Invesco Mortgage Capital (IVR) - 2021 Q4 - Annual Report

PART I Business Overview Invesco Mortgage Capital Inc. is a Maryland corporation focused on investing in, financing, and managing mortgage-backed securities (MBS) and other mortgage-related assets, aiming for attractive risk-adjusted returns through dividends and capital appreciation - The Company is a Maryland corporation primarily focused on investing in, financing, and managing mortgage-backed securities (MBS) and other mortgage-related assets, aiming for attractive risk-adjusted returns through dividends and capital appreciation[18] - Current investment portfolio includes Agency RMBS, non-Agency CMBS, non-Agency RMBS, TBAs, and commercial mortgage loans. Historically, it also invested in Agency CMBS, GSE CRT, and residential mortgage loans[18][21] - The Company is externally managed by Invesco Advisers, Inc. and operates as a REIT for U.S. federal income tax purposes, requiring distribution of at least 90% of REIT taxable income annually[19][20] - Competitive advantages include significant experience of senior management and the Manager, access to sophisticated analytical tools and infrastructure, extensive strategic relationships, and a disciplined investment approach focused on rigorous quantitative and qualitative analysis[22][23][24][25] - Financing strategy primarily involves repurchase agreements, typically short-term (one to six months), and the company uses leverage to achieve return objectives, adjusting based on asset volatility, liquidity, financing type, and cost[50][54] - Risk management strategy includes mitigating prepayment, interest rate, spread, credit, liquidity, and foreign exchange rate risks through active portfolio-wide and security-specific processes, utilizing derivative financial instruments like interest rate swaps and currency forward contracts[56][57][58][60][62][63] Our Company Invesco Mortgage Capital Inc. is a Maryland REIT focused on MBS investments, aiming for stockholder returns through dividends and capital appreciation, externally managed by Invesco Advisers, Inc - Invesco Mortgage Capital Inc. is a Maryland corporation focused on investing in, financing, and managing mortgage-backed securities (MBS) and other mortgage-related assets[18] - The company's objective is to provide attractive risk-adjusted returns to stockholders, primarily through dividends and secondarily through capital appreciation[18] - Current investments include Agency RMBS, non-Agency CMBS, non-Agency RMBS, TBAs, commercial mortgage loans, and other real estate-related financing arrangements[18] - Historically, the company also invested in Agency CMBS, credit risk transfer securities (GSE CRT), and residential mortgage loans[18] - The company conducts business through its wholly-owned subsidiary, IAS Operating Partnership L.P., and is externally managed and advised by Invesco Advisers, Inc[19] - It has elected to be taxed as a REIT for U.S. federal income tax purposes, requiring distribution of at least 90% of REIT taxable income annually, and operates to be excluded from the definition of an 'Investment Company' under the 1940 Act[20] Our Manager The Manager provides the Company's management team and resources, with functions supervised by the Board of Directors - The Manager provides the Company's management team, including officers and support personnel, all of whom are employees of the Manager or its affiliates[21] - The Manager invests significantly in talent development, health and welfare programs, technology, and other resources to support its employees and is committed to improving diversity[21] - The Manager is not obligated to dedicate employees exclusively to the Company or a specific portion of time to its business, and its functions are subject to the Board of Directors' supervision[21] Our Competitive Advantages The Company leverages its experienced management, sophisticated analytical tools, strategic relationships, and disciplined investment approach for competitive edge - The Company benefits from the significant experience of its senior management and the Manager's structured investments team in managing mortgage-related assets across various market conditions[22] - Access to the Manager's sophisticated analytical tools, infrastructure, and expertise aids in asset selection, risk management, and in-depth market analysis[23] - Extensive strategic relationships with financial intermediaries enhance the ability to source, finance, and hedge investment opportunities[24] - A disciplined investment approach, relying on rigorous quantitative and qualitative analysis, aims to maximize risk-adjusted returns and preserve capital[25] Investment Strategy The Company diversifies investments across Agency and non-Agency RMBS, CMBS, TBAs, and commercial mortgage loans, utilizing various structures and historical asset classes - The Company invests in a diversified pool of mortgage assets, including Agency RMBS, non-Agency RMBS, non-Agency CMBS, TBAs, and commercial mortgage loans, and may also invest in ventures managed by an affiliate of its Manager[26] - Agency RMBS are guaranteed by U.S. government agencies (Ginnie Mae) or federally chartered corporations (Fannie Mae, Freddie Mac) and provide monthly principal and interest payments, subject to prepayment risk[27][28][29][30] - Non-Agency CMBS are backed by commercial mortgages and typically issued in multiple tranches, with credit quality dependent on securitization structure and underlying loan quality[32][33] - Non-Agency RMBS are residential mortgage-backed securities not guaranteed by U.S. government agencies, collateralized by loans that do not conform to GSE underwriting guidelines, such as prime, jumbo prime, and Alt-A mortgage loans[34][35][36] - TBAs are forward contracts to purchase or sell Agency RMBS, specifying price, issuer, term, and coupon, with actual securities identified shortly before settlement[40] - Commercial mortgage loans are secured by first or second liens on commercial properties, typically with 2-10 year terms and fixed or floating interest rates, often including prepayment penalties[41] - Mezzanine loans represent a senior position in the borrower's equity, subordinate to a first mortgage, secured by pledges of ownership interests in entities owning real property[42] - Investments in unconsolidated ventures, where the Company has significant influence but not control, are accounted for using the equity method[43][44] - Agency CMBS are structured pass-through certificates representing interests in pools of commercial loans, guaranteed by U.S. government agencies or federally chartered corporations, often with prepayment protection[45][46][47] - GSE Credit Risk