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Invesco Mortgage Capital Inc. - Quarter Report: 2019 March (Form 10-Q)

Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
_______________________________________________ 
FORM 10-Q 
_______________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission file number 001-34385
ivrmainimageinblacka05.jpg
(Exact Name of Registrant as Specified in Its Charter)
_______________________________________________
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)
(404) 892-0896
(Registrant’s Telephone Number, Including Area Code) 
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Title of Each Class
 
Trading Symbol
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
IVR
 
New York Stock Exchange
7.75% Series A Cumulative Redeemable Preferred Stock
 
IVRpA
 
New York Stock Exchange
7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock
 
IVRpB
 
New York Stock Exchange
7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock
 
IVRpC
 
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer
 
ý
 
  
Accelerated filer
 
o
Non-Accelerated filer
 
o
 
  
Smaller reporting company
 
o
 
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  ý
As of April 30, 2019, there were 128,588,493 outstanding shares of common stock of Invesco Mortgage Capital Inc.


Table of Contents


INVESCO MORTGAGE CAPITAL INC.
TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.


Table of Contents


PART I
ITEM 1.
FINANCIAL STATEMENTS
INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
  
As of
 $ in thousands except share amounts
March 31, 2019
 
December 31, 2018
ASSETS
 
Mortgage-backed and credit risk transfer securities, at fair value (including pledged securities of $20,544,317 and $17,082,825, respectively)
21,127,598

 
17,396,642

Cash and cash equivalents
78,482

 
135,617

Restricted cash
5,025

 

Due from counterparties
13,000

 
13,500

Investment related receivable
70,789

 
66,598

Derivative assets, at fair value
26,580

 
15,089

Other assets
177,913

 
186,059

Total assets
21,499,387

 
17,813,505

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Repurchase agreements
16,824,387

 
13,602,484

Secured loans
1,650,000

 
1,650,000

Derivative liabilities, at fair value
8,463

 
23,390

Dividends and distributions payable
60,433

 
49,578

Investment related payable
222,500

 
132,096

Accrued interest payable
47,100

 
37,620

Collateral held payable
2,273

 
18,083

Accounts payable and accrued expenses
2,384

 
1,694

Due to affiliate
10,133

 
11,863

Total liabilities
18,827,673

 
15,526,808

Commitments and contingencies (See Note 14):

 

Equity:
 
 
 
Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized:
 
 
 
7.75% Series A Cumulative Redeemable Preferred Stock: 5,600,000 shares issued and outstanding ($140,000 aggregate liquidation preference)
135,356

 
135,356

7.75% Fixed-to-Floating Series B Cumulative Redeemable Preferred Stock: 6,200,000 shares issued and outstanding ($155,000 aggregate liquidation preference)
149,860

 
149,860

7.50% Fixed-to-Floating Series C Cumulative Redeemable Preferred Stock: 11,500,000 shares issued and outstanding ($287,500 aggregate liquidation preference)
278,108

 
278,108

Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 128,267,497 and 111,584,996 shares issued and outstanding, respectively
1,282

 
1,115

Additional paid in capital
2,642,050

 
2,383,532

Accumulated other comprehensive income
277,182

 
220,813

Retained earnings (distributions in excess of earnings)
(812,124
)
 
(882,087
)
Total stockholders’ equity
2,671,714

 
2,286,697

Total liabilities and stockholders' equity
21,499,387

 
17,813,505

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three Months Ended March 31,
$ in thousands, except share amounts
2019
 
2018
Interest Income

 

Mortgage-backed and credit risk transfer securities
185,492

 
149,003

Commercial and other loans
1,582

 
4,222

Total interest income
187,074

 
153,225

Interest Expense
 
 
 
Repurchase agreements
101,875

 
59,585

Secured loans
11,144

 
6,927

Exchangeable senior notes

 
1,621

Total interest expense
113,019

 
68,133

Net interest income
74,055

 
85,092

Other Income (loss)

 

Gain (loss) on investments, net
268,382

 
(160,370
)
Equity in earnings (losses) of unconsolidated ventures
692

 
896

Gain (loss) on derivative instruments, net
(201,460
)
 
133,367

Realized and unrealized credit derivative income (loss), net
7,884

 
3,165

Net loss on extinguishment of debt

 
(26
)
Other investment income (loss), net
1,029

 
3,102

Total other income (loss)
76,527

 
(19,866
)
Expenses
 
 
 
Management fee – related party
9,534

 
10,221

General and administrative
2,258

 
1,756

Total expenses
11,792

 
11,977

Net income
138,790

 
53,249

Net income attributable to non-controlling interest

 
671

Net income attributable to Invesco Mortgage Capital Inc.
138,790

 
52,578

Dividends to preferred stockholders
11,107

 
11,107

Net income attributable to common stockholders
127,683

 
41,471

Earnings per share:
 
 


Net income attributable to common stockholders
 
 

Basic
1.05

 
0.37

Diluted
1.05

 
0.37

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Net income
138,790

 
53,249

Other comprehensive income (loss):
 
 
 
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net
52,349

 
(132,317
)
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net
10,147

 
9,237

Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense
(5,851
)
 
(6,539
)
Currency translation adjustments on investment in unconsolidated venture
(276
)
 
312

Total other comprehensive income (loss)
56,369

 
(129,307
)
Comprehensive income (loss)
195,159

 
(76,058
)
Less: Comprehensive (income) loss attributable to non-controlling interest

 
959

Less: Dividends to preferred stockholders
(11,107
)
 
(11,107
)
Comprehensive income (loss) attributable to common stockholders
184,052

 
(86,206
)

The accompanying notes are an integral part of these condensed consolidated financial statements.


 
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the three months ended March 31, 2019 and 2018
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Distributions
in excess of
earnings)
 
Total
Stockholders’
Equity
 
Series A
Preferred Stock
 
Series B
Preferred Stock
 
Series C
Preferred Stock
 
 
 
$ in thousands 
except share amounts
 
 
 
Common Stock
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2018
5,600,000

 
135,356

 
6,200,000

 
149,860

 
11,500,000

 
278,108

 
111,584,996

 
1,115

 
2,383,532

 
220,813

 
(882,087
)
 
2,286,697

Net income

 

 

 

 

 

 

 

 

 

 
138,790

 
138,790

Other comprehensive income

 

 

 

 

 

 

 

 

 
56,369

 

 
56,369

Proceeds from issuance of common stock, net of offering costs

 

 

 

 

 

 
16,672,000

 
167

 
258,386

 

 

 
258,553

Stock awards

 

 

 

 

 

 
10,501

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 
(57,720
)
 
(57,720
)
Preferred stock dividends

 

 

 

 

 

 

 

 

 

 
(11,107
)
 
(11,107
)
Amortization of equity-based compensation

 

 

 

 

 

 

 

 
132

 

 

 
132

Balance at March 31, 2019
5,600,000

 
135,356

 
6,200,000

 
149,860

 
11,500,000

 
278,108

 
128,267,497

 
1,282

 
2,642,050

 
277,182

 
(812,124
)
 
2,671,714

The accompanying notes are an integral part of these condensed consolidated financial statements.








 
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Continued)
For the three months ended March 31, 2019 and 2018
(Unaudited)
 
 
 
 
 
 
 
 
 
 
 
Attributable to Common Stockholders
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Distributions
in excess of
earnings)
 
Total
Stockholders’
Equity
 
Non-
Controlling
Interest
 
 
 
Series A
Preferred Stock
 
Series B
Preferred Stock
 
Series C
Preferred Stock
 
 
 
 
$ in thousands 
except
share amounts
 
 
 
Common Stock
 
Total
Equity
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2017
5,600,000

 
135,356

 
6,200,000

 
149,860

 
11,500,000

 
278,108

 
111,624,159

 
1,116

 
2,384,356

 
261,029

 
(579,334
)
 
2,630,491

 
26,387

 
2,656,878

Net income

 

 

 

 

 

 

 

 

 

 
52,578

 
52,578

 
671

 
53,249

Other comprehensive loss

 

 

 

 

 

 

 

 

 
(127,677
)
 

 
(127,677
)
 
(1,630
)
 
(129,307
)
Stock awards

 

 

 

 

 

 
12,564

 

 

 

 

 

 

 

Common stock dividends

 

 

 

 

 

 

 

 

 

 
(46,887
)
 
(46,887
)
 

 
(46,887
)
Common unit dividends

 

 

 

 

 

 

 

 

 

 

 

 
(599
)
 
(599
)
Preferred stock dividends

 

 

 

 

 

 

 

 

 

 
(11,107
)
 
(11,107
)
 

 
(11,107
)
Amortization of equity-based compensation

 

 

 

 

 

 

 

 
127

 

 

 
127

 
2

 
129

Rebalancing of ownership percentage of non-controlling interest

 

 

 

 

 

 

 

 
143

 

 

 
143

 
(143
)
 

Balance at March 31, 2018
5,600,000

 
135,356

 
6,200,000

 
149,860

 
11,500,000

 
278,108

 
111,636,723

 
1,116

 
2,384,626

 
133,352

 
(584,750
)
 
2,497,668

 
24,688

 
2,522,356

The accompanying notes are an integral part of these condensed consolidated financial statements.


