Invesco Mortgage Capital Inc. Reports Fourth Quarter 2020 Financial Results

ATLANTA, Feb. 22, 2021 /PRNewswire/ -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended December 31, 2020.

Update from John Anzalone, Chief Executive Officer

"We are pleased to announce core earnings of $0.10 per common share for the fourth quarter of 2020. During the quarter, we largely completed our portfolio reallocation to Agency residential mortgage-backed securities ("Agency RMBS") following the market disruption associated with the COVID-19 pandemic. Approximately 98% of our $8.2 billion investment portfolio was invested in Agency RMBS at year end. We also maintained a sizeable balance of unrestricted cash and unencumbered investments of $744.8 million as of December 31, 2020.

"Valuations of our Agency RMBS benefited from strong demand by the Federal Reserve and commercial banks for lower coupon mortgages despite elevated supply during the quarter. The strong performance of Agency RMBS along with continued investor demand for our remaining credit assets contributed to an 11.2% increase in book value per common share. Our higher book value per common share combined with our recently increased common stock dividend of $0.08 per share produced an economic return of 13.5% for the quarter. Our outlook for Agency RMBS remains constructive, as the asset class offers an attractive return profile, benefits from substantial liquidity and funding and is supported by ongoing purchases by the Federal Reserve. We raised an additional $103.1 million in common equity earlier this month that was deployed into Agency RMBS and will allow us to build upon our success in restoring core earnings."

Key performance indicators for the quarters ended December 31, 2020 and September 30, 2020 are summarized in the table below.

Financial Summary

Net income attributable to common stockholders for the fourth quarter of 2020 was $111.6 million, up $14.7 million compared to $96.9 million for the third quarter of 2020. Higher net income attributable to common stockholders was primarily due to a $9.5 million increase in net interest income and a $5.7 million increase in other income. The change in other income was driven by an increase of $53.8 million in net gains on derivatives, partially offset by a decrease of $30.3 million in net gains on investments and a one-time gain on settlement of a debt obligation of $16.0 million in the third quarter. Net gains on derivatives were driven by an increase in interest rates as the benchmark 10 year U.S. Treasury note rose 23 basis points to 0.91% as of December 31, 2020.

Book value per common share rose 11.2% for the fourth quarter of 2020 to $3.86 compared to $3.47 in the third quarter reflecting Agency RMBS spread tightening during the quarter. Book value per common share primarily benefited from a higher allocation to lower coupon 30-year Agency RMBS specified pools whose valuations rose due to persistent Federal Reserve and commercial bank demand for similar securities during the quarter.

Total average assets increased to $7.7 billion from $4.2 billion in the third quarter of 2020, and total average borrowings increased to $6.9 billion from $3.4 billion in the third quarter of 2020. Average assets and average borrowings increased as the Company deployed proceeds from the sale of unencumbered credit assets and $73.7 million raised through the issuance of common shares under the Company's at-the-market programs into Agency RMBS and increased leverage. During the fourth quarter of 2020, the Company generated $18.6 million in core earnings, an increase of $7.3 million (65.1%) over the third quarter of 2020. Higher core earnings were driven by a $6.3 million increase in to-be-announced securities forward contract ("TBA") dollar roll income. Given the attractiveness of TBAs, the Company increased its allocation to TBAs in the fourth quarter.

Average net interest margin rate decreased 79 basis points to 2.00% in the fourth quarter of 2020 primarily due to lower average earning asset yields. Average earning asset yield decreased 76 basis points to 1.86% in the fourth quarter of 2020 primarily due to a change in portfolio composition. The Company's Agency RMBS portfolio primarily consists of 2.0% to 2.5% coupon 30 year fixed-rate securities as of December 31, 2020. Average cost of funds was (0.14%) in the fourth quarter of 2020 compared to (0.17%) during the third quarter. While average borrowings rose during the fourth quarter, the impact on cost of funds was mostly offset by higher amortization of net deferred gains on de-designated interest rate swaps.

The Company's debt-to-equity ratio was 5.3x as of December 31, 2020 compared to 4.3x as of September 30, 2020 and economic debt-to-equity ratio was 6.6x as of December 31, 2020 compared to 5.1x as of September 30, 2020. Higher leverage as of year end reflects a change in asset mix to a higher portfolio concentration in Agency securities.