Transfer Securities (CRTs) provide credit protection to issuers for defaults within pools of mortgage loans collateralizing Agency RMBS or CMBS, with payments based on prepayments and floating interest rates[48] - The Company historically invested in a loan participation interest in a secured loan collateralized by mortgage servicing rights, which was sold in April 2020[49] Financing Strategy The Company primarily finances assets using short-term repurchase agreements linked to SOFR, employing leverage based on asset characteristics and market conditions - The Company primarily uses repurchase agreements, typically short-term (one to six months) and bearing interest rates linked to SOFR, to finance the majority of its target assets[50] - Historically, secured loans from the Federal Home Loan Bank of Indianapolis (FHLBI) were used, but these were repaid in 2020, and FHLBI membership was terminated[51] - Repurchase agreements involve selling assets to a counterparty with an obligation to repurchase them at a higher price, with financing limited to a specified percentage of the asset's market value[52] - Leverage is used on assets to achieve return objectives, with the amount depending on expected price volatility, liquidity, financing type, advance rate, and cost of financing[54] Risk Management Strategy The Company employs comprehensive risk management, utilizing derivatives and active monitoring to mitigate interest rate, spread, credit, liquidity, and foreign exchange risks - Risk management is integral to the Company's strategy, actively employing portfolio-wide and security-specific risk measurement and management processes to mitigate investment losses from prepayment, interest rate volatility, and other risks[56] - Interest rate risk is managed through techniques like derivative financial instruments (e.g., interest rate swaps, futures, options) to hedge exposure to potential interest rate mismatches between asset income and borrowing costs[57] - Spread risk, the difference between investment interest rates and risk-free instruments, is managed through careful asset selection, sector allocation, portfolio value-at-risk regulation, and maintaining adequate liquidity[58] - Credit risk on residential and commercial mortgage investments is managed through pre-acquisition due diligence and regular re-evaluation of credit risk based on macroeconomic factors and key loan credit metrics[60] - Liquidity risk is managed through statistical analysis of required liquidity needs under multiple scenarios and time horizons, with consistent monitoring of cash, unencumbered assets, and future cash inflows against internal targets[62] - Foreign exchange rate risk, arising from investments in unconsolidated joint ventures with foreign currency exposure, is hedged by purchasing currency forward contracts[63] Investment Guidelines The board has established investment guidelines to ensure REIT qualification and 1940 Act exemption, which can be modified without stockholder approval - The board of directors has adopted investment guidelines to ensure REIT qualification, exemption from the 1940 Act, investment within target assets, and appropriate management of proceeds from offerings[64][65] - These guidelines can be changed by the board without stockholder approval[64] Investment Committee The investment committee periodically reviews the portfolio's risk, performance, and compliance, with the Manager providing quarterly reports to the board - The investment committee, comprising Company officers and Manager's investment professionals, periodically reviews the investment portfolio for risk characteristics, performance, liquidity, composition, and leverage[65] - It also reviews compliance with investment policies and procedures, and the Manager provides quarterly investment performance reports to the board[65] Investment Process The Manager's team employs a rigorous investment process, from sourcing to structuring, evaluating each opportunity based on risk-adjusted returns and market outlook - The Manager's investment team focuses on asset selection and relative value within the mortgage market to build a diversified portfolio, incorporating views on the economic environment and mortgage market outlook[66] - The investment process includes sourcing, screening, assessing suitability, conducting interest rate and prepayment analysis, evaluating cash flow and collateral performance, reviewing legal structure, and investment structuring[67] - Each investment opportunity is evaluated based on expected risk-adjusted return relative to comparable investments and existing portfolio assets, considering leverage terms and risks from illiquidity or correlations[68] Competition The Company faces intense competition from larger, better-resourced entities, but leverages its Manager's expertise for a competitive advantage - The Company operates in a highly competitive market for investment opportunities, competing with other REITs, specialty finance companies, and various institutional investors[69] - Many competitors are larger, have greater capital and resources, and may have higher risk tolerances, potentially limiting the Company's ability to acquire desirable assets at favorable spreads[69] - Access to the Manager's professionals and industry expertise provides a competitive advantage in assessing risks and pricing investments, though competitive risks may still hinder business goals[70] Our Corporate Information The Company's principal executive offices are in Atlanta, Georgia, and it publicly files reports with the SEC - The Company's principal executive offices are located in Atlanta, Georgia, and it files current and periodic reports, proxy statements, and other information with the SEC, available on www.sec.gov and its corporate website[71] Risk Factors This section outlines material risks and uncertainties that could adversely affect the Company's business, financial condition, results of operations, and stock price - Investing in the Company's capital stock involves a high degree of risk, and investors should carefully consider all information in the report[73] - The COVID-19 pandemic has significantly disrupted economies and financial markets, leading to declines in asset values, adverse financing terms, margin calls, and potential increases in mortgage loan delinquencies and defaults[75][76] - Inability to access funding or unfavorable financing terms, especially due to market volatility, could force asset disposals at lower prices, causing significant losses and limiting asset acquisition activities[78][80][81][82] - Fluctuations in interest rates can adversely affect investment values, increase interest expense, and reduce earnings and