Invesco Mortgage Capital (IVR) - 2021 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents Invesco Mortgage Capital Inc.'s unaudited condensed consolidated financial statements for Q3 and nine months ended September 30, 2021, with detailed disclosures Condensed Consolidated Balance Sheets The balance sheet shows an increase in total assets to $9.38 billion as of September 30, 2021, from $8.63 billion at year-end 2020, driven by mortgage-backed securities and funded by repurchase agreements and stockholders' equity Condensed Consolidated Balance Sheet Highlights ($ in thousands) | Account | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $9,379,248 | $8,632,851 | | Mortgage-backed securities, at fair value | $8,828,002 | $8,172,182 | | Cash and cash equivalents | $189,528 | $148,011 | | Total Liabilities | $7,922,877 | $7,265,693 | | Repurchase agreements | $7,873,798 | $7,228,699 | | Total Stockholders' Equity | $1,456,371 | $1,367,158 | Condensed Consolidated Statements of Operations For Q3 2021, net income attributable to common stockholders decreased to $49.3 million ($0.17 per share) from $96.9 million ($0.53 per share) in Q3 2020, while the nine-month period showed a net loss of $59.4 million, a significant improvement from the prior year's $1.83 billion loss Statements of Operations Highlights ($ in thousands, except per share data) | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $46,454 | $28,852 | $134,455 | $159,594 | | Total Other Income (Loss) | $18,797 | $85,053 | $(137,758) | $(1,922,793) | | Net Income (Loss) Attributable to Common Stockholders | $49,286 | $96,859 | $(59,436) | $(1,830,385) | | Diluted EPS | $0.17 | $0.53 | $(0.23) | $(10.87) | - Negative interest expense on repurchase agreements in 2021 is due to the amortization of net deferred gains on de-designated interest rate swaps exceeding the current period interest expense[12] Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive income attributable to common stockholders was $43.4 million for Q3 2021, down from $62.2 million in Q3 2020, with the nine-month comprehensive loss improving significantly to $74.0 million from $2.05 billion in the prior-year period Comprehensive Income (Loss) Attributable to Common Stockholders ($ in thousands) | Period | 2021 | 2020 | | :--- | :--- | :--- | | Three Months Ended Sep 30 | $43,399 | $62,210 | | Nine Months Ended Sep 30 | $(74,007) | $(2,047,649) | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased from $1.37 billion at year-end 2020 to $1.46 billion as of September 30, 2021, driven by common stock issuances offsetting net losses and dividends, and the redemption of Series A Preferred Stock - The company issued a significant amount of common stock during the first nine months of 2021, raising capital through public offerings and at-the-market sales[17] - The Series A Preferred Stock was fully redeemed in the second quarter of 2021[17] Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, net cash from operating activities was $110.5 million, investing activities used $797.6 million, and financing activities provided $780.8 million, primarily from common stock issuances and repurchase agreements Net Cash Flow Summary for Nine Months Ended Sep 30 ($ in thousands) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $110,455 | $143,712 | | Net Cash from Investing Activities | $(797,630) | $13,656,206 | | Net Cash from Financing Activities | $780,840 | $(13,664,322) | | Net Change in Cash | $93,665 | $135,596 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations of the company's accounting policies and financial activities, covering investments, financing, and equity Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operating results, covering market conditions, investment strategies, capital, and non-GAAP measures Executive Summary The company is a Maryland corporation focused on investing in, financing, and managing mortgage-backed securities and other mortgage-related assets, aiming for attractive risk-adjusted returns as an externally managed REIT - The company's current investment focus includes Agency RMBS, non-Agency CMBS and RMBS, TBAs, commercial mortgage loans, and other real estate-related financing[141] Market Conditions In Q3 2021, financial conditions remained accommodative with stable interest rates and elevated inflation, while Agency RMBS performance was mixed due to anticipated Federal Reserve tapering - The yield curve was largely unchanged in Q3 2021, with the 10-year Treasury yield at 1.49%, and the Consumer Price Index (CPI) remained elevated at 5.4%[146] - Agency RMBS performance was mixed, with lower coupons suffering from the increased likelihood of the Federal Reserve tapering its purchase activity, which is expected to begin in Q4 2021[151] - The company is monitoring the transition from LIBOR to SOFR, noting that its Series B and C Preferred Stock have LIBOR-based rates and existing fallback language will not be amended[156][153] Investment Activities The company's investment portfolio grew to $10.4 billion (including TBAs) as of September 30, 2021, primarily concentrated in 30-year fixed-rate Agency RMBS, with active management involving significant sales and purchases to rotate into higher-yielding securities Total Investment Portfolio, including TBAs ($ in thousands) | Date | Amount | | :--- | :--- | | September 30, 2021 | $10,415,665 | | December 31, 2020 | $9,983,899 | | September 30, 2020 | $6,955,522 | - In the first nine months of 2021, the company sold $11.8 billion and purchased $13.4 billion of Agency RMBS, primarily to rotate into higher-yielding securities[160] - The company's Agency RMBS purchases have focused on specified pools with prepayment protection characteristics, such as lower loan balances and higher LTV ratios[162] Financing and Other Liabilities The company primarily finances assets through short-term repurchase agreements, with collateralized borrowings totaling $7.87 billion as of September 30, 2021, having fully repaid FHLBI secured loans in 2020 Collateralized Borrowings under Repurchase Agreements ($ in thousands) | Quarter Ended | Quarter-end balance | | :--- | :--- | | September 30, 2021 | $7,873,798 | | June 30, 2021 | $7,851,204 | | March 31, 2021 | $8,240,887 | | December 31, 2020 | $7,228,699 | Capital Activities During 2021, the company raised significant capital through two public common stock offerings, generating $103.1 million and $145.9 million in net proceeds, and redeemed all outstanding Series A Preferred Stock for $140.0 million - Completed a public offering of 27.6 million common shares in February 2021 for net proceeds of $103.1 million[177] - Completed a public offering of 43.1 million common shares in June 2021 for net proceeds of $145.9 million[177] - Redeemed all outstanding Series A Preferred Stock for $140.0 million on June 16, 2021[178] Book Value per Common Share The company's book value per common share decreased by 15.8% to $3.25 as of September 30, 2021, from $3.86 at year-end 2020, primarily due to Agency RMBS underperforming interest rate swap hedges amid interest rate volatility and Federal Reserve tapering expectations Book Value per Common Share | Date | Book Value per Common Share | | :--- | :--- | | September 30, 2021 | $3.25 | | December 31, 2020 | $3.86 | Results of Operations This section details the company's operational results for Q3 and nine months ended September 30, 2021, analyzing key performance drivers Non-GAAP Financial Measures Management uses non-GAAP financial measures like Earnings Available for Distribution to analyze operating results and portfolio earnings capacity - The company uses non-GAAP measures such as earnings available for distribution, effective interest income/expense, and economic debt-to-equity ratio to assess performance[236] - The non-GAAP measure 'core earnings' was renamed to 'earnings available for distribution' starting in Q2 2021 to better clarify its purpose, with no change in calculation methodology[236] Liquidity and Capital Resources The company's liquidity sources include equity offerings, operations, and repurchase agreements, holding $486.2 million in cash and restricted cash as of September 30, 2021, and has adapted its financing strategy following 2020 market disruptions - As of September 30, 2021, the company held cash, cash equivalents, and restricted cash of $486.2 million[274] - The company experienced significant margin calls in 2020 due to COVID-19 market disruptions, leading to a strategy of avoiding repurchase agreement financing for less liquid assets[273] - As of September 30, 2021, the company had approximately $598.1 million of unencumbered investments and $189.5 million of unrestricted cash[284] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks, primarily interest rate, prepayment, and market value risks, outlining management strategies including derivatives and providing a yield curve sensitivity analysis Interest Rate Sensitivity Analysis (as of Sep 30, 2021) | Change in Interest Rates | Percentage Change in Projected Net Interest Income | Percentage Change in Projected Portfolio Value | | :--- | :--- | :--- | | +1.00% | (1.53)% | 1.74% | | +0.50% | 1.21% | (0.59)% | | -0.50% | (10.60)% | (0.57)% | | -1.00% | (27.82)% | (2.59)% | - The primary components of market risk are identified as interest rate, principal prepayment, and market value risk[299] - The company uses hedging instruments, primarily interest rate swaps, to manage interest rate risk associated with its short-term repurchase agreement financing[301][323] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of September 30, 2021[325] - No material changes to internal control over financial reporting occurred during the quarter ended September 30, 2021[327] PART II OTHER INFORMATION Item 1. Legal Proceedings The company reports that it was not involved in any material legal proceedings arising in the ordinary course of business as of September 30, 2021 - As of September 30, 2021, the company was not involved in any material legal proceedings[330] Item 1A. Risk Factors The company states that there were no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes to risk factors were reported for the period[331] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reports that it did not repurchase any shares of its common stock during the three months ended September 30, 2021 - No shares of common stock were repurchased during Q3 2021[332] Item 6. Exhibits This section provides an index of the exhibits filed with the Form 10-Q, including corporate governance documents and certifications from the CEO and CFO as required by the Sarbanes-Oxley Act - The report includes certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[342]