 
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
  
Three Months Ended March 31,
$ in thousands
2019
 
2018
Cash Flows from Operating Activities
 
 
 
Net income
138,790

 
53,249

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of mortgage-backed and credit risk transfer securities premiums and (discounts), net
3,185

 
12,663

Realized and unrealized (gain) loss on derivative instruments, net
205,969

 
(145,479
)
Realized and unrealized (gain) loss on credit derivatives, net
(2,534
)
 
2,468

(Gain) loss on investments, net
(268,382
)
 
160,370

(Gain) loss from investments in unconsolidated ventures in excess of distributions received
(692
)
 
(352
)
Other amortization
(5,719
)
 
(6,265
)
Net loss on extinguishment of debt

 
26

(Gain) loss on foreign currency transactions, net

 
(1,800
)
Changes in operating assets and liabilities:
 
 
 
(Increase) decrease in operating assets
(10,015
)
 
1,334

Increase in operating liabilities
7,758

 
562

Net cash provided by operating activities
68,360

 
76,776

Cash Flows from Investing Activities
 
 
 
Purchase of mortgage-backed and credit risk transfer securities
(4,340,536
)
 
(298,859
)
(Contributions to) distributions from investments in unconsolidated ventures, net
299

 
(1,532
)
Change in other assets
1,154

 

Principal payments from mortgage-backed and credit risk transfer securities
300,222

 
488,123

Proceeds from sale of mortgage-backed and credit risk transfer securities
734,834

 

Settlement (termination) of futures, currency forwards and interest rate swaps, net
(232,387
)
 
113,578

Net change in due from counterparties and collateral held payable
(14,060
)
 
14,853

Principal payments from commercial loans held-for-investment
7,128

 
10,042

Origination and advances of commercial loans, net of origination fees

 
(698
)
Net cash (used in) provided by investing activities
(3,543,346
)
 
325,507

Cash Flows from Financing Activities
 
 
 
Proceeds from issuance of common stock
258,966

 

Proceeds from repurchase agreements
28,316,732

 
35,711,164

Principal repayments of repurchase agreements
(25,094,829
)
 
(35,880,828
)
Extinguishment of exchangeable senior notes

 
(143,433
)
Payments of deferred costs
(21
)
 
(76
)
Payments of dividends and distributions
(57,972
)
 
(58,587
)
Net cash provided by (used in) financing activities
3,422,876

 
(371,760
)
Net change in cash, cash equivalents and restricted cash
(52,110
)
 
30,523

Cash, cash equivalents and restricted cash, beginning of period
135,617

 
89,001

Cash, cash equivalents and restricted cash, end of period
83,507

 
119,524

Supplement Disclosure of Cash Flow Information
 
 
 
Interest paid
109,392

 
73,811

Non-cash Investing and Financing Activities Information
 
 
 
Net change in unrealized gain (loss) on mortgage-backed and credit risk transfer securities
62,496

 
(123,080
)
Dividends and distributions declared not paid
60,433

 
50,199

Net change in investment related payable (receivable)
(95,250
)
 
80,688

Offering costs not paid
(413
)
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 
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INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Organization and Business Operations
Invesco Mortgage Capital Inc. (the "Company", "we") is a Maryland corporation primarily focused on investing in, financing and managing residential and commercial mortgage-backed securities and other mortgage-related assets. We are externally managed and advised by Invesco Advisers, Inc. (our "Manager"), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. ("Invesco"), a leading independent global investment management firm. We conduct our business through IAS Operating Partnership LP (the "Operating Partnership") and have one operating segment. Prior to November 30, 2018, a wholly-owned subsidiary of Invesco owned 1.3% of the Operating Partnership. See Note 15 - "Non-Controlling Interest - Operating Partnership" of our Annual Report on Form 10-K for the year ended December 31, 2018 for information regarding redemption of Operating Partnership Units ("OP Units") previously held by Invesco.
We primarily invest in:
Residential mortgage-backed securities ("RMBS") that are guaranteed by a U.S. government agency such as the Government National Mortgage Association ("Ginnie Mae"), or a federally chartered corporation such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively "Agency RMBS");
Commercial mortgage-backed securities (“CMBS”) that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively "Agency CMBS");
RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation ("non-Agency RMBS");
CMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS”);
Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises ("GSE CRT");
Residential and commercial mortgage loans; and
Other real estate-related financing agreements.
We elected to be taxed as a real estate investment trust ("REIT") for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986 commencing with our taxable year ended December 31, 2009. To maintain our REIT qualification, we are generally required to distribute at least 90% of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits exclusion from the "Investment Company" definition under the Investment Company Act of 1940.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation and Consolidation
Certain disclosures included in our Annual Report on Form 10-K are not required to be included on an interim basis in our quarterly reports on Form 10-Q. We have condensed or omitted these disclosures. Therefore, this Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.
Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP and consolidate the financial statements of the Company and our controlled subsidiaries. All significant intercompany transactions, balances, revenues and expenses are eliminated upon consolidation. In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for a fair statement of our financial condition and results of operations for the periods presented.
Reclassifications
Our condensed consolidated balance sheet for the year ended December 31, 2018 presented in this Form 10-Q includes a reclassification of Commercial Loans, held-for-investment to Other assets to conform to our current period presentation. See Note 5 - "Other Assets" for further information. 
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and

 
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accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income on mortgage-backed and credit risk transfer securities, provision for loan losses and other-than-temporary impairment charges. Actual results may differ from those estimates.
Significant Accounting Policies
There have been no changes to our accounting policies included in Note 2 to the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2018 except for the implementation of new accounting guidance for stock-based payments to non-employees discussed below.
Accounting Pronouncements Recently Adopted
Effective January 1, 2019, we adopted the accounting guidance that aligns the measurement and classification for stock-based payments to non-employees with the guidance for stock-based payments to employees. Under the new guidance, the measurement of equity-classified non-employee awards is fixed at the grant date. The implementation of the guidance did not have a material impact on our financial statements.
Pending Accounting Pronouncements
In June 2016, new accounting guidance was issued for reporting credit losses for assets measured at amortized cost and available-for-sale securities. The new guidance significantly changes how entities will measure credit losses for most financial assets, including loans, that are not measured at fair value through net income. The guidance replaces the existing “incurred loss” model with an “expected loss” model for instruments measured at amortized cost, and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. The new guidance also simplifies the accounting model for purchased credit-impaired debt securities and loans. We are required to adopt the new guidance in the first quarter of 2020 by recording a cumulative effect adjustment to retained earnings as of January 1, 2020. We are currently evaluating the potential impacts of the new guidance and proposed amendments to the new guidance on our consolidated financial statements.
Note 3 – Variable Interest Entities ("VIEs")
Our maximum risk of loss in VIEs in which we are not the primary beneficiary at March 31, 2019 is presented in the table below.
$ in thousands
Carrying Amount
 
Company's Maximum Risk of Loss
Non-Agency CMBS
3,455,806

 
3,455,806

Non-Agency RMBS
1,186,896

 
1,186,896

Investments in unconsolidated ventures
24,129

 
24,129

Total
4,666,831

 
4,666,831

Refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities" and Note 5 - "Other Assets" for additional details regarding these investments.

 
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Note 4 – Mortgage-Backed and Credit Risk Transfer Securities
The following tables summarize our mortgage-backed securities ("MBS") and GSE CRT portfolio by asset type as of March 31, 2019 and December 31, 2018.
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
$ in thousands
Principal/ Notional
Balance
 
Unamortized
Premium
(Discount)
 
Amortized
Cost
 
Unrealized
Gain/
(Loss), net
 
Fair
Value
 
Period-
end
Weighted
Average
Yield (1)
Agency RMBS:
 
 
 
 
 
 
 
 
 
 
 
15 year fixed-rate
343,116

 
2,595

 
345,711

 
6,391

 
352,102

 
3.34
%
30 year fixed-rate
12,264,517

 
386,145

 
12,650,662

 
65,974

 
12,716,636

 
3.66
%
ARM*
6,215

 
184

 
6,399

 
5

 
6,404

 
3.64
%
Hybrid ARM*
170,397

 
3,602

 
173,999

 
(478
)
 
173,521

 
3.11
%
Total Agency RMBS pass-through
12,784,245

 
392,526

 
13,176,771

 
71,892

 
13,248,663

 
3.64
%
Agency-CMO (2)
913,574

 
(585,878
)
 
327,696

 
(545
)
 
327,151

 
3.65
%
Agency CMBS
1,898,205

 
35,961

 
1,934,166

 
67,387

 
2,001,553

 
3.48
%
Non-Agency CMBS (3)
4,127,880

 
(737,241
)
 