dividends, with market conditions potentially disrupting historical relationships between interest rates and prepayment trends[104][105][107][108][110] - Maintaining 1940 Act exclusions for subsidiaries imposes limits on operations, and failure to comply could require changes in investments or business conduct, or even registration as an investment company, negatively impacting the business and stock value[157][160][161][163] - The Company is highly dependent on its Manager and key personnel, and conflicts of interest may arise due to the Manager's duties to other clients and funds, potentially leading to decisions not in the best interests of stockholders[171][173][174] - Failure to qualify as a REIT would subject the Company to U.S. federal income tax and potentially increased state and local taxes, significantly reducing cash available for distribution to stockholders[196][198] - The market price and trading volume of the Company's capital stock may be highly volatile, influenced by factors such as distribution rates relative to market interest rates, and future offerings could dilute existing stockholders' interests[237][239][241] Risk Factor Summary Investing in the Company's stock carries high risk, encompassing pandemic impacts, financing challenges, market volatility, and compliance with REIT/1940 Act requirements - Investing in the Company's capital stock involves a high degree of risk, and potential investors should carefully consider all information in the report[73] - Key risks include the economic and operational impact of the COVID-19 pandemic, business and investment strategy (including concentration and leverage), investment portfolio risks, general financial market volatility, and governmental responses[73] - Other significant risks relate to financing availability and terms, leverage changes, dividend payment ability, interest rate mismatches, liquidity, credit rating changes, prepayment rates, third-party reliance, IT disruptions, hedging effectiveness, default rates, and compliance with regulations and REIT/1940 Act requirements[73] Risks Related to the COVID-19 Pandemic The COVID-19 pandemic caused market volatility, asset value declines, financing challenges, and operational disruptions, impacting the Company's financial condition - The COVID-19 pandemic has caused significant disruptions to the U.S. and global economies, leading to volatility in financial markets and declines in the value of target assets[75][76] - The Company experienced significant declines in asset values, adverse financing terms, and margin calls in early 2020, forcing sales of securities at potentially unfavorable terms[76] - Inability to secure or maintain repurchase agreements, or facing less favorable conditions, could force asset disposals at depressed prices, causing significant losses and impacting liquidity[78][80][81][82] - The pandemic created an uncertain and volatile interest rate environment, making prepayment levels difficult to predict and potentially impacting hedging strategies[85] - Market disruptions have made fair value determination more difficult, potentially leading to material differences between estimated and realized values, and requiring impairment recognition[86][87][88][89] - Measures to prevent COVID-19 spread, such as remote work, could disrupt operations and increase cybersecurity risks[90] Risks Related to Our Investments The Company's investments face risks from market illiquidity, interest rate fluctuations, prepayment rates, credit defaults, valuation uncertainties, and reliance on third-party servicers - Difficult conditions in mortgage and real estate markets can cause market losses, reduce earnings, and diminish cash available for distribution, also impacting book value per common share[92][93] - Periods of illiquidity in mortgage-related assets may prevent the Company from selling at opportune times, limiting portfolio adjustments and potentially leading to losses[94][95] - Investment concentration in certain security types or geographic locations increases default risk and could reduce net income and stock value[96] - Acquired target assets are subject to risks of defaults, foreclosure timeline extensions, fraud, price depreciation, and unfavorable loan modifications, which could result in principal losses[97][98][99][100] - Investments in non-Agency RMBS collateralized by Alt-A and subprime mortgage loans carry increased risks due to less restrictive underwriting standards and higher delinquency/loss rates[101] - Subordinated MBS assets may be in a 'first loss' position, exposing the Company to greater risks of loss if underlying mortgage portfolios are overvalued or decline[102][103] - Fluctuations in interest rates can adversely affect investment values, increase interest expense, and reduce earnings and dividends, particularly if borrowing costs rise faster than asset income[104][105][106] - Rising interest rates may decrease the availability of certain target assets, hindering the ability to acquire profitable investments and generate income[107] - Prepayment rates on RMBS can adversely affect portfolio value, accelerating premium amortization and reducing interest income, or reducing interest income for discount securities if prepayments are slower than expected[108][109] - Changes in LIBOR calculation or discontinuance may adversely affect interest receivable on commercial loans and dividends on preferred stock, impacting market liquidity and value[111][112][113] - Federal conservatorship of Fannie Mae and Freddie Mac, or changes in their relationship with the U.S. Government, could negatively affect Agency MBS availability, credit spreads, and value[114][115][116][117] - Competition in the investment market may limit the ability to acquire desirable assets at attractive prices, potentially affecting profitability[118] - Lack of control over special servicing of CMBS may lead to actions adverse to the Company's interests[119][120] - Due diligence may not reveal all liabilities or weaknesses in assets, potentially leading to losses[121] - Reliance on third-party service providers, like mortgage servicers, exposes the Company to risks if these providers fail to perform competently[122] - Commercial loans held-for-investment, such as mezzanine loans and preferred equity, involve greater risks of loss than senior loans due to subordination and potential lack of collateral recourse[123][124][125][126] - Declines in the market value of mortgage-backed securities adversely affect results of operations and financial condition, reducing book value per common share[127] - Uncertainty in valuing non-publicly traded mortgage-backed securities, which rely on subjective estimates, could