Total expenses for the fourth quarter of 2020 increased to approximately $6.4 million compared to $5.9 million for the third quarter of 2020 primarily due to higher management fees. The ratio of annualized total expenses to average stockholders' equity^* decreased to 2.49% compared from 2.61% for the third quarter of 2020 due to higher stockholders' equity in the fourth quarter.

As previously announced on December 28, 2020, the Company declared a common stock dividend of $0.08 per share paid on January 26, 2021 to its stockholders of record as of January 12, 2021. The Company declared the following dividends on February 19, 2021: a Series A Preferred Stock dividend of $0.4844 per share payable on April 26, 2021 to its stockholders of record as of April 1, 2021; a Series B Preferred Stock dividend of $0.4844 per share payable on March 29, 2021 to its stockholders of record as of March 5, 2021; and a Series C Preferred Stock dividend of $0.46875 per share payable on March 29, 2021 to its stockholders of record on March 5, 2021.

About Invesco Mortgage Capital Inc.

Invesco Mortgage Capital Inc. is a real estate investment trust that primarily focuses on investing in, financing and managing mortgage-backed securities and other mortgage-related assets. Invesco Mortgage Capital Inc. is externally managed and advised by Invesco Advisers, Inc., a registered investment adviser and an indirect wholly-owned subsidiary of Invesco Ltd., a leading independent global investment management firm.

Earnings Call

Members of the investment community and the general public are invited to listen to the Company's earnings conference call on Tuesday, February 23, 2021, at 9:00 a.m. ET, by calling one of the following numbers:

North America Toll Free:    800-857-7465
International:                       1-312-470-0052
Passcode:                           Invesco

An audio replay will be available until 5:00 pm ET on March 9, 2021 by calling:

888-566-0473 (North America) or 1-402-998-0640 (International)

The presentation slides that will be reviewed during the call will be available on the Company's website at www.invescomortgagecapital.com.

Cautionary Notice Regarding Forward-Looking Statements

This press release, the related presentation and comments made in the associated conference call, may include statements and information that constitute "forward-looking statements" within the meaning of the U.S. securities laws as defined in the Private Securities Litigation Reform Act of 1995, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements include our views on the risk positioning of our portfolio, domestic and global market conditions (including the residential and commercial real estate market), the ongoing spread and the economic and operational impact of the COVID-19 pandemic, the market for our target assets, our financial performance, including our core earnings, economic return, comprehensive income and changes in our book value, our intention and ability to pay dividends, our ability to continue performance trends, the stability of portfolio yields, interest rates, credit spreads, prepayment trends, financing sources, cost of funds, our leverage and equity allocation. In addition, words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "projects," "forecasts," and future or conditional verbs such as "will," "may," "could," "should," and "would" as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions "Risk Factors," "Forward-Looking Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission's website at www.sec.gov.

All written or oral forward-looking statements that we make, or that are attributable to us, are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Investor Relations Contact: Jack Bateman, 404-439-3323

Non-GAAP Financial Measures

The Company uses the following non-GAAP financial measures to analyze its operating results and believes these financial measures are useful to investors in assessing the Company's performance as further discussed below:

• core earnings (and by calculation, core earnings per common share),
• effective interest income (and by calculation, effective yield),
• effective interest expense (and by calculation, effective cost of funds),
• effective net interest income (and by calculation, effective interest rate margin), and
• economic debt-to-equity ratio.
• The most directly comparable U.S. GAAP measures are:
• net income (loss) attributable to common stockholders (and by calculation, basic earnings (loss) per common share),
• total interest income (and by calculation, earning asset yield),
• total interest expense (and by calculation, cost of funds),
• net interest income (and by calculation, net interest rate margin), and
• debt-to-equity ratio.

The Company is not presenting core earnings for the year ended December 31, 2020 because core earnings excludes the material adverse impact of the market disruption caused by the COVID-19 pandemic on the Company's financial condition. In addition, core earnings for the year ended December 31, 2020 is not indicative of the reduced earnings potential of the Company's current investment portfolio. The Company intends to resume reporting annual core earnings for the year ended December 31, 2021.

The non-GAAP financial measures used by the Company's management should be analyzed in conjunction with U.S. GAAP financial measures and should not be considered substitutes for U.S. GAAP financial measures. In addition, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of its peer companies.

Core Earnings

The Company calculates core earnings as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net; unrealized (gain) loss on derivative instruments, net; TBA dollar roll income; realized and unrealized (gain) loss on GSE CRT embedded derivatives, net; (gain) loss on foreign currency transactions, net; amortization of net deferred (gain) loss on de-designated interest rate swaps; and net (gain) loss on extinguishment of debt. The Company may add and has added additional reconciling items to its core earnings calculation as appropriate.