3,390,639

 
65,167

 
3,455,806

 
5.08
%
Non-Agency RMBS (4)(5)(6)
2,774,428

 
(1,700,612
)
 
1,073,816

 
113,080

 
1,186,896

 
6.89
%
GSE CRT (7)
823,578

 
19,823

 
843,401

 
64,128

 
907,529

 
3.16
%
Total
23,321,910

 
(2,575,421
)
 
20,746,489

 
381,109

 
21,127,598

 
4.01
%
* Adjustable-rate mortgage ("ARM")
 
(1)
Period-end weighted average yield is based on amortized cost as of March 31, 2019 and incorporates future prepayment and loss assumptions.
(2)
Agency collateralized mortgage obligation ("Agency-CMO") includes interest-only securities ("Agency IO"), which represent 67.8% of principal/notional balance, 10.3% of amortized cost and 9.7% of fair value.
(3)
Non-Agency CMBS includes interest-only securities which represent 14.6% of principal/notional balance, 0.4% of amortized cost and 0.4% of fair value.
(4)
Non-Agency RMBS is 54.9% fixed rate, 39.7% variable rate, and 5.4% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying ARM and Hybrid ARM loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index.
(5)
Of the total discount in non-Agency RMBS, $140.8 million is non-accretable calculated using the principal/notional balance and based on estimated future cash flows of the securities.
(6)
Non-Agency RMBS includes interest-only securities ("non-Agency IO") which represent 54.6% of principal/notional balance, 2.2% of amortized cost and 2.1% of fair value.
(7)
GSE CRT weighted average yield excludes coupon interest associated with embedded derivatives not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net.


 
9
 


Table of Contents


December 31, 2018
 
 
 
 
 
 
 
 
 
 
$ in thousands
Principal/Notional
Balance
 
Unamortized
Premium
(Discount)
 
Amortized
Cost
 
Unrealized
Gain/
(Loss), net
 
Fair
Value
 
Period-
end
Weighted
Average
Yield (1)
Agency RMBS:
 
 
 
 
 
 
 
 
 
 
 
15 year fixed-rate
417,233

 
5,077

 
422,310

 
1,944

 
424,254

 
3.27
%
30 year fixed-rate
9,599,301

 
298,693

 
9,897,994

 
(125,225
)
 
9,772,769

 
3.55
%
ARM
105,453

 
350

 
105,803

 
(56
)
 
105,747

 
2.74
%
Hybrid ARM
548,133

 
13,425

 
561,558

 
(7,357
)
 
554,201

 
2.80
%
Total Agency RMBS pass-through
10,670,120

 
317,545

 
10,987,665

 
(130,694
)
 
10,856,971

 
3.49
%
Agency-CMO (2)
907,862

 
(631,180
)
 
276,682

 
(8,991
)
 
267,691

 
3.61
%
Agency CMBS
973,122

 
15,058

 
988,180

 
14,330

 
1,002,510

 
3.54
%
Non-Agency CMBS (3)
4,024,715

 
(727,307
)
 
3,297,408

 
(10,949
)
 
3,286,459

 
5.05
%
Non-Agency RMBS (4)(5)(6)
2,800,335

 
(1,748,223
)
 
1,052,112

 
111,570

 
1,163,682

 
7.24
%
GSE CRT (7)
738,529

 
21,259

 
759,788

 
59,541

 
819,329

 
3.10
%
Total
20,114,683

 
(2,752,848
)
 
17,361,835

 
34,807

 
17,396,642

 
4.00
%
 
(1)
Period-end weighted average yield is based on amortized cost as of December 31, 2018 and incorporates future prepayment and loss assumptions.
(2)
Agency collateralized mortgage obligation ("Agency-CMO") includes interest-only securities ("Agency IO"), which represent 73.6% of principal (notional) balance, 13.5% of amortized cost and 12.4% of fair value.
(3)
Non-Agency CMBS includes interest-only securities which represent 15.0% of principal/notional balance, 0.4% of amortized cost and 0.5% of fair value.
(4)
Non-Agency RMBS is 43.5% variable rate, 50.7% fixed rate, and 5.8% floating rate based on fair value. Coupon payments on variable rate investments are based upon changes in the underlying ARM and Hybrid ARM loan coupons, while coupon payments on floating rate investments are based upon a spread to a reference index.
(5)
Of the total discount in non-Agency RMBS, $145.6 million is non-accretable calculated using the principal/notional balance and based on estimated future cash flows of the securities.
(6)
Non-Agency RMBS includes interest-only securities, which represent 55.4% of principal/notional balance, 2.3% of amortized cost and 2.4% of fair value.
(7)
GSE CRT weighted average yield excludes coupon interest associated with embedded derivatives not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net.
The following table presents the fair value of our available-for-sale securities and securities accounted for under the fair value option by asset type as of March 31, 2019 and December 31, 2018. We have elected the fair value option for all of our RMBS IOs, our MBS purchased on or after September 1, 2016 and our GSE CRTs purchased on or after August 24, 2015. As of March 31, 2019 and December 31, 2018, approximately 76% and 67%, respectively, of our MBS and GSE CRTs are accounted for under the fair value option.
 
March 31, 2019
 
December 31, 2018
$ in thousands
Available-for-sale Securities
 
Securities under Fair Value Option
 
Total
Fair Value
 
Available-for-sale Securities
 
Securities under Fair Value Option
 
Total
Fair Value
Agency RMBS:
 
 
 
 
 
 
 
 
 
 
 
15 year fixed-rate
135,169

 
216,933

 
352,102

 
204,347

 
219,907

 
424,254

30 year fixed-rate
918,778

 
11,797,858

 
12,716,636

 
1,093,070

 
8,679,699

 
9,772,769

ARM
6,404

 

 
6,404

 
105,747

 

 
105,747

Hybrid ARM
141,320

 
32,201

 
173,521

 
521,199

 
33,002

 
554,201

Total RMBS Agency pass-through
1,201,671

 
12,046,992

 
13,248,663

 
1,924,363

 
8,932,608

 
10,856,971

Agency-CMO
166,730

 
160,421

 
327,151

 
168,385

 
99,306

 
267,691

Agency CMBS

 
2,001,553

 
2,001,553

 

 
1,002,510

 
1,002,510

Non-Agency CMBS
2,144,187

 
1,311,619

 
3,455,806

 
2,153,403

 
1,133,056

 
3,286,459

Non-Agency RMBS
916,158

 
270,738

 
1,186,896

 
961,445

 
202,237

 
1,163,682

GSE CRT
579,142

 
328,387

 
907,529

 
586,231

 
233,098

 
819,329

Total
5,007,888

 
16,119,710

 
21,127,598

 
5,793,827

 
11,602,815

 
17,396,642


 
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The components of the carrying value of our MBS and GSE CRT portfolio at March 31, 2019 and December 31, 2018 are presented below. 
 
March 31, 2019
$ in thousands
MBS and GSE CRT Securities
 
Interest-Only Securities
 
Total
Principal/ notional balance
20,734,762

 
2,587,148

 
23,321,910

Unamortized premium
488,161

 

 
488,161

Unamortized discount
(545,248
)
 
(2,518,334
)
 
(3,063,582
)
Gross unrealized gains (1)
447,903

 
5,613

 
453,516

Gross unrealized losses (1)
(67,022
)
 
(5,385
)
 
(72,407
)
Fair value
21,058,556

 
69,042

 
21,127,598

 
December 31, 2018
$ in thousands
MBS and GSE CRT Securities
 
Interest-Only Securities
 
Total
Principal/ notional balance
17,442,367

 
2,672,316

 
20,114,683

Unamortized premium
395,907

 

 
395,907

Unamortized discount
(549,988
)
 
(2,598,767
)
 
(3,148,755
)
Gross unrealized gains (1)
238,579

 
7,448

 
246,027

Gross unrealized losses (1)
(204,664
)
 
(6,556
)
 
(211,220
)
Fair value
17,322,201

 
74,441

 
17,396,642

(1)
Gross unrealized gains and losses includes gains (losses) recognized in net income for securities accounted for as derivatives or under the fair value option as well as gains (losses) for available-for-sale securities which are recognized as adjustments to other comprehensive income. Realization occurs upon sale or settlement of such securities. Further detail on the components of our total gains (losses) on investments, net for the three months ended March 31, 2019 and 2018 is provided below within this Note 4.
The following table summarizes our MBS and GSE CRT portfolio according to estimated weighted average life classifications as of March 31, 2019 and December 31, 2018
$ in thousands
March 31, 2019
 
December 31, 2018
Less than one year
49,768

 
110,020

Greater than one year and less than five years
5,188,229

 
3,508,100

Greater than or equal to five years
15,889,601

 
13,778,522

Total
21,127,598

 
17,396,642



 
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The following tables present the estimated fair value and gross unrealized losses of our MBS and GSE CRTs by length of time that such securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018.
March 31, 2019
  
Less than 12 Months
 
12 Months or More
 
Total
$ in thousands
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
Agency RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15 year fixed-rate
8,398