lead to material differences between determined and realized fair values[128] - Underestimating collateral loss on investments by the Manager could lead to losses or lower-than-expected yields[129] - Foreclosing on an asset could lead to owning and operating the property, exposing the Company to different and potentially more significant risks, and impacting financial performance[130] - Environmental liabilities on acquired or foreclosed properties could impact property value, owner's ability to make payments, and incur substantial remediation costs[131][132] Risks Related to Financing and Hedging The Company faces risks from leverage, dependence on repurchase agreements, margin calls, covenant non-compliance, and the potential ineffectiveness or costs of hedging strategies - The Company uses leverage, which depends on market conditions, lender's view of asset quality, regulatory requirements, and earnings, and can adversely affect asset returns and cash available for distribution[134][135][136] - Dependence on repurchase agreement financing means inability to access funding on acceptable terms could materially affect operations, forcing asset sales at inopportune times[137][138] - Inherent uncertainty of repurchase transactions, including counterparty defaults or declines in underlying security values, may cause losses[139][140] - Repurchase agreements may require additional collateral (margin calls) if asset values decline, potentially forcing asset sales at depressed prices and rapidly deteriorating financial condition[141][142] - Failure to comply with financial covenants in financing arrangements could lead to default, acceleration of debt, and enforcement against collateral, impacting REIT distribution requirements[143] - Repurchase agreements may give lenders greater rights in bankruptcy, allowing them to liquidate pledged assets without delay[144] - Hedging transactions could expose the Company to contingent liabilities, requiring cash payments in certain circumstances (e.g., early termination or margin requests), which could adversely impact financial condition[145][146] - Hedging may adversely affect earnings due to high costs, imperfect correlation with risk, duration mismatches, REIT tax limitations, counterparty credit quality, or default[147] - Investment in synthetic securities, credit default swaps, and other credit derivatives exposes the Company to additional risks, including counterparty insolvency and illiquid markets[149][150][151][152] - It may be uneconomical or impossible to 'roll' Agency MBS TBA holdings, or inability to meet margin calls on TBA contracts, could negatively affect financial condition and results of operations[153][154][155][156] Risks Related to Our Company The Company faces risks from maintaining 1940 Act exclusions, dependence on third-party IT systems, and potential impacts of share repurchases on compliance and investment capacity - Maintaining 1940 Act exclusions for subsidiaries imposes limits on operations, and failure to maintain an exclusion could materially impact the business, requiring changes in investments or registration as an investment company[157][160][161][163] - The Company is highly dependent on third-party information systems, and system failures or cyber-attacks could disrupt business, negatively affecting stock price and dividend payment ability[164][165] - Share repurchases may negatively impact compliance with financing covenants and regulatory requirements (1940 Act, REIT qualification) and could limit future investment ability[166][167] Risks Related to Accounting Financial statements rely on estimates, and fair value changes in derivatives can cause earnings volatility, while GAAP results differ from REIT taxable income - Financial statements rely on estimates, judgments, and assumptions, and inaccuracies could materially affect reported amounts and require charges to income[168] - Changes in the fair value of derivatives, recorded in the consolidated statement of operations, may result in volatility in U.S. GAAP earnings, potentially affecting stock price[169] - Reported U.S. GAAP financial results differ from REIT taxable income, impacting dividend distribution requirements and making U.S. GAAP results an inaccurate indicator of future taxable income and dividends[170] Risks Related to Our Relationship with Our Manager The Company's dependence on its Manager creates risks from personnel, conflicts of interest, a non-arm's-length management agreement, and broad investment guidelines - The Company is highly dependent on its Manager and its key personnel for success, and their departure or inability to dedicate sufficient time could materially affect performance[171][172] - Conflicts of interest exist due to the Manager's duties to other clients and funds, potentially leading to allocation of favorable investments away from the Company[173][174] - The management agreement was not negotiated on an arm's-length basis and may be costly and difficult to terminate, requiring a significant termination fee[176][177] - The Manager maintains a contractual, not fiduciary, relationship and is generally not liable for acts unless they constitute bad faith, willful misconduct, gross negligence, or reckless disregard of duties[178][179] - Broad investment guidelines for the Manager, without board approval for each investment, could lead to returns substantially below expectations or losses[180] Risks Related to Our Capital Stock The Company's capital stock faces risks from uncertain dividend levels, potential dilution from future offerings, and market price volatility - The Company has not established a minimum dividend payment level, and its ability to pay dividends depends on earnings, financial condition, debt covenants, and REIT qualification[181] - Future offerings of debt or equity securities senior to common stock may adversely affect the market price of common stock and dilute existing holders' interests[182][183][184] - The market price and trading volume of capital stock may be highly volatile, influenced by distribution rates relative to market interest rates, potentially leading to significant price fluctuations or declines[237][241][242] - Future sales of common stock or the perception of such sales could adversely affect the prevailing market price and dilute existing stockholders' interests[238][239] - Investments made in accordance with objectives may carry high risk, leading to volatility or loss of principal, making the capital stock unsuitable for investors with lower risk tolerance[240] Risks Related to Our Organization and Structure Maryland law, REIT ownership limits, and preferred stock features could impede changes in control, while the