end balance | Average quarterly balance | | :--- | :--- | :--- | | March 31, 2023 | $4,814,700 | $4,734,819 | | December 31, 2022 | $4,234,823 | $3,825,218 | Hedging and Capital Activities The company managed interest rate risk via swap terminations and raised $35.8 million from equity sales, while book value per share slightly decreased - During Q1 2023, the company sold 2,930,069 shares of common stock under its equity distribution agreement, generating net proceeds of $35.8 million[154] Book Value Per Common Share | Date | Book Value Per Common Share | | :--- | :--- | | March 31, 2023 | $12.61 | | December 31, 2022 | $12.79 | Results of Operations Analysis Q1 2023 saw a net income reversal to $15.6 million due to investment gains, despite a decline in net interest income from higher funding costs - Net interest income decreased to $19.6 million for Q1 2023 from $44.3 million in Q1 2022, primarily due to a higher cost of funds related to increases in the Federal Funds target rate[184] - The company recorded a net gain on investments of $52.0 million in Q1 2023, compared to a net loss of $504.4 million in Q1 2022, driven by $65.7 million in unrealized gains on MBS due to improved valuations as Treasury yields decreased[185][188] - Net losses on derivative instruments were $44.9 million in Q1 2023, a stark contrast to net gains of $238.9 million in Q1 2022, primarily due to changes in forward interest rate expectations affecting interest rate swaps[193][203] Non-GAAP Financial Measures Non-GAAP metrics show Earnings Available for Distribution increased to $59.3 million, while the economic debt-to-equity ratio rose to 5.8x Earnings Available for Distribution (EAD) Reconciliation ($ in thousands) | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net income (loss) attributable to common stockholders | $15,601 | $(236,816) | | Adjustments (Net) | $43,699 | $274,962 | | Earnings available for distribution | $59,300 | $38,146 | | EAD per common share | $1.50 | $1.16 | Economic Debt-to-Equity Ratio | Date | Debt-to-equity ratio (GAAP) | Economic debt-to-equity ratio (Non-GAAP) | | :--- | :--- | :--- | | March 31, 2023 | 5.8x | 5.8x | | December 31, 2022 | 5.3x | 5.3x | Liquidity and Capital Resources The company maintains $228.9 million in cash and equivalents, with sufficient liquidity for short-term needs, and an average 4.6% margin requirement on Agency RMBS - As of March 31, 2023, the company held $228.9 million in cash, cash equivalents, and restricted cash, with management believing it has sufficient liquidity for short-term requirements[238][248] - The average margin requirement, or haircut, under repurchase agreements was 4.6% for Agency RMBS as of March 31, 2023, with liquidity maintained to manage margin call risk[242][244] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to interest rate, prepayment, and market value risks, and its strategies using derivatives to mitigate them - The company's primary market risks are related to interest rate, principal prepayment, and market value, which are actively managed to ensure sufficient compensation and capital levels[259] Interest Rate Sensitivity Analysis (as of March 31, 2023) | Change in Interest Rates | Percentage Change in Projected Net Interest Income | Percentage Change in Projected Portfolio Value | | :--- | :--- | :--- | | +1.00% | (0.92)% | (1.02)% | | +0.50% | (0.38)% | (0.40)% | | -0.50% | 0.18% | 0.10% | | -1.00% | 0.74% | (0.17)% | - Risk management strategies include monitoring asset and financing characteristics, structuring varied financing terms, and using hedging instruments, primarily interest rate swaps, to manage interest rate sensitivity[281] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of March 31, 2023[284] - No changes occurred in the company's internal control over financial reporting during the quarter ended March 31, 2023, that materially affected, or are reasonably likely to materially affect, these controls[286] PART II OTHER INFORMATION Item 1. Legal Proceedings As of March 31, 2023, the company was not involved in any material legal proceedings arising in the ordinary course of business - As of March 31, 2023, the company was not involved in any material legal proceedings[289] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022, were reported - No material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022, were reported for the period[290] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[291] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[292] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[293] Item 5. Other Information The company reported no other information for the period - None[294] Item 6. Exhibits This section provides an index of exhibits filed with the Form 10-Q, including corporate governance documents and officer certifications - A list of exhibits filed with the Form 10-Q is provided, including corporate governance documents and required officer certifications[295][302]