The Company believes the presentation of core earnings provides a consistent measure of operating performance by excluding the impact of gains and losses described above from operating results. The Company excludes the impact of gains and losses because gains and losses are not accounted for consistently under U.S. GAAP. Under U.S. GAAP, certain gains and losses are reflected in net income whereas other gains and losses are reflected in other comprehensive income. For example, a portion of the Company's mortgage-backed securities are classified as available-for-sale securities, and changes in the valuation of these securities are recorded in other comprehensive income on its consolidated balance sheet. The Company elected the fair value option for its mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in other income (loss) in the consolidated statement of operations. In addition, certain gains and losses represent one-time events.

The Company believes that providing transparency into core earnings enables its investors to consistently measure, evaluate and compare its operating performance to that of its peers over multiple reporting periods. However, the Company cautions that core earnings should not be considered as an alternative to net income (determined in accordance with U.S. GAAP), or as an indication of the Company's cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of the Company's liquidity, or an indication of amounts available to fund its cash needs, including its ability to make cash distributions.

The table below provides a reconciliation of U.S. GAAP net income (loss) attributable to common stockholders to core earnings for the following periods:

The table below presents the components of core income:

Effective Interest Income/Effective Yield/Effective Interest Expense/Effective Cost of Funds/Effective Net Interest Income/Effective Interest Rate Margin

The Company calculates effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net. The Company includes its GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest is not accounted for consistently under U.S. GAAP. The Company accounts for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but has elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP, coupon interest on GSE CRTs accounted for using the fair value option is recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments is recorded as realized and unrealized credit derivative income (loss). The Company adds back GSE CRT embedded derivative coupon interest to its total interest income because the Company considers GSE CRT embedded derivative coupon interest a current component of its total interest income irrespective of whether the Company has elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.

The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for contractual net interest income (expense) on its interest rate swaps that is recorded as gain (loss) on derivative instruments, net and the amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense. The Company views its interest rate swaps as an economic hedge against increases in future market interest rates on its floating rate borrowings. The Company adds back the net payments it makes on its interest rate swap agreements to its total U.S. GAAP interest expense because the Company uses interest rate swaps to add stability to interest expense. The Company excludes the amortization of net deferred gains (losses) on de-designated interest rate swaps from its calculation of effective interest expense because the Company does not consider the amortization a current component of its borrowing costs.

The Company calculates effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for contractual net interest income (expense) on its interest rate swaps that is recorded as gain (loss) on derivative instruments, net; amortization of net deferred gains (losses) on de-designated interest rate swaps that is recorded as repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that is recorded as realized and unrealized credit derivative income (loss), net.

The Company believes the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provide information that is useful to investors in understanding the Company's borrowing costs and operating performance.

The following tables reconcile total interest income to effective interest income and yield to effective yield for the following periods:

The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods:

The following tables reconcile net interest income to effective net interest income and net interest rate margin to effective interest rate margin for the following periods:

Economic Debt-to-Equity Ratio

The following tables show the allocation of the Company's stockholders' equity to its target assets, the Company's debt-to-equity ratio, and the Company's economic debt-to-equity ratio as of December 31, 2020 and September 30, 2020. The Company's debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt to total stockholders' equity.

The Company presents an economic debt-to-equity ratio, a non-GAAP financial measure of leverage that considers the impact of the off-balance sheet financing of its investments in TBAs that are accounted for as derivative instruments under U.S. GAAP. The Company includes its TBAs at implied cost basis in its measure of leverage because a forward contract to acquire Agency RMBS in the TBA market carries similar risks to Agency RMBS purchased in the cash market and funded with on-balance sheet liabilities. Similarly, a contract for the forward sale of Agency RMBS has substantially the same effect as selling the underlying Agency RMBS and reducing the Company's on-balance sheet funding commitments. The Company believes that presenting its economic debt-to-equity ratio, when considered together with its U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding how management evaluates at-risk leverage and gives investors a comparable statistic to those other mortgage REITs who also invest in TBAs and present a similar non-GAAP measure of leverage.

December 31, 2020

September 30, 2020

Average Balances

The table below presents information related to the Company's average earning assets, average earning assets yields, average borrowings and average cost of funds for the following periods:

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SOURCE Invesco Mortgage Capital Inc.