Company's role as general partner carries liability risks - Certain provisions of Maryland law (e.g., business combinations, control share provisions, unsolicited takeover provisions) could deter or impede changes in control, potentially preventing stockholders from realizing a premium for their shares[185][186][187][188] - REIT ownership limitations (no more than 50% by five or fewer individuals) and charter prohibitions (no more than 9.8% ownership) restrict change of control opportunities[189] - Authorized but unissued shares of capital stock can be used by the board to delay or prevent a change in control[190] - The change of control conversion feature of Series B and Series C Preferred Stock may discourage acquisition proposals[191][192] - As the sole general partner of the Operating Partnership, the Company could become liable for its debts and other obligations, potentially affecting financial condition and dividend payments[193] Tax Risks Failure to maintain REIT qualification would result in significant tax liabilities, while complex REIT rules and potential legislative changes pose ongoing tax risks - Failure to qualify as a REIT would subject the Company to U.S. federal income tax and potentially increased state and local taxes, significantly reducing cash available for distribution[196][198] - Legislative, regulatory, or administrative changes, including those related to the Tax Cuts and Jobs Act, could adversely affect the Company or its stockholders, potentially with retroactive effect[199][200][201][202] - Complying with REIT requirements may force the liquidation of otherwise attractive investments to meet asset and income tests, potentially reducing income and distributions[203] - REIT distribution requirements may force the Company to incur debt, sell assets, or make taxable stock distributions to meet the 90% taxable income distribution rule, hindering growth[204][205][206] - Dividends may be paid in stock, requiring stockholders to pay income taxes in excess of cash received, potentially putting downward pressure on stock price[207][208] - Ownership of and relationship with Taxable REIT Subsidiaries (TRSs) is subject to limitations, and non-compliance could jeopardize REIT qualification or incur a 100% excise tax[209][210] - Liquidation of assets to repay obligations may jeopardize REIT qualification by failing asset and income requirements[211] - Characterization of repurchase agreements as sales for tax purposes or failure of mezzanine loans to qualify as real estate assets could adversely affect REIT qualification[212][213] - The 100% tax on prohibited transactions limits the ability to engage in certain sales or securitization methods, even if otherwise beneficial[214] - REIT requirements limit effective hedging, potentially increasing costs or exposing the Company to greater interest rate risks[215] - Purchases of mortgages at a discount may affect the ability to satisfy REIT asset and gross income tests if loans are not adequately secured by real property[216] - Interests in joint ventures or investment funds could jeopardize REIT qualification if timely information is unavailable or actions are taken that cause non-compliance[217] - The Company may be required to report taxable income for certain investments (e.g., OID, market discount, modified debt) in excess of economic income, leading to tax liabilities without corresponding cash flow[218][219][220][221] - Even with REIT qualification, the Company may face U.S. federal, state, and local taxes on undistributed income, foreclosure income, or through TRSs, reducing cash flow[222] - REIT dividends generally do not qualify for reduced tax rates applicable to other corporate dividends, potentially making REIT investments less attractive to individual investors[223] - High-income U.S. individuals, estates, and trusts may be subject to an additional 3.8% Medicare tax on net investment income, including REIT dividends[224] - Tax-exempt stockholders may realize unrelated business taxable income if the Company generates 'excess inclusion income' from REMIC residual interests or taxable mortgage pools[225] - Changing the nature of assets, especially reducing RMBS holdings, may complicate satisfying REIT gross income and asset tests, potentially forcing undesirable investment decisions[226] - REIT qualification may depend on the accuracy of legal opinions or advice regarding securities, and inaccuracies could adversely affect qualification[227] - Uncertainty exists regarding the tax treatment of TBAs for REIT asset and income tests, and a successful challenge by the IRS could lead to penalty taxes or loss of REIT status[228] - Modifications to hedging transactions and other contracts to replace LIBOR may have tax consequences, though recent regulations aim to treat certain modifications as non-taxable[229] General Risk Factors The Company faces risks from extensive and changing regulations, governmental actions, potential strategy shifts, and the financial impacts of acquisitions - The business is subject to extensive and frequently changing federal and state regulations, incurring significant compliance costs, and changes in interpretation or enforcement could materially affect operations[230][231] - Economic, regulatory, and other actions by government bodies and central banks, including responses to geopolitical developments, can adversely affect the Company, potentially increasing competition or reducing revenues[232][233][234] - The Company may change strategies, policies, or procedures without stockholder consent, potentially leading to a different risk profile, investment decisions stockholders disagree with, or failure to meet investment criteria[235] - Transactions like acquisitions could use significant cash, issue dilutive equity, incur substantial debt or contingent liabilities, or result in amortization expenses, harming business and stock price[236] Unresolved Staff Comments The Company has no unresolved staff comments to report - The Company has no unresolved staff comments[243] Properties The Company's principal executive office is located in Atlanta, Georgia. As per the management agreement, the Manager is responsible for providing the necessary office space and services - The Company's principal executive office is located at 1555 Peachtree Street, NE, Suite 1800, Atlanta, Georgia 30309[244] - The Manager is responsible for providing office space and services required for the Company's operations under the management agreement[244] Legal Proceedings As of December 31, 2021, the Company was not involved in any material legal proceedings - The Company may be involved in various claims and legal actions in the ordinary course of business