 
(28
)
 
21

 
35,070

 
(165
)
 
25

 
43,468

 
(193
)
 
46

30 year fixed-rate
1,286

 
(11
)
 
4

 
4,448,849

 
(50,925
)
 
146

 
4,450,135

 
(50,936
)
 
150

ARM

 

 

 
2,760

 
(60
)
 
2

 
2,760

 
(60
)
 
2

Hybrid ARM
3,059

 
(6
)
 
1

 
101,210

 
(1,595
)
 
24

 
104,269

 
(1,601
)
 
25

Total Agency RMBS pass-through (1)
12,743

 
(45
)
 
26

 
4,587,889

 
(52,745
)
 
197

 
4,600,632

 
(52,790
)
 
223

Agency-CMO (2)
9,749

 
(3,276
)
 
16

 
109,177

 
(3,380
)
 
20

 
118,926

 
(6,656
)
 
36

Non-Agency CMBS (3)
94,622

 
(538
)
 
9

 
478,174

 
(10,226
)
 
41

 
572,796

 
(10,764
)
 
50

GSE CRT (4)
62,965

 
(381
)
 
4

 

 

 

 
62,965

 
(381
)
 
4

Non-Agency RMBS (5)
63,102

 
(1,225
)
 
13

 
93,291

 
(591
)
 
15

 
156,393

 
(1,816
)
 
28

Total
243,181

 
(5,465
)
 
68

 
5,268,531

 
(66,942
)
 
273

 
5,511,712

 
(72,407
)
 
341

(1)
Includes Agency RMBS with a fair value of $4.2 billion for which the fair value option has been elected. Such securities have unrealized losses of $47.0 million.
(2)
Includes Agency IO and Agency-CMO with fair value of $13.9 million and $17.9 million, respectively, for which the fair value option has been elected. These Agency IO and Agency-CMO securities have unrealized losses of $4.6 million and $64,000, respectively.
(3)
Includes non-Agency CMBS with a fair value of $323.9 million for which the fair value option has been elected. Such securities have unrealized losses of $3.1 million.
(4)
Fair value option has been elected for all GSE CRT that are in an unrealized loss position.
(5)
Includes non-Agency RMBS and non-Agency IO with a fair value of $6.1 million and $4.9 million, respectively for which the fair value option has been elected. Such securities have unrealized losses of $223,000 and $821,000, respectively.


 
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Table of Contents


December 31, 2018
  
Less than 12 Months
 
12 Months or More
 
Total
$ in thousands
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
 
Fair
Value
 
Unrealized
Losses
 
Number
of
Securities
Agency RMBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
15 year fixed-rate
86,241

 
(814
)
 
50

 
16,660

 
(189
)
 
22

 
102,901

 
(1,003
)
 
72

30 year fixed-rate
3,966,347

 
(49,182
)
 
158

 
2,846,090

 
(94,716
)
 
95

 
6,812,437

 
(143,898
)
 
253

ARM
2,632

 
(28
)
 
1

 
49,954

 
(785
)
 
10

 
52,586

 
(813
)
 
11

Hybrid ARM
6,758

 
(59
)
 
2

 
453,463

 
(8,390
)
 
71

 
460,221

 
(8,449
)
 
73

Total Agency RMBS pass-through (1)
4,061,978

 
(50,083
)
 
211

 
3,366,167

 
(104,080
)
 
198

 
7,428,145

 
(154,163
)
 
409

Agency-CMO (2)
152,962

 
(6,315
)
 
34

 
101,705

 
(5,100
)
 
19

 
254,667

 
(11,415
)
 
53

Non-Agency CMBS (3)
1,214,691

 
(17,778
)
 
94

 
659,298

 
(25,381
)
 
52

 
1,873,989

 
(43,159
)
 
146

Non-Agency RMBS (4)
87,850

 
(1,152
)
 
19

 
89,265

 
(1,138
)
 
16

 
177,115

 
(2,290
)
 
35

GSE CRT(5)
9,639

 
(193
)
 
1

 

 

 

 
9,639

 
(193
)
 
1

Total
5,527,120

 
(75,521
)
 
359

 
4,216,435

 
(135,699
)
 
285

 
9,743,555

 
(211,220
)
 
644

(1)
Includes Agency RMBS with a fair value of $6.1 billion for which the fair value option has been elected. Such securities have unrealized losses of $130.2 million.
(2)
Includes Agency IO and Agency-CMO with fair value of $21.8 million and $66.0 million, respectively, for which the fair value option has been elected. These Agency IO and Agency-CMO securities have unrealized losses of $6.3 million and $845,000, respectively.
(3)
Includes non-Agency CMBS with a fair value of $831.3 million for which the fair value option has been elected. Such securities have unrealized losses of $26.3 million.
(4)
Includes non-Agency RMBS and non-Agency IO with a fair value of $6.2 million and $3.7 million for which the fair value option has been elected. Such securities have unrealized losses of $79,000 and $269,000, respectively.
(5)
Fair value option has been elected for all GSE CRT that are in an unrealized loss position.
Gross unrealized losses on our Agency RMBS, Agency CMBS, GSE CRT and CMO were $55.3 million at March 31, 2019 (December 31, 2018: $159.3 million). Due to the inherent credit quality of Agency RMBS, Agency CMBS and Agency-CMO, we determined that at March 31, 2019 and December 31, 2018, any unrealized losses on these securities are not other than temporary.
Gross unrealized losses on our Agency IO, non-Agency RMBS and non-Agency CMBS were $17.1 million at March 31, 2019 (December 31, 2018: $51.9 million). We did not consider these unrealized losses to be credit related, but rather due to non-credit related factors such as interest rates, prepayment speeds, and market fluctuations. These investment securities are included in our assessment for other-than-temporary impairment ("OTTI").
We assess our investment securities for OTTI on a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either "temporary" or "other-than-temporary." This analysis includes a determination of estimated future cash flows through an evaluation of the characteristics of the underlying loans and the structural features of the investment. Underlying loan characteristics reviewed include, but are not limited to, delinquency status, loan-to-value ratios, borrower credit scores, occupancy status and geographic concentration.
The following table summarizes OTTI included in earnings for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
RMBS interest-only securities
1,463

 
4,309

Non-Agency RMBS (1)
313

 
50

Total
1,776

 
4,359

(1)
Amounts disclosed relate to credit losses on debt securities for which a portion of an other-than-temporary impairment was recognized in other comprehensive income.

 
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Table of Contents


OTTI on RMBS interest-only securities was recorded as a reclassification from an unrealized to realized loss within gain (loss) on investments, net on the condensed consolidated statements of operations because we account for these securities under the fair value option. As of March 31, 2019, we did not intend to sell the securities and determined that it was not more likely than not that we will be required to sell the securities.
The following table summarizes the components of our total gain (loss) on investments, net for the three months ended March 31, 2019 and 2018.
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Gross realized gains on sale of investments
1,202

 

Gross realized losses on sale of investments
(12,317
)
 
(9,237
)
Other-than-temporary impairment losses
(1,776
)
 
(4,359
)
Net unrealized gains and losses on MBS accounted for under the fair value option
280,039

 
(147,195
)
Net unrealized gains and losses on GSE CRT accounted for under the fair value option
1,234

 
434

Net unrealized gains and losses on trading securities

 
(13
)
Total gain (loss) on investments, net
268,382

 
(160,370
)
The following tables present components of interest income recognized on our MBS and GSE CRT portfolio for the three months ended March 31, 2019 and 2018. GSE CRT interest income excludes coupon interest associated with embedded derivatives not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net.
For the three months ended March 31, 2019
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency RMBS and Agency CMBS
130,197

 
(12,725
)
 
117,472

Non-Agency CMBS
38,830

 
3,031

 
41,861

Non-Agency RMBS
14,267

 
3,922

 
18,189

GSE CRT
8,596

 
(1,178
)
 
7,418

Other
552

 

 
552

Total
192,442

 
(6,950
)
 
185,492

For the three months ended March 31, 2018
$ in thousands
Coupon
Interest
 
Net (Premium
Amortization)/Discount
Accretion
 
Interest
Income
Agency RMBS and Agency CMBS
108,317

 
(23,222
)
 
85,095

Non-Agency CMBS
37,293

 
1,426

 
38,719

Non-Agency RMBS
14,012

 
5,177

 
19,189

GSE CRT
6,525

 
(697
)
 
5,828

Other
172

 

 
172

Total
166,319

 
(17,316
)
 
149,003

 
 

 
14
 


Table of Contents


Note 5 – Other Assets
The following table summarizes our other assets as of March 31, 2019 and December 31, 2018.
$ in thousands
March 31, 2019
 
