Invesco Mortgage Capital Inc. - Annual Report: 2009 (Form 10-K)

 

 

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(Mark One)

 

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

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Maryland	26-2749336
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1555 Peachtree Street, N.E., Suite 1800 Atlanta, Georgia	30309
(Address of principal executive offices)	(Zip Code)

 

Title of Each Class	Name of Each Exchange on Which Registered

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward-Looking Statements

·	use of proceeds of our equity offerings;

·	our business and investment strategy;

·	our investment portfolio;

·	our projected operating results;

·	actions and initiatives of the U.S. government and changes to U.S. government policies;

·	our ability to obtain additional financing arrangements;

·	financing and advance rates for our target assets;

·	our expected leverage;

·	general volatility of the securities markets in which we invest;

·	our expected investments;

·	interest rate mismatches between our target assets and our borrowings used to fund such investments;

·	changes in interest rates and the market value of our target assets;

·	changes in prepayment rates on our target assets;

·	effects of hedging instruments on our target assets;

·	rates of default or decreased recovery rates on our target assets;

·	modifications to whole loans or loans underlying securities;

·	the degree to which our hedging strategies may or may not protect us from interest rate volatility;

·	changes in governmental regulations, tax law and rates, and similar matters;

·	our ability to qualify as a REIT for U.S. federal income tax purposes;

 

·	our ability to maintain our exemption from registration under the 1940 Act;

 

 

·	availability of investment opportunities in mortgage-related, real estate-related and other securities;

·	availability of qualified personnel;

·	estimates relating to our ability to continue to make distributions to our shareholders in the future;

·	our understanding of our competition; and

·	market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy.

 

PART I

·	no investment shall be made that would cause us to fail to qualify as a REIT for federal income tax purposes;

·	no investment shall be made that would cause us to be regulated as an investment company under the 1940 Act;

·	our assets will be invested within our target assets; and

·	until appropriate investments can be identified, our Manager may pay off short-term debt or invest the proceeds of this and any future offerings in interest-bearing, short-term investments, including funds that are consistent with our intention to qualify as a REIT.

·	the issuer issues securities the payment of which depends primarily on the cash flow from “eligible assets,” which include many of the types of assets that we acquire in our TALF fundings, that by their terms convert into cash within a finite time period;

·

the securities sold are fixed income securities rated investment grade by at least one rating agency (fixed income securities which are unrated or rated below investment grade may be sold to institutional accredited investors and any securities may be sold to “qualified institutional buyers” and to persons involved in the organization or operation of the issuer);

·

the issuer acquires and disposes of eligible assets (1) only in accordance with the agreements pursuant to which the securities are issued, (2) so that the acquisition or disposition does not result in a downgrading of the issuer’s fixed income securities and (3) the eligible assets are not acquired or disposed of for the primary purpose of recognizing gains or decreasing losses resulting from market value changes; and

·	unless the issuer is issuing only commercial paper, the issuer appoints an independent trustee, takes reasonable steps to transfer to the trustee an ownership or perfected security interest in the eligible assets, and meets rating agency requirements for commingling of cash flows.

·	general market conditions;

·	the market’s view of the quality of our assets;

 

 

·	the market’s perception of our growth potential;

·	our eligibility to participate in and access capital from programs established by the U.S. government;

·	our current and potential future earnings and cash distributions; and

·	the market price of the shares of our capital stock.

·	our lenders do not make repurchase agreement financing available to us at acceptable rates;

·	certain of our lenders exit the repurchase market;

·	our lenders require that we pledge additional collateral to cover our borrowings, which we may be unable to do; or

·	we determine that the leverage would expose us to excessive risk.

·	interest rate hedging can be expensive, particularly during periods of rising and volatile interest rates;

·	available interest rate hedges may not correspond directly with the interest rate risk for which protection is sought;

·	due to a credit loss, the duration of the hedge may not match the duration of the related liability;

·

the amount of income that a REIT may earn from hedging transactions (other than hedging transactions that satisfy certain requirements of the Internal Revenue Code or that are done through a taxable REIT subsidiary (“TRS”)) to offset interest rate losses is limited by U.S. federal tax provisions governing REITs;

·	the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

·	the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.

