Invesco Mortgage Capital (IVR) - 2021 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents Invesco Mortgage Capital Inc.'s unaudited condensed consolidated financial statements for Q1 2021 and Q1 2020, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows Unaudited Condensed Consolidated Balance Sheets Total assets increased to $9.76 billion as of March 31, 2021, driven by mortgage-backed securities, while total liabilities and stockholders' equity also rose Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $9,762,836 | $8,632,851 | | Mortgage-backed securities, at fair value | $9,099,742 | $8,172,182 | | Total Liabilities | $8,280,904 | $7,265,693 | | Repurchase agreements | $8,240,887 | $7,228,699 | | Total Stockholders' Equity | $1,481,932 | $1,367,158 | Unaudited Condensed Consolidated Statements of Operations The company reported a net loss of $9.3 million for Q1 2021, a significant improvement from a $1.6 billion loss in Q1 2020, despite decreased net interest income Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Total interest income | $40,010 | $186,699 | | Total interest expense | $(1,660) | $85,688 | | Net interest income | $41,670 | $101,011 | | Total other income (loss) | $(44,068) | $(1,703,147) | | Net income (loss) | $(9,275) | $(1,616,192) | | Net income (loss) per share (Basic & Diluted) | $(0.09) | $(10.38) | Unaudited Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities was $34.5 million, while investing activities used $986.3 million, and financing activities provided $1.14 billion, leading to an overall cash increase of $186.5 million Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $34,505 | $110,038 | | Net cash provided by (used in) investing activities | $(986,251) | $11,553,491 | | Net cash provided by (used in) financing activities | $1,138,197 | $(11,588,052) | | Net change in cash, cash equivalents and restricted cash | $186,451 | $75,477 | Notes to Condensed Consolidated Financial Statements These notes detail accounting policies, the $9.1 billion Agency RMBS-dominated portfolio, $8.2 billion in repurchase agreements, derivative hedging, and significant capital raising activities - The company is a REIT primarily focused on investing in, financing, and managing mortgage-backed securities (MBS) and other mortgage-related assets, externally managed by Invesco Advisers, Inc[20] - The MBS portfolio totaled $9.1 billion at fair value as of March 31, 2021, a significant increase from $8.17 billion at year-end 2020, with Agency RMBS constituting $9.0 billion of the total[30] - Borrowings outstanding under repurchase agreements increased to $8.24 billion as of March 31, 2021, from $7.23 billion at the end of 2020, with a weighted average interest rate of 0.15%[55] - In Q1 2021, the company completed a public offering of 27.6 million shares of common stock for net proceeds of approximately $103.1 million and sold an additional 15.55 million shares under its equity distribution agreement for net proceeds of $57.8 million[113][114] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant improvement in Q1 2021 financial results, portfolio repositioning, a 5.4% decrease in book value per share, non-GAAP core earnings of $0.11 per share, and sufficient liquidity Market Conditions and Investment Activities Q1 2021 saw a steepening yield curve, prompting the company to sell $5.5 billion of lower-yielding Agency RMBS and purchase $7.0 billion of higher-yielding Agency RMBS, growing the total investment portfolio to $10.7 billion - The yield curve steepened dramatically in Q1 2021, with the 10-year Treasury yield rising 83 basis points to 1.74%, driven by inflation fears and economic stimulus[138] - The company sold $5.5 billion of lower-yielding Agency RMBS and purchased $7.0 billion of higher-yielding Agency RMBS to capitalize on the sharp increase in interest rates[153] Investment Portfolio Composition (in thousands) | Asset Class | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Agency RMBS | $8,997,918 | $8,050,866 | | Non-Agency CMBS | $91,250 | $109,583 | | Non-Agency RMBS | $10,574 | $11,733 | | Commercial loan | $20,000 | $23,098 | | TBAs (implied cost) | $1,548,066 | $1,772,211 | | Total Investment Portfolio | $10,683,574 | $9,983,899 | Results of Operations Net loss attributable to common stockholders improved significantly to $20.4 million in Q1 2021, primarily due to a $287.0 million gain on derivatives and a smaller loss on investments, despite reduced net interest income - Net interest income decreased to $41.7 million in Q1 2021 from $101.0 million in Q1 2020, primarily due to a smaller average portfolio of earning assets[199] - A net loss on investments of $331.9 million was recorded, mainly from unrealized losses on MBS due to wider interest rate spreads and rising mortgage rates[202][205] - A net gain on derivative instruments of $287.0 million was recorded, driven by a $327.5 million realized gain on interest rate swaps as interest rates rose[169][210] - Management fees decreased to $4.9 million from $11.0 million year-over-year due to a lower average equity base for the fee calculation[219] Non-GAAP Financial Measures The company reported non-GAAP core earnings of $25.2 million, or $0.11 per share, for Q1 2021, with an economic debt-to-equity ratio of 6.6x and an effective interest rate margin of 1.32% Core Earnings Reconciliation (in thousands, except per share) | Metric | Q1 2021 | | :--- | :--- | | Net loss attributable to common stockholders | $(20,382) | | Adjustments (net) | $45,540 | | Core earnings attributable to common stockholders | $25,158 | | Core earnings per share | $0.11 | Leverage Ratios | Ratio | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Debt-to-equity ratio (GAAP) | 5.6x | 5.3x | | Economic debt-to-equity ratio (Non-GAAP) | 6.6x | 6.6x | Liquidity and Capital Resources The company maintained strong liquidity with $579.0 million in cash, cash equivalents, and restricted cash, supported by $1.1 billion from financing activities, and actively manages margin call risk - Held cash, cash equivalents, and restricted cash of $579.0 million at March 31, 2021[257] - Financing activities provided $1.1 billion in cash, including $1.0 billion net from repurchase agreements and $161.4 million from common stock issuances[260] - The average haircut under repurchase agreements for Agency RMBS was 4.9% as of March 31, 2021[261] - As of March 31, 2021, the company had approximately $494.5 million of unencumbered investments and $198.4 million of unrestricted cash[267] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages primary market risks—interest rate, prepayment, and market value—through hedging and asset selection, with a 100 basis point rate increase projected to decrease portfolio value by 3.00% and net interest income by 2.31% Interest Rate Sensitivity Analysis (as of March 31, 2021) | Change in Interest Rates | Percentage Change in Projected Net Interest Income | Percentage Change in Projected Portfolio Value | | :--- | :--- | :--- | | +1.00% | (2.31)% | (3.00)% | | +0.50% | 0.21% | (1.35)% | | -0.50% | (8.72)% | 0.44% | | -1.00% | (23.89)% | (0.36)% | - The company's primary market risks include interest rate risk, spread risk, prepayment risk, extension risk, and credit risk[283][291][304] - Risk management strategies include using derivatives (primarily interest rate swaps), structuring financing agreements with varied maturities, and actively managing the interest rate sensitivity of assets and liabilities[307] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[309] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[311] PART II OTHER INFORMATION Item 1. Legal Proceedings As of March 31, 2021, the company was not involved in any material legal proceedings - As of March 31, 2021, the company was not involved in any material legal proceedings arising in the ordinary course of business[314] Item 1A. Risk Factors There were 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, 2020 - No material changes to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020, were reported for the period[315] 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 March 31, 2021 - The company did not repurchase any of its common stock during the three months ended March 31, 2021[316]