from time to time[245] - As of December 31, 2021, the Company was not involved in any material legal proceedings[245] Mine and Safety Disclosures This item is not applicable to the Company - This item is not applicable[246] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company's common stock is traded on the NYSE under the symbol 'IVR', with an intent to pay quarterly dividends to maintain REIT status, though no minimum level is established - The Company's common stock is traded on the NYSE under the symbol 'IVR'[249] - The Company intends to pay quarterly dividends, distributing all or substantially all of its taxable income to maintain REIT qualification, but has not established a minimum dividend payment level[249] - As of February 15, 2022, there were 135 common stockholders of record[251] - Net proceeds from common and preferred stock offerings are used to acquire target assets consistent with investment objectives and REIT/1940 Act requirements[256] - As of December 31, 2021, 18,163,982 common shares were available for repurchase under a Board-authorized program, but no shares were repurchased during the quarter ended December 31, 2021[257] 5-Year Cumulative Total Return (12/31/2016 - 12/31/2021) | Index | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Invesco Mortgage Capital Inc. | 100.00 | 134.61 | 121.69 | 156.94 | 38.72 | 35.11 | | S&P 500 | 100.00 | 121.83 | 116.49 | 153.17 | 181.35 | 233.41 | | FTSE NAREIT Mortgage REITs | 100.00 | 119.79 | 116.77 | 141.67 | 115.09 | 133.08 | Item 6. [Reserved] This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides an overview of the Company's financial condition and results of operations, highlighting factors impacting performance such as market interest rates, prepayment speeds, and credit spreads - The Company's operating results are primarily affected by net interest income and the market value of assets, influenced by market interest rates, prepayment speeds, credit spread premiums, and supply/demand dynamics[263] - Macroeconomic factors like interest rate spread premiums, governmental policy, real estate prices, credit availability, and inflation significantly impact the business[264] - Financial conditions tightened in H2 2021 due to COVID-19 resurgence and inflation concerns, leading to rising interest rates across the yield curve and increased interest rate volatility[265][267][268] - The housing market showed robust recovery, but Agency RMBS underperformed in 2021 due to increased interest rate volatility and anticipation of Federal Reserve tapering[270][271][273] - The Company is transitioning away from LIBOR to SOFR for financial instruments, with most interest rate swaps already transitioned in Q4 2021[275][277] Investment Portfolio Breakdown (in thousands) | $ in thousands | As of December 31, 2021 | As of December 31, 2020 | | :--- | :--- | :--- | | Agency RMBS: 30 year fixed-rate, at fair value | 7,701,523 | 8,050,866 | | Agency CMO, at fair value | 30,757 | — | | Non-Agency CMBS, at fair value | 62,909 | 109,583 | | Non-Agency RMBS, at fair value | 9,070 | 11,733 | | Commercial loan, at fair value | 23,515 | 23,098 | | Investments in unconsolidated ventures | 12,476 | 16,408 | | Subtotal | 7,840,250 | 8,211,688 | | TBAs, at implied cost basis | 1,636,906 | 1,772,211 | | Total investment portfolio, including TBAs | 9,477,156 | 9,983,899 | - Agency RMBS represented 81% of the total investment portfolio as of December 31, 2021, with purchases focused on specified pools with prepayment protection and higher yields[280][281] - TBAs constituted approximately 17% of the total investment portfolio as of December 31, 2021, maintained due to attractive implied financing rates in the dollar roll market[282] - The Company primarily uses repurchase agreements for financing, with average quarterly balances fluctuating significantly, especially after the COVID-19 pandemic disruption in 2020[288][290] - Hedging instruments, primarily interest rate swaps, are used to mitigate interest rate risk, with $2.5 billion notional amount of swaps terminated and $4.3 billion entered into during 2021, excluding LIBOR to SOFR transition[292][293][294] - Capital activities in 2021 included public offerings of common stock raising $103.1 million and $145.9 million, and the redemption of Series A Preferred Stock for $140.0 million[296][297][298] Book Value per Common Share (in thousands except per share amounts) | In thousands except per share amounts | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total adjusted equity | 959,635 | 784,658 | 2,349,399 | | Common stock outstanding | 329,875 | 203,222 | 144,256 | | Book value per common share | 2.91 | 3.86 | 16.29 | - Book value per common share decreased 24.6% in 2021 and 76.3% in 2020, primarily due to increased interest rate volatility, prepayment speeds, reduced investor demand, Federal Reserve tapering, and realized/unrealized losses from COVID-19 market disruption[300][301] Consolidated Statements of Operations Summary (in thousands except share data) | $ in thousands except share data | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total interest income | 169,202 | 280,166 | 778,367 | | Total interest expense | (11,290) | 82,262 | 472,320 | | Net interest income | 180,492 | 197,904 | 306,047 | | Total other income (loss) | (241,259) | (1,832,026) | 104,228 | | Total expenses | 29,233 | 40,230 | 46,174 | | Net income (loss) attributable to Invesco Mortgage Capital Inc. | (90,000) | (1,674,352) | 364,101 | | Dividends to preferred stockholders | 37,795 | 44,426 | 44,426 | | Issuance and redemption costs of redeemed preferred stock | 4,682 | — | — | | Net income (loss) attributable to common stockholders | (132,477) | (1,718,778) | 319,675 | | Basic earnings (loss) per share | (0.48) | (9.89) | 2.42 | | Diluted earnings (loss) per share | (0.48) | (9.89) | 2.42 | - Net loss attributable to common stockholders was $132.5 million in 2021, a significant improvement from the $1.7 billion loss in 2020, primarily due to reduced net losses on investments and net gains on derivative instruments[374][375] - The Company uses non-GAAP financial measures like 'Earnings Available for Distribution' to assess its investment portfolio's income generation for common stockholders, adjusting for certain gains and losses[383][384] Earnings Available for Distribution (in thousands, except per share data) | $ in thousands, except per share data | 2021 | 2019 | | :--- | :--- | :--- | | Net income (loss) attributable to common stockholders | (132,477) | 319,675 | | Adjustments: | | | | (Gain) loss on investments, net | 366,509 | (624,466) | | Realized (gain) loss on derivative instruments, net | (156,157) | 597,077 | | Unrealized (gain) loss on derivative instruments, net | 17,743 | (26,482) | | Realized and unrealized (gain) loss on GSE CRT embedded derivatives, net | — | 12,490 | | TBA dollar roll income | 40,058 | — | | (Gain) loss on foreign currency transactions, net | (1) | (6) | | Amortization of net deferred (gain) loss on de-designated interest rate swaps | (22,000) | (23,729) | | Subtotal | 246,152 | (65,116) | | Earnings available for distribution | 113,675 | 254,559 | | Basic earnings (loss) per common share | (0.48) | 2.42 | | Earnings available for distribution per common share | 0.41 | 1.92 | Economic Debt-to-Equity Ratio (in thousands) | $ in thousands | December 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total stockholders' equity (allocated) | 1,402,135 | 1,367,158 | | Debt-to-equity ratio | 5.0 | 5.3 | | Economic debt-to-equity ratio | 6.2 | 6.6 | - The economic debt-to-equity ratio, a non-GAAP measure, considers off-balance sheet financing of TBAs, providing a comprehensive view of leverage[402] - The Company believes it has sufficient liquidity and capital resources for short-term needs, including investments, debt repayment, and dividends, but long-term needs depend on additional debt financing or equity/debt offerings[411][426][427] - As of December 31, 2021, the Company held $7.3 billion in Agency securities financed by repurchase agreements, with $514.1 million in unencumbered investments and $357.1 million in unrestricted cash[425] - The Company believes it met all REIT income, asset, stock ownership, and distribution requirements as of December 31, 2021, and conducted business to avoid being regulated as an investment company under the 1940 Act[434][435] Overview Invesco Mortgage Capital Inc. is a Maryland REIT externally managed by Invesco Advisers, Inc., investing in MBS and other mortgage-related assets to provide stockholder returns - Invesco Mortgage Capital Inc. is a Maryland corporation focused on investing in, financing, and managing mortgage-backed securities (MBS) and other mortgage-related assets[260] - The Company's objective is to provide attractive risk-adjusted returns to stockholders, primarily through dividends and secondarily through capital appreciation[260] - Current investments include Agency RMBS, non-Agency CMBS, non-Agency RMBS, TBAs, commercial mortgage loans, and other real estate-related financing arrangements[260] - The Company is externally managed by Invesco Advisers, Inc. and operates as a REIT, requiring distribution of at least 90% of its REIT taxable income annually[261][262] Factors Impacting Our Operating Results Operating results are primarily influenced by net interest income and asset market value, which are affected by interest rates, prepayment speeds, and credit spreads - Operating results are primarily affected by net interest income and the market value of assets[263] - Net interest income varies with changes in market interest rates and prepayment speeds (CPR) on assets[263] - Market value of assets is impacted by credit spread premiums and the supply/demand for investments[263] Market Conditions Macroeconomic factors, including rising interest rates, inflation, and COVID-19 concerns, influenced financial conditions and led to Agency RMBS underperformance in 2021 - Macroeconomic factors influencing the business include interest rate spread premiums, governmental policy, real estate prices, credit availability, consumer income/spending, corporate earnings, employment, and inflation[264] - Financial conditions eased in H1 2021 but tightened in H2 due to COVID-19 resurgence and inflation concerns, leading to cautious investor sentiment[265] - Employment improved steadily in 2021, with nonfarm payrolls averaging 537,000 gains and unemployment falling to 3.9% by year-end[266] - Interest rates rose across the yield curve in 2021, with the 2-year Treasury yield increasing 61 bps to 0.73% and the 10-year Treasury yield increasing 60 bps to 1.51%[267] - Inflation was a major concern in 2021, with the personal consumption expenditure index increasing to 4.9% and commodity indices showing significant gains[268] - CMBS risk premiums increased in Q4 2021 due to new issuance, Omicron variant concerns, higher inflation, and interest rate volatility, despite overall economic improvement in real estate[269] - The housing market saw a robust recovery driven by low mortgage rates and tight supply, leading to rapid home price appreciation, though moderating recently[270][271] - Government fiscal stimulus and relief programs substantially reduced borrower defaults and loan losses during the pandemic[272] - Agency RMBS significantly underperformed in 2021, marking its worst total return since 2013, due to increased interest rate volatility and anticipation of Federal Reserve tapering[273] - The outlook for 2022 is cautious, with investors focused on Federal Reserve policy accommodation removal and the ongoing impact of the COVID-19 pandemic[274] Proposed Changes to LIBOR USD LIBOR will cease publication by July 2023, prompting the Company to transition its financial instruments to SOFR - The FCA announced that USD LIBOR settings will cease publication on July 1, 2023, with SOFR recommended as the alternative reference rate[275] - The Company is actively transitioning away from LIBOR to SOFR, having already transitioned interest rate swaps in Q4 2021, qualifying for contract modification relief[275][277] - A commercial loan indexed to LIBOR matures in 2022, and Series B and C Preferred Stock will pay a LIBOR-based rate when callable, with New York state law providing for transition to an alternative rate[276] Investment Activities The Company actively manages its investment portfolio, primarily in Agency RMBS and TBAs, with a focus on higher-yielding securities and prepayment protection Investment Portfolio Breakdown (in thousands) | $ in thousands | As of December 31, 2021 | As of December 31, 2020 | | :--- | :--- | :--- | | Agency RMBS: 30 year fixed-rate, at fair value | 7,701,523 | 8,050,866 | | Agency CMO, at fair value | 30,757 | — | | Non-Agency CMBS, at fair value | 62,909 | 109,583 | | Non-Agency RMBS, at fair value | 9,070 | 11,733 | | Commercial loan, at fair value | 23,515 | 23,098 | | Investments in unconsolidated ventures | 12,476 | 16,408 | | Subtotal | 7,840,250 | 8,211,688 | | TBAs, at implied cost basis | 1,636,906 | 1,772,211 | | Total investment portfolio, including TBAs | 9,477,156 | 9,983,899 | - In 2021, the Company sold $16.3 billion and purchased $17.1 billion of Agency RMBS, rotating into higher-yielding securities and funding purchases with sales proceeds, paydowns, and common stock issuance[279] - As of December 31, 2021, 30-year fixed-rate Agency