 

    Requests for funding under the PPIP may surpass the amount of funding authorized by the U.S. Treasury, resulting in an early termination of the PPIP. In addition, under the terms of the legacy securities PPIP, the U.S. Treasury has the right to cease funding of committed but undrawn equity capital and debt financing to a specific fund participating in the legacy securities PPIP in its sole discretion. We may be unable to obtain capital and debt financing on similar terms and such actions may adversely affect our ability to purchase eligible assets and may otherwise affect expected returns on our investments.

·	acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses;

 

 

 

·	acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;

·	adverse changes in national and local economic and market conditions;

·	changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

·	costs of remediation and liabilities associated with environmental conditions such as indoor mold; and

·	the potential for uninsured or under-insured property losses.

·	tenant mix;

·	success of tenant businesses;

·	property management decisions;

·	property location and condition;

·	competition from comparable types of properties;

·	changes in laws that increase operating expenses or limit rents that may be charged;

·	any need to address environmental contamination at the property or the occurrence of any uninsured casualty at the property;

·	changes in national, regional or local economic conditions and/or specific industry segments;

·	declines in regional or local real estate values;

·	declines in regional or local rental or occupancy rates;

·	increases in interest rates;

·	real estate tax rates and other operating expenses;

 

 

·	changes in governmental rules, regulations and fiscal policies, including environmental legislation; and

·	acts of God, terrorist attacks, social unrest and civil disturbances.

 

·

We may purchase RMBS that have a higher interest rate than the market interest rate at the time. In exchange for this higher interest rate, we may pay a premium over the par value to acquire the security. In accordance with US GAAP, we may amortize this premium over the estimated term of the RMBS. If the RMBS is prepaid in whole or in part prior to its maturity date, however, we may be required to expense the premium that was prepaid at the time of the prepayment.

·

A substantial portion of our adjustable-rate RMBS may bear interest rates that are lower than their fully indexed rates, which are equivalent to the applicable index rate plus a margin. If an adjustable-rate RMBS is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, we will have held that RMBS while it was least profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life.

·

If we are unable to acquire new RMBS similar to the prepaid RMBS, our financial condition, results of operation and cash flow would suffer. Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, but changes in prepayment rates are difficult to predict. Prepayment rates also may be affected by conditions in the housing and financial markets, general economic conditions and the relative interest rates on FRMs and ARMs.

·	actual or anticipated variations in our quarterly operating results or distributions;

·	changes in our earnings estimates or publication of research reports about us or the real estate or specialty finance industry;

 

 

 

·	decrease in the market valuations of our target assets;

·	increased difficulty in maintaining or obtaining financing or attractive terms, or at all;

·	increases in market interest rates that lead purchasers of our shares of common stock to demand a higher yield;

·	changes in market valuations of similar companies;

·	adverse market reaction to any increased indebtedness we incur in the future;

·	additions or departures of key management personnel;

·	actions by institutional shareholders;

·	speculation in the press or investment community; and

·	general market and economic conditions.

 

·	the profitability of the investment of the net proceeds of our IPO and concurrent private placement and our follow-on offering;

·	our ability to make profitable investments;

·	margin calls or other expenses that reduce our cash flow;

·	defaults in our asset portfolio or decreases in the value of our portfolio; and

·	the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.

 

		High				Low
2009
Second quarter		$	19.80			$	18.73
Third quarter		$	22.18			$	19.25
Fourth quarter		$	24.92			$	19.34

 

Date Declared		Common Dividends Declared Per Share
		Amount			Date of Payment
October 13, 2009		$	0.61		November 12, 2009
December 17, 2009		$	1.05		January 27, 2010

 

 

 

 

		6/26/09	6/30/09	9/30/09	12/31/09
Invesco Mortgage Capital Inc.		100.00	100.31	112.51	126.21
S&P 500		100.00	100.20	115.83	122.83
FTSE NAREIT Mortgage REITs		100.00	109.71	132.18	130.53

$ in thousands		December 31, 2009				December 31, 2008
Mortgage-backed securities, at fair value			802,592				—
Total assets			853,400				979
Repurchase agreements			545,975				—
TALF financing			80,377				—
Total  shareholders’ equity (deficit)			180,515				(21	)
Non-controlling interest			29,795				—
Total equity (deficit)			210,310				(21	)