December 31, 2018
FHLBI stock
74,250

 
74,250

Loan participation interest
53,827

 
54,981

Commercial loans, held-for-investment
24,454

 
31,582

Investments in unconsolidated ventures
24,129

 
24,012

Prepaid expenses and other assets
1,253

 
1,234

Total
177,913

 
186,059

IAS Services LLC, our wholly-owned captive insurance subsidiary, is required to purchase and hold Federal Home Loan Bank of Indianapolis ("FHLBI") stock as a condition of membership in the FHLBI. The stock is recorded at cost.
In August 2018, we acquired a participation interest in a secured loan collateralized by mortgage servicing rights. The loan has a two year term subject to a one year extension at the borrower's option. The participation interest bears interest at a floating rate based on LIBOR plus a spread. The weighted average asset yield for the participation interest was 6.14% as of March 31, 2019 and 6.06% as of December 31, 2018. We elected to account for the investment using the fair value option. Refer to Note 14 - "Commitments and Contingencies" for additional details regarding our unfunded commitment on this loan participation interest.
As of March 31, 2019, our commercial loan portfolio consisted of one commercial loan with a weighted average maturity of 1.9 years (December 31, 2018: two commercial loans with a weighted average maturity of 1.7 years). The loans had a weighted average coupon rate of 10.99% as of March 31, 2019 and 10.69% as of December 31, 2018. The loans were not impaired, and we have not recorded an allowance for loan losses as of March 31, 2019 and December 31, 2018 based on our analysis of credit quality factors as described in Note 2 - "Summary of Significant Accounting Policies" included in the consolidated financial statements of our Annual Report on Form 10-K for the year ended December 31, 2018.
We have invested in unconsolidated ventures that are managed by an affiliate of our Manager. The unconsolidated ventures invest in our target assets. Refer to Note 14 - "Commitments and Contingencies" for additional details regarding our commitments to these unconsolidated ventures.



 
15
 


Table of Contents


Note 6 – Borrowings
We finance the majority of our investment portfolio through repurchase agreements and secured loans. The following tables summarize certain characteristics of our borrowings at March 31, 2019 and December 31, 2018. Refer to Note 7 - "Collateral Positions" for collateral pledged under our repurchase agreements and secured loans.
$ in thousands
March 31, 2019
 
 
 
 
Weighted
 
 
Weighted
 
Average
 
 
Average
 
Remaining
Amount
 
Interest
 
Maturity
Outstanding
 
Rate
 
(days)
Repurchase Agreements:
 
 
 
 
 
Agency RMBS
11,868,925

 
2.68
%
 
67
Agency CMBS
1,639,097

 
2.67
%
 
72
Non-Agency CMBS
1,642,106

 
3.57
%
 
18
Non-Agency RMBS
887,186

 
3.46
%
 
25
GSE CRT
746,703

 
3.49
%
 
20
Loan participation interest
40,370

 
4.09
%
 
515
Total Repurchase Agreements
16,824,387

 
2.85
%
 
59
Secured Loans
1,650,000

 
2.76
%
 
1862
Total Borrowings
18,474,387

 
2.84
%
 
220

$ in thousands
December 31, 2018
 
 
 
 
Weighted
 
 
Weighted
 
Average
 
 
Average
 
Remaining
Amount
 
Interest
 
Maturity
Outstanding
 
Rate
 
(days)
Repurchase Agreements:
 
 
 
 
 
Agency RMBS
9,529,352

 
2.56
%
 
36
Agency CMBS
810,450

 
2.53
%
 
31
Non-Agency CMBS
1,616,473

 
3.56
%
 
19
Non-Agency RMBS
923,959

 
3.60
%
 
26
GSE CRT
681,014

 
3.48
%
 
21
Loan participation interest
41,236

 
4.09
%
 
605
Total Repurchase Agreements
13,602,484

 
2.80
%
 
34
Secured Loans
1,650,000

 
2.68
%
 
1952
Total Borrowings
15,252,484

 
2.79
%
 
242

The following table shows the aggregate amount of maturities of our outstanding borrowings:
$ in thousands
As of
Borrowings maturing within:
March 31, 2019
4/1/2019 - 3/31/2020
17,084,017

4/1/2020 - 3/31/2021
140,370

4/1/2021 - 3/31/2022

4/1/2022 - 3/31/2023

4/1/2023 - 3/31/2024

Thereafter
1,250,000

Total
18,474,387



 
16
 


Table of Contents


Repurchase Agreements
Our repurchase agreements generally bear interest at a contractually agreed upon rate and have maturities ranging from one month to six months. Our repurchase agreement that is collateralized by a loan participation interest bears interest at a floating rate based on LIBOR plus a spread and matures on August 27, 2020. Repurchase agreements are accounted for as secured borrowings since we maintain effective control of the financed assets. Repurchase agreements are subject to certain financial covenants. We were in compliance with these covenants at March 31, 2019.
Our repurchase agreement collateral ratio (MBS, GSE CRTs and a loan participation interest pledged as collateral/Amount Outstanding) was 110% as of March 31, 2019 (December 31, 2018: 111%).
Secured Loans
Our wholly-owned captive insurance subsidiary, IAS Services LLC, is a member of the FHLBI. As a member of the FHLBI, IAS Services LLC has borrowed funds from the FHLBI in the form of secured loans.
As of March 31, 2019, IAS Services LLC had $1.65 billion in outstanding secured loans from the FHLBI. These secured loans have floating rates that are based on the three-month FHLB swap rate plus a spread. For the three months ended March 31, 2019, IAS Services LLC had weighted average borrowings of $1.65 billion with a weighted average borrowing rate of 2.70% and a weighted average maturity of 5.1 years.
The Federal Housing Finance Agency’s ("FHFA") final rule governing Federal Home Loan Bank membership (the "FHFA Rule") became effective on February 19, 2016. The FHFA Rule permits existing captive insurance companies, such as IAS Services LLC, to remain members until February 2021. New advances or renewals that mature after February 2021 are prohibited. The FHLBI has indicated it will honor the contractual maturity dates of existing advances to IAS Services LLC that were made prior to February 19, 2016 and extend beyond February 2021. We do not expect there to be any impact to our existing FHLBI borrowings under the FHFA rule. The ability to borrow from the FHLBI is subject to our continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with certain agreements with FHLBI and FHFA rules.
As discussed in Note 5 - "Other Assets," IAS Services LLC is required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured loans from the FHLBI.


 
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Note 7 - Collateral Positions
The following table summarizes the fair value of collateral that we have pledged and held under our repurchase agreements, secured loans, interest rate swaps, futures contracts and currency forward contracts as of March 31, 2019 and December 31, 2018. Refer to Note 2 - "Summary of Significant Accounting Policies - Fair Value Measurements" of our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 for a description of how we determine fair value. RMBS, CMBS and GSE CRT collateral pledged is included in mortgage-backed and credit risk transfer securities on our condensed consolidated balance sheets. Loan participation interest collateral pledged is included in other assets on our condensed consolidated balance sheets. Cash collateral pledged on secured loans, centrally cleared swaps, bilateral interest rate swaps and currency forward contracts is classified as restricted cash on our condensed consolidated balance sheets. Cash collateral pledged on futures contracts is classified as due from counterparties on our condensed consolidated balance sheets.
Cash collateral held on bilateral swaps that is not restricted for use is included in cash and cash equivalents on our condensed consolidated balance sheets and the liability to return the collateral is included in collateral held payable. Non-cash collateral held is only recognized if the counterparty defaults or if we sell the pledged collateral. As of March 31, 2019 and December 31, 2018, we did not recognize any non-cash collateral held.
$ in thousands
As of
Collateral Pledged
March 31, 2019
 
December 31, 2018
Repurchase Agreements:
 
 
 
Agency RMBS
12,575,947

 
10,158,404

Agency CMBS
1,763,779

 
870,702

Non-Agency CMBS
2,072,829

 
2,016,202

Non-Agency RMBS
1,079,223

 
1,127,911

GSE CRT
907,529

 
819,328

Loan participation interest
53,827

 
54,981

Total repurchase agreements collateral pledged
18,453,134

 
15,047,528

Secured Loans:
 
 
 
Agency RMBS
686,656

 
702,952

Non-Agency CMBS
1,260,396

 
1,227,412

Total secured loans collateral pledged
1,947,052

 
1,930,364

Interest Rate Swaps, Futures Contracts and Currency Forward Contracts:
 
 
 
Agency RMBS
197,958

 
159,914

Cash (1)
18,025

 
13,500

Total interest rate swaps, futures contracts and currency forward contracts collateral pledged
215,983

 
173,414

 
 
 
 
Total collateral pledged:
 
 
 
Mortgage-backed and credit risk transfer securities
20,544,317

 
17,082,825

Loan participation interest
53,827

 
54,981

 Cash
18,025

 
13,500

Total collateral pledged
20,616,169

 
17,151,306

 
 
 
 
 
As of
Collateral Held
March 31, 2019
 
December 31, 2018
Interest Rate Swaps:
 
 
 
Cash
2,273

 
18,083

Non-cash collateral

 

Total collateral held
2,273

 
18,083

(1) Includes restricted cash of $5,025,000 pledged as collateral on centrally cleared swaps.

 
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Repurchase Agreements
Collateral pledged with our repurchase agreement counterparties is segregated in our books and records. The repurchase agreement counterparties have the right to resell and repledge the collateral posted but have the obligation to return the pledged collateral, or substantially the same collateral if agreed to by us, upon maturity of the repurchase agreement. Under the repurchase agreements, the respective lender retains the contractual right to mark the underlying collateral to fair value as determined by a pricing service agreed to by the respective lender and us. We would be required to provide additional collateral or fund margin calls if the value of pledged assets declined. We intend to maintain a level of liquidity that will enable us to meet margin calls.
Secured Loans
The ability to borrow from the FHLBI is subject to our continued creditworthiness, pledging of sufficient eligible collateral to secure advances, and compliance with FHLBI and FHFA rules. Collateral pledged with the FHLBI is held in trust for the benefit of the FHLBI and is not commingled with our other assets. The FHLBI does not have the right to resell or repledge collateral posted unless an event of default occurs. The FHLBI retains the right to mark the underlying collateral for FHLBI advances to fair value as determined by the FHLBI in its sole discretion. IAS Services LLC would be required to provide additional collateral or fund margin calls if the value of pledged assets declines.
Interest Rate Swaps
Collateral pledged with our interest rate swap counterparties is segregated in our books and records. We have two types of interest rate swap agreements: bilateral interest rate swaps that are governed by an International Swaps and Derivatives Association ("ISDA") agreement and interest rate swaps that are centrally cleared by a registered clearing organization such as the Chicago Mercantile Exchange ("CME") and LCH Limited ("LCH") through a Futures Commission Merchant ("FCM"). Interest rate swaps that are governed by an ISDA agreement provide for bilateral collateral pledging based on the counterparties' market value. The counterparties have the right to repledge the collateral posted, but have the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the interest rate swaps change.
We are required to pledge initial margin and daily variation margin for our interest rate swaps that are centrally cleared. The FCM determines the fair value of our centrally cleared swaps, including daily variation margin. The daily variation margin payment for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. Accordingly, cash collateral pledged on our centrally cleared interest rate swaps is settled against the fair value of these swaps.

Futures Contracts
We are required to pledge initial margin and daily variation margin for our futures contracts that is based on the fair value of our contracts as determined by our FCM. The daily variation margin payment for our futures contracts is characterized as settlement of the futures contract itself rather than collateral. Accordingly, cash collateral pledged on our futures contracts is settled against the fair value of these contracts.

Currency Forward Contracts
Collateral pledged with our currency forward counterparty is segregated in our books and records. Our currency forward contract provides for bilateral collateral pledging based on market value as determined by the counterparty and can be in the form of cash or securities. Our counterparty has the right to repledge the collateral posted, but has the obligation to return the pledged collateral, or substantially the same collateral, if agreed to by us, as the market value of the currency forward contract changes.



 
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Note 8 – Derivatives and Hedging Activities
The following table summarizes changes in the notional amount of our derivative instruments during 2019:
$ in thousands
Notional Amount as
of December 31, 2018
 
Additions
 
Settlement,
Termination,
Expiration
or Exercise
 
Notional Amount as
of March 31, 2019
Interest Rate Swaps
12,370,000

 
4,575,000

 
(4,050,000
)
 
12,895,000

Futures Contracts
1,689,900

 
1,586,400

 
(1,689,900
)
 
1,586,400

Currency Forward Contracts
23,149

 
25,534

 
(23,149
)
 
25,534

Credit Derivatives
526,912

 

 
(9,378
)
 
517,534

Total
14,609,961

 
6,186,934

 
(5,772,427
)
 
15,024,468

Refer to Note 7 - "Collateral Positions" for further information regarding our collateral pledged to and received from our interest rate swap counterparties.
Interest Rate Swaps
Our repurchase agreements are usually settled on a short-term basis ranging from one to twelve months. At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time. In addition, our secured loans have floating interest rates. As such, we are exposed to changing interest rates. Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposures to interest rate movements. To accomplish these objectives, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps involve making fixed-rate payments to a counterparty in exchange for the receipt of variable-rate amounts over the life of the agreements without exchange of the underlying notional amount.
Amounts recorded in accumulated other comprehensive income ("AOCI") before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements. We reclassified $5.9 million as a decrease (March 31, 2018: $6.5 million as a decrease) to interest expense for the three months ended March 31, 2019. During the next 12 months, we estimate that $23.8 million will be reclassified as a decrease to interest expense, repurchase agreements. As of March 31, 2019, $93.8 million (December 31, 2018: $99.6 million) of unrealized gains on discontinued cash flow hedges, net are still included in accumulated other comprehensive income and will be reclassified to interest expense over a period of time through December 15, 2023.


 
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As of March 31, 2019 and December 31, 2018, we had the following interest rate swaps outstanding:
$ in thousands
 
As of March 31, 2019
Maturities
 
Notional Amount(1)
 
Weighted Average Fixed Pay Rate
 
Weighted Average Receive Rate
 
Weighted Average Years to Maturity
2020
 
1,000,000

 
2.72
%
 
2.50
%
 
1.4
2021
 
2,800,000

 
2.49
%
 
2.54
%
 
2.2
2022
 
2,550,000

 
2.13
%
 
2.61
%
 
3.2
2023
 
1,500,000

 
2.21
%
 
2.48
%
 
4.3
2024
 
1,600,000

 
2.27
%
 
2.65
%
 
4.8
Thereafter
 
3,445,000

 
2.46
%
 
2.52
%
 
7.8
Total
 
12,895,000

 
2.37
%
 
2.55
%
 
4.4
$ in thousands
 
As of December 31, 2018
Maturities
 
Notional Amount(2)
 
Weighted Average Fixed Pay Rate
 
Weighted Average Receive Rate
 
Weighted Average Years to Maturity
2019
 
1,500,000

 
2.70
%
 
2.47
%
 
0.9
2020
 
1,500,000

 
2.78
%
 
2.51
%
 
1.7
2021
 
2,300,000

 
2.51
%
 
2.58
%
 
2.5
2022
 
2,550,000

 
2.13
%
 
2.65
%
 
3.4
2023
 
1,600,000

 
2.39
%
 
2.47
%
 
4.7
Thereafter
 
2,920,000

 
2.47
%
 
2.55
%
 
6.8
Total
 
12,370,000

 
2.46
%
 
2.55
%
 
3.7
(1)
Notional amount includes $8.4 billion of interest rate swaps that receive variable payments based on 1-month LIBOR and $4.5 billion of interest rate swaps that receive variable payments based on 3-month LIBOR as of March 31, 2019.
(2)
Notional amount includes $6.7 billion of interest rate swaps that receive variable payments based on 1-month LIBOR and $5.7 billion of interest rate swaps that receive variable payments based on 3-month LIBOR as of December 31, 2018.
TBAs, Futures and Currency Forward Contracts
We purchase or sell certain TBAs and U.S. Treasury futures contracts to help mitigate the potential impact of changes in interest rates on the performance of our investment portfolio. We recognize realized and unrealized gains and losses associated with the purchases or sales of TBAs and U.S. Treasury futures contracts in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations.
We use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our investments denominated in foreign currencies. We recognize realized and unrealized gains and losses associated with the purchases or sales of currency forward contracts in gain (loss) on derivative instruments, net in our condensed consolidated statements of operations. As of March 31, 2019, we had $25.5 million (December 31, 2018: $23.1 million) of notional amount of currency forward contracts denominated in Euro.
Credit Derivatives
Our GSE CRTs purchased prior to August 24, 2015 are accounted for as hybrid financial instruments consisting of a debt host contract and an embedded credit derivative. Embedded derivatives associated with GSE CRTs are recorded within mortgage-backed and credit risk transfer securities, at fair value, on the condensed consolidated balance sheets. At March 31, 2019 and December 31, 2018, terms of the GSE CRT embedded derivatives are:
$ in thousands
March 31, 2019
 
December 31, 2018
Fair value amount
25,305

 
22,771

Notional amount
517,534

 
526,912

Maximum potential amount of future undiscounted payments
517,534

 
526,912


 
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Tabular Disclosure of the Effect of Derivative Instruments on the Balance Sheet
The table below presents the fair value of our derivative financial instruments, as well as their classification on the condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018.
$ in thousands
Derivative Assets
 
Derivative Liabilities
 
 
As of
March 31, 2019
 
As of December 31, 2018
 
 
 
As of
March 31, 2019
 
As of December 31, 2018
Balance
Sheet
 
Fair Value
 
Fair Value
 
Balance
Sheet
 
Fair Value
 
Fair Value
Interest Rate Swaps Asset
 
21,161

 
15,089

 
Interest Rate Swaps Liability
 
8,463

 
15,382

Currency Forward Contracts
 
311

 

 
Currency Forward Contracts
 

 
172

Futures Contracts
 
5,108

 

 
Futures Contracts
 

 
7,836

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
The tables below present the effect of our credit derivatives on the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018.
$ in thousands
 
Three months ended March 31, 2019
Derivative
not designated as
hedging instrument
 
Realized gain (loss), net
 
GSE CRT embedded derivative coupon interest
 
Unrealized gain (loss), net
 
Realized and unrealized credit derivative income (loss), net
GSE CRT Embedded Derivatives
 

 
5,350

 
2,534

 
7,884

$ in thousands
 
Three months ended March 31, 2018
Derivative
not designated as
hedging instrument
 
Realized gain (loss), net
 
GSE CRT embedded derivative coupon interest
 
Unrealized gain (loss), net
 
Realized and unrealized credit derivative income (loss), net
GSE CRT Embedded Derivatives
 

 
5,633

 
(2,468
)
 
3,165

 
 
The following table summarizes the effect of interest rate swaps, futures contracts and currency forward contracts reported in gain (loss) on derivative instruments, net on the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018:
$ in thousands
 
Three Months Ended March 31, 2019
Derivative
not designated as
hedging instrument
 
Realized gain (loss) on derivative instruments, net
 
 Contractual net interest income (expense)
 
Unrealized gain (loss), net
 
Gain (loss) on derivative instruments, net
Interest Rate Swaps
 
(165,884
)
 
4,509

 
12,991

 
(148,384
)
Futures Contracts
 
(66,688
)
 

 
12,944

 
(53,744
)
Currency Forward Contracts
 
185

 

 
483

 
668

Total
 
(232,387
)
 
4,509

 
26,418

 
(201,460
)

 
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$ in thousands
 
Three Months Ended March 31, 2018
Derivative
not designated as
hedging instrument
 
Realized gain (loss) on derivative instruments, net
 
 Contractual net interest income (expense)
 
Unrealized gain (loss), net
 
Gain (loss) on derivative instruments, net
Interest Rate Swaps
 
122,273

 
(12,112
)
 
32,374

 
142,535

Futures Contracts
 
(5,277
)
 

 
(1,612
)
 
(6,889
)
Currency Forward Contracts
 
(3,418
)
 

 
1,139

 
(2,279
)
Total
 
113,578

 
(12,112
)
 
31,901

 
133,367

 
 
Credit-risk-related Contingent Features
We have agreements with each of our bilateral derivative counterparties. Some of those agreements contain a provision whereby if we default on any of our indebtedness, including default whereby repayment of the indebtedness has not been accelerated by the lender, we could be declared in default on our derivative obligations.
At March 31, 2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for non-performance risk related to bilateral interest rate swap agreements, was $8.4 million. We have minimum collateral posting thresholds with certain of our bilateral derivative counterparties and were required to pledge $12.1 million of collateral with these counterparties as of March 31, 2019. If we had breached any of these provisions at March 31, 2019, we could have been required to settle our obligations under these agreements at their termination value.
We also have an agreement with a clearing counterparty for our interest rate swaps that includes cross default provisions. The fair value of our centrally cleared interest rate derivative contracts, which includes accrued interest and variation margin but excludes any adjustment for non-performance risk, was a net asset of $17.8 million as of March 31, 2019.
We were in compliance with all of the financial provisions of these counterparty agreements as of March 31, 2019.
Note 9 – Offsetting Assets and Liabilities
Certain of our repurchase agreements and derivative transactions are governed by underlying agreements that generally provide for a right of offset under master netting arrangements (or similar agreements) in the event of default or in the event of bankruptcy of either party to the transactions. Assets and liabilities subject to such arrangements are presented on a gross basis in the condensed consolidated balance sheets.
The following tables present information about the assets and liabilities that are subject to master netting agreements (or similar agreements) and can potentially be offset on our condensed consolidated balance sheets at March 31, 2019 and December 31, 2018. The daily variation margin payment for centrally cleared interest rate swaps is characterized as settlement of the derivative itself rather than collateral. As of March 31, 2019, our derivative asset of $17.8 million (December 31, 2018: derivative liability of $13.2 million) related to centrally cleared interest rate swaps is not included in the table below as a result of this characterization of daily variation margin.
Offsetting of Derivative Assets
As of March 31, 2019
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
 
$ in thousands
Description
Gross
Amounts of
Recognized
Assets
 
Gross
Amounts
Offset in the Condensed Consolidated
Balance
Sheets
 
Net Amounts
of Assets
presented in
the Condensed
Consolidated
Balance Sheets
 
Financial
Instruments
 
Cash Collateral
Received
 
Net Amount
Derivatives (1) (3)
8,742

 

 
8,742

 

 
(2,201
)
 
6,541


 
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Offsetting of Derivative Liabilities, Repurchase Agreements and Secured Loans
As of March 31, 2019
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
 
$ in thousands
Description
Gross
Amounts of
Recognized
Liabilities
 
Gross
Amounts
Offset in the Condensed Consolidated
Balance
Sheets
 
Net Amounts
of Liabilities
presented in
the Condensed
Consolidated
Balance Sheets
 
Financial
Instruments (2)
 

Cash Collateral
Pledged
 
Net Amount
Derivatives (3)
8,463

 

 
8,463

 
(8,463
)
 

 

Repurchase Agreements (4)
16,824,387

 

 
16,824,387

 
(16,824,387
)
 

 

Secured Loans (5)
1,650,000

 

 
1,650,000

 
(1,650,000
)
 

 

Total
18,482,850

 

 
18,482,850

 
(18,482,850
)
 

 

Offsetting of Derivative Assets
As of December 31, 2018
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
 
$ in thousands
Description
Gross
Amounts of
Recognized
Assets
 
Gross
Amounts
Offset in the Condensed Consolidated
Balance
Sheets
 
Net Amounts
of Assets
presented in
the Condensed
Consolidated
Balance Sheets
 
Financial
Instruments
 
Cash Collateral
Received
 
Net Amount
Derivatives (1) (3)
15,089

 

 
15,089

 
(433
)
 
(14,656
)
 


 
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Offsetting of Derivative Liabilities and Repurchase Agreements
As of December 31, 2018
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets
 
 
$ in thousands
Description
Gross
Amounts of
Recognized
Liabilities
 
Gross
Amounts
Offset in the Condensed Consolidated
Balance
Sheets
 
Net Amounts
of Liabilities
presented in
the Condensed
Consolidated
Balance Sheets
 
Financial
Instruments (2)
 

Cash Collateral
Pledged
 
Net Amount
Derivatives (3)
10,239

 

 
10,239

 
(2,058
)
 
(7,836
)
 
345

Repurchase Agreements (4)
13,602,484

 

 
13,602,484

 
(13,602,484
)
 

 

Secured Loans (5)
1,650,000

 

 
1,650,000

 
(1,650,000
)
 

 

Total
15,262,723

 

 
15,262,723

 
(15,254,542
)
 
(7,836
)
 
345

(1)
Amounts represent derivatives in an asset position which could potentially be offset against derivatives in a liability position at March 31, 2019 and December 31, 2018, subject to a netting arrangement.
(2)
Amounts represent collateral pledged that is available to be offset against liability balances associated with repurchase agreements, secured loans and derivatives.
(3)
The fair value of securities pledged against our derivatives was $198.0 million (December 31, 2018: $159.9 million) at March 31, 2019, of which $164.8 million (December 31, 2018: $158.3 million) relates to initial margin pledged on centrally cleared interest rate swaps. Centrally cleared interest rate swaps are excluded from the tables above. Cash collateral received on our derivatives was $2.3 million and $18.1 million at March 31, 2019 and December 31, 2018, respectively. Cash collateral pledged by us on our futures contracts and interest rate swaps were $18.0 million and $13.5 million at March 31, 2019 and December 31, 2018, respectively. Cash collateral pledged on our centrally cleared interest rate swaps is settled against the fair value of these swaps and therefore excluded from the tables above at March 31, 2019 and December 31, 2018, respectively.
(4)
The fair value of securities pledged against our borrowing under repurchase agreements was $18.5 billion and $15.0 billion at March 31, 2019 and December 31, 2018, respectively.
(5)
The fair value of securities pledged against IAS Services LLC's borrowings under secured loans was $1.9 billion at March 31, 2019 and December 31, 2018, respectively.
Note 10 – Fair Value of Financial Instruments
A three-level valuation hierarchy exists for disclosure of fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The three levels are defined as follows:
Level 1 Inputs – Quoted prices for identical instruments in active markets.
Level 2 Inputs – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs – Instruments with primarily unobservable value drivers.

 
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The following tables present our assets and liabilities measured at fair value on a recurring basis.
 
March 31, 2019
 
 
 
Fair Value Measurements Using:
 
 
$ in thousands
Level 1
 
Level 2
 
Level 3
 
NAV as a practical expedient (3)
 
Total at
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Mortgage-backed and credit risk transfer securities (1)(2)

 
21,102,293

 
25,305

 

 
21,127,598

Derivative assets
5,108

 
21,472

 

 

 
26,580

Other assets (4)

 

 
53,827

 
24,129

 
77,956

Total assets
5,108

 
21,123,765

 
79,132

 
24,129

 
21,232,134

Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities

 
8,463

 

 

 
8,463

Total liabilities

 
8,463

 

 

 
8,463

 
December 31, 2018
 
 
 
Fair Value Measurements Using:
 
 
$ in thousands
Level 1
 
Level 2
 
Level 3
 
NAV as a practical expedient (3)
 
Total at
Fair Value
Assets:
 
 
 
 
 
 
 
 
 
Mortgage-backed and credit risk transfer securities (1)(2)

 
17,373,871

 
22,771

 

 
17,396,642

Derivative assets

 
15,089

 

 

 
15,089

Other assets (4)

 

 
54,981

 
24,012

 
78,993

Total assets

 
17,388,960

 
77,752

 
24,012

 
17,490,724

Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
7,836

 
15,554

 

 

 
23,390

Total liabilities
7,836

 
15,554

 

 

 
23,390

(1)
For more detail about the fair value of our MBS and GSE CRTs, refer to Note 4 - "Mortgage-Backed and Credit Risk Transfer Securities."
(2)
Our GSE CRTs purchased prior to August 24, 2015 are accounted for as hybrid financial instruments with an embedded derivative. The hybrid financial instruments consist of debt host contracts classified as Level 2 and embedded derivatives classified as Level 3. As of March 31, 2019, the net embedded derivative asset position of $25.3 million includes $30.2 million of embedded derivatives in an asset position and $4.9 million of embedded derivatives in a liability position. As of December 31, 2018, the net embedded derivative asset position of $22.8 million includes $28.8 million of embedded derivatives in an asset position and $6.0 million of embedded derivatives in a liability position.
(3)
Investments in unconsolidated ventures are valued using the net asset value ("NAV") as a practical expedient and are not subject to redemption, although investors may sell or transfer their interest at the approval of the general partner of the underlying funds. As of March 31, 2019 and December 31, 2018, the weighted average remaining term of our investments in unconsolidated ventures is 2.8 and 2.6 years, respectively.
(4)
Includes $53.8 million and $55.0 million of a loan participation interest as of March 31, 2019 and December 31, 2018, respectively. The loan participation interest is transferable and bears interest at a variable rate based on LIBOR plus a spread and resets daily. As a result, the cost of the loan participation interest approximates its fair value.


 
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The following table shows a reconciliation of the beginning and ending fair value measurements of our GSE CRT embedded derivatives, which we have valued utilizing Level 3 inputs:
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Beginning balance
22,771

 
45,400

Unrealized credit derivative gains (losses), net
2,534

 
(2,468
)
Ending balance
25,305

 
42,932

The following table shows a reconciliation of the beginning and ending fair value measurements of our loan participation interest, which we have valued utilizing Level 3 inputs:
 
Three Months Ended March 31,
$ in thousands
2019
Beginning balance
54,981

Advances
577

Repayments
(1,731
)
Ending balance
53,827

The following tables summarize significant unobservable inputs used in the fair value measurement of our GSE CRT embedded derivatives:
 
Fair Value at
 
Valuation
 
Unobservable
 
 
 
Weighted
$ in thousands
March 31, 2019
 
Technique
 
Input
 
Range
 
Average
GSE CRT Embedded Derivatives
25,305

 
Market Comparables, Vendor Pricing
 
Weighted average life
 
2.5 - 5.6 years
 
4.0 years
 
Fair Value at
 
Valuation
 
Unobservable
 
 
 
Weighted
$ in thousands
December 31, 2018
 
Technique
 
Input
 
Range
 
Average
GSE CRT Embedded Derivatives
22,771

 
Market Comparables, Vendor Pricing
 
Weighted average life
 
2.9 - 5.9 years
 
4.3 years
These significant unobservable inputs change according to market conditions and security performance. We estimate the weighted average life of GSE CRTs in order to identify GSE corporate debt with a similar maturity. We obtain our weighted average life estimates from a third party provider. Although weighted average life is a significant input, changes in weighted average life may not have an explicit directional impact on the fair value measurement.

 
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The following table presents the carrying value and estimated fair value of our financial instruments that are not carried at fair value on the condensed consolidated balance sheets at March 31, 2019 and December 31, 2018:
 
March 31, 2019
 
December 31, 2018
$ in thousands
Carrying
Value
 
Estimated
Fair Value
 
Carrying
Value
 
Estimated
Fair Value
Financial Assets
 
 
 
 
 
 
 
Commercial loans, held-for-investment
24,454

 
24,732

 
31,582

 
31,826

FHLBI stock
74,250

 
74,250

 
74,250

 
74,250

Total
98,704

 
98,982

 
105,832

 
106,076

Financial Liabilities
 
 
 
 
 
 
 
Repurchase agreements
16,824,387

 
16,825,642

 
13,602,484

 
13,602,050

Secured loans
1,650,000

 
1,650,000

 
1,650,000

 
1,650,000

Total
18,474,387

 
18,475,642

 
15,252,484

 
15,252,050

The following describes our methods for estimating the fair value for financial instruments not carried at fair value on the condensed consolidated balance sheets.
The estimated fair value of commercial loans held-for-investment, included in "Other assets" on our condensed consolidated balance sheets, is a Level 3 fair value measurement. Subsequent to the origination or purchase, commercial loan investments are valued on a monthly basis by an independent third party valuation agent using a discounted cash flow technique.
The estimated fair value of FHLBI stock, included in "Other assets" on our condensed consolidated balance sheets, is a Level 3 fair value measurement. FHLBI stock may only be sold back to the FHLBI at its discretion at par. As a result, the cost of the FHLBI stock approximates its fair value.
The estimated fair value of repurchase agreements is a Level 3 fair value measurement based on an expected present value technique. This method discounts future estimated cash flows using rates we determined best reflect current market interest rates that would be offered for repurchase agreements with similar characteristics and credit quality.
The estimated fair value of secured loans is a Level 3 fair value measurement. The secured loans have floating rates based on an index plus a spread and the spread is typically consistent with those demanded in the market. Accordingly, the interest rates on these secured loans are at market, and thus the carrying amount approximates fair value.

Note 11 – Related Party Transactions
Under the terms of our management agreement, our Manager and its affiliates provide us with our management team, including our officers and appropriate support personnel. Each of our officers is an employee of our Manager or one of its affiliates. We do not have any employees. Our Manager is not obligated to dedicate any of its employees exclusively to us, nor is our Manager obligated to dedicate any specific portion of time to our business. During the three months ended March 31, 2019, we reimbursed our Manager $183,000 (March 31, 2018: $214,000) for costs of support personnel that are fully dedicated to our business.
We have invested $62.0 million as of March 31, 2019 (December 31, 2018: $131.9 million) in money market or mutual funds managed by affiliates of our Manager. The investments are reported as cash and cash equivalents on our condensed consolidated balance sheets.
Management Fee Expense
We pay our Manager a management fee equal to 1.50% of our stockholders’ equity per annum. The fee is calculated and payable quarterly in arrears. For purposes of calculating the management fee, stockholders’ equity is equal to the sum of the net proceeds from all issuances of equity securities since inception including proceeds from the issuance of operating partnership units to an affiliate of our Manager, plus retained earnings at the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation expense incurred in current or prior periods), less any amount paid to repurchase common stock since inception. Stockholders equity excludes (i) any unrealized gains, losses or other items that do not affect realized net income (regardless of whether such items are included in other comprehensive income or loss, or in net income); (ii) cumulative net realized losses that are not attributable to permanently impaired investments and that relate to the investments for which market movement is accounted for in other comprehensive income; provided, however, that such adjustment shall not exceed cumulative unrealized net gains in other comprehensive income; (iii) one-time events pursuant to

 
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changes in U.S. GAAP; and (iv) certain non-cash items after discussions between our Manager and our independent directors and approval by a majority of our independent directors.
We do not pay any management fees on our investments in unconsolidated ventures that are managed by an affiliate of our Manager.
Expense Reimbursement
We are required to reimburse our Manager for our operating expenses incurred on our behalf, including directors and officers insurance, accounting services, auditing and tax services, filing fees, and miscellaneous general and administrative costs. Our reimbursement obligation is not subject to any dollar limitation.
The following table summarizes the costs incurred on our behalf by our Manager for the three months ended March 31, 2019 and 2018.
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Incurred costs, prepaid or expensed
1,604

 
1,492

Incurred costs, charged against equity as a cost of raising capital
320

 
165

Total incurred costs, originally paid by our Manager
1,924

 
1,657

Termination Fee
If we terminate our management agreement, we owe our Manager a termination fee equal to three times the sum of our average annual management fee during the 24-month period before termination, calculated as of the end of the most recently completed fiscal quarter.
Note 12 – Stockholders’ Equity
Preferred Stock
Holders of our Series A Preferred Stock are entitled to receive dividends at an annual rate of 7.75% of the liquidation preference of $25.00 per share or $1.9375 per share per annum. Dividends are cumulative and payable quarterly