RMBS represented 81% of the total investment portfolio, with a focus on specified pools offering prepayment protection[280][281] - TBAs constituted approximately 17% of the total investment portfolio in 2021, maintained due to attractive implied financing rates in the dollar roll market, despite the Federal Reserve reducing MBS purchases[282][283] - Non-Agency CMBS and non-Agency RMBS holdings each represented less than 1% of the total investment portfolio as of December 31, 2021[284][285] - A commercial real estate mezzanine loan, due in February 2022, had an LTV ratio of approximately 68.0% as of December 31, 2021, with an extension request received in February 2022[286] - Investments in two unconsolidated ventures, managed by an affiliate, are in liquidation, with a commitment to fund $6.5 million in additional capital for future expenses[287] Financing and Other Liabilities The Company primarily uses short-term repurchase agreements linked to SOFR for financing, having repaid all secured loans in 2020 - The Company primarily uses repurchase agreements, typically short-term (one to six months) and linked to SOFR, to finance the majority of its target assets[288] - Secured loans from the FHLBI were repaid in 2020, and FHLBI membership was terminated[289] Collateralized Borrowings (in thousands) | Quarter Ended | Quarter-end balance | Average quarterly balance (1) | (2) Maximum balance | | :--- | :--- | :--- | :--- | | March 31, 2020 | 7,637,746 | 16,673,939 | 23,132,234 | | June 30, 2020 | 740,000 | 983,599 | 1,373,296 | | September 30, 2020 | 5,243,288 | 3,373,356 | 5,243,288 | | December 31, 2020 | 7,228,699 | 6,883,773 | 7,237,496 | | March 31, 2021 | 8,240,887 | 8,359,010 | 8,708,686 | | June 30, 2021 | 7,851,204 | 7,945,494 | 8,004,924 | | September 30, 2021 | 7,873,798 | 7,846,536 | 7,886,360 | | December 31, 2021 | 6,987,834 | 7,442,784 | 7,776,070 | Hedging Instruments The Company uses interest rate swaps and currency forward contracts to manage interest rate and foreign exchange risks, realizing a $185.2 million net gain on swaps in 2021 - The Company hedges interest rate and foreign exchange risk to the extent deemed prudent, without specific percentage requirements[292] - Interest rate swap agreements are primarily used to mitigate interest rate increases on borrowings, generally paying fixed and receiving floating rates indexed to SOFR (previously LIBOR)[293] - In 2021, the Company terminated $2.5 billion and entered into $4.3 billion notional amount of new swaps, realizing a net gain of $185.2 million on interest rate swaps due to rising interest rates[294] - Currency forward contracts are used to mitigate foreign currency exchange rate changes on foreign-denominated investments, with $13.6 million notional amount outstanding as of December 31, 2021[295] Capital Activities In 2021, the Company raised $249 million through common stock offerings and redeemed $140 million of Series A Preferred Stock - In February 2021, the Company completed a public offering of 27,600,000 common shares at $3.75/share, yielding $103.1 million net proceeds[296] - In June 2021, another public offering of 43,125,000 common shares at $3.39/share generated $145.9 million net proceeds[296] - On June 16, 2021, all Series A Preferred Stock was redeemed for $140.0 million plus accrued dividends, resulting in a $4.7 million reduction in net income attributable to common stockholders[297] - During 2021, 55,744,020 common shares were sold under equity distribution agreements for $180.5 million net proceeds[298] Book Value per Common Share Book value per common share significantly decreased in 2021 and 2020 due to market volatility, interest rate changes, and COVID-19 disruptions Book Value per Common Share (in thousands except per share amounts) | In thousands except per share amounts | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Total equity | 1,402,135 | 1,367,158 | 2,931,899 | | Less: Liquidation preference of Series A Preferred Stock | — | (140,000) | (140,000) | | Less: Liquidation preference of Series B Preferred Stock | (155,000) | (155,000) | (155,000) | | Less: Liquidation preference of Series C Preferred Stock | (287,500) | (287,500) | (287,500) | | Total adjusted equity | 959,635 | 784,658 | 2,349,399 | | Common stock outstanding | 329,875 | 203,222 | 144,256 | | Book value per common share | 2.91 | 3.86 | 16.29 | - Book value per common share decreased 24.6% in 2021 compared to 2020, primarily due to increased interest rate volatility, prepayment speeds, reduced investor demand for prepayment protection, and Federal Reserve tapering impacting Agency RMBS valuations[300] - Book value per common share decreased 76.3% in 2020 compared to 2019, mainly due to realized and unrealized losses on investments and derivatives resulting from the COVID-19 pandemic market disruption[301] Critical Accounting Policies and Estimates Financial statements rely on critical estimates for fair value, interest income, and credit losses, with most MBS valued at fair value through profit or loss - Financial statements require estimates and assumptions, particularly for fair value of financial instruments, interest income recognition, and allowances for credit losses, which are critical to understanding financial condition[302] - For MBS and GSE CRTs, the fair value option is elected for most securities (99% as of Dec 31, 2021), recognizing changes in fair value in the consolidated statement of operations to align with economic hedging instruments[303] - Fair value of MBS is determined by independent pricing services using market and income approaches, considering observable inputs and proprietary models[305] - Interest income on MBS is accrued based on contractual terms, with premiums/discounts amortized/accreted using the effective interest method, and estimated future cash flows are updated for securities where initial investment recovery is uncertain[306][307] - Accounting for derivative financial instruments involves recording them at fair value on the balance sheet, with changes in fair value recognized in the consolidated statement of operations[312][313] Expected Impact of New Authoritative Guidance on Future Financial Information New FASB guidance provides expedients for LIBOR transition, impacting the Company's commercial loan and preferred stock - The FASB expanded accounting guidance for reference rate reform, providing optional expedients for contracts and hedging relationships impacted by LIBOR transition, applicable through December 31, 2022[314][315] - The Company's commercial loan and preferred stock are indexed to LIBOR, but New York state law provides for transition to an alternative rate for LIBOR-linked contracts[316](in