$ in thousands, except per share data		For the Year Ended December 31, 2009				Period from June 5, 2008 (Date of Inception) to December 31, 2008
Interest income			23,529				—
Interest expense			4,627				—
Net interest income			18,902				—
Other income			2,073				—
Operating expenses			3,464				22
Net income (loss)			17,511				(22	)
Net income attributable to non-controlling interest			2,417				—
Net income (loss) attributable to common shareholders			15,094				(22	)
Earnings per share:
Net income attributable to common shareholders (basic/diluted)			3.37				—
Dividends declared per common share			1.66				—
Weighted average number of shares of common stock:
Basic			4,480			NM
Diluted			5,198			NM

 

$ in thousands		Principal Balance				Unamortized Premium (Discount)				Amortized Cost				Unrealized Gain/ (Loss)				Fair Value				Net Weighted Average Coupon (1)				Average Yield (2)
Agency RMBS:
15 year fixed-rate			251,752				9,041				260,793				1,023				261,816				4.82	%			3.80	%
30 year fixed-rate			149,911				10,164				160,075				990				161,065				6.45	%			5.02	%
ARM			10,034				223				10,257				(281	)			9,976				2.52	%			1.99	%
Hybrid ARM			117,163				5,767				122,930				597				123,527				5.14	%			3.55	%
Total Agency RMBS			528,860				25,195				554,055				2,329				556,384				5.31	%			4.07	%
MBS-CMO			27,819				978				28,797				936				29,733				6.34	%			4.83	%
Non-Agency RMBS			186,682				(79,341	)			107,341				7,992				115,333				4.11	%			17.10	%
CMBS			104,512				(4,854	)			99,658				1,484				101,142				4.93	%			5.97	%
Total			847,873				(58,022	)			789,851				12,741				802,592				5.03	%			6.10	%

$ in thousands
Less than one year			—
Greater than one year and less than five years			483,540
Greater than or equal to five years			319,052
Total			802,592

$ in thousands
Principal balance			847,873
Unamortized premium			26,174
Unamortized discount			(84,196	)
Gross unrealized gains			14,595
Gross unrealized losses			(1,854	)
Carrying value/estimated fair value			802,592

Counterparty		Notional Amount $ in thousands			Maturity Date		Fixed Interest Rate in Contract
The Bank of New York Mellon			175,000		08/05/2012			2.07	%
SunTrust Bank			100,000		07/15/2014			2.79	%
Credit Suisse International			100,000		02/24/2015			3.26	%
Total/Weighted Average			375,000					2.58	%

 

$ in thousands, except per share data		Year Ended December 31, 2009				Period from June 5, 2008 (Date of Inception) to December 31, 2008
Revenues
Interest income			23,529				—
Interest expense			4,627				—
Net interest income			18,902				—
Other income
Gain on sale of investments			2,002
Equity in earnings and fair value change in unconsolidated limited partnerships			71				—
Total other income			2,073				—
Expenses
Management fee – related party			1,513				—
General and administrative			499				22
Insurance			723				—
Professional Fees			729				—
Total expenses			3,464				22
Net income (loss)			17,511				(22	)
Net income attributable to non-controlling interest			2,417				—
Net income (loss) attributable to common shareholders			15,094				(22	)
Earnings per share:
Net income attributable to common shareholders (basic/diluted)			3.37			NM
Dividends declared per common share			1.66				—
Weighted average number of shares of common stock:
Basic			4,480			NM
Diluted			5,198			NM

·	increased volatility of many financial assets, including agency securities and other high-quality RMBS assets, due to potential security liquidations;

 

 

 

·	increased volatility and deterioration in the broader residential mortgage and RMBS markets; and

·	significant disruption in financing of RMBS.

		Payments Due by Period
		Total				Less than 1 year				1-3 years				3-5 years				After 5 years
$ in thousands
Repurchase agreements			545,975				545,975				—				—				—
TALF financing			80,377				—				—				80,377				—
Invesco PPIP Fund investment			20,943				—				20,943				—				—
Total contractual obligations			647,295				545,975				20,943				80,377				—

       As of December 31, 2009, we had approximately $91,000 and $14.3 million in contractual interest payments related to our repurchase agreements and TALF financing respectively.

 

Change in Interest Rates		Percentage Change in Projected Net Interest Income		Percentage Change in Projected Portfolio Value
+1.00%		7.79%		(1.71)%
+0.50%		5.76%		(0.73)%
-0.50%		(4.25)%		0.32%
-1.00%		(14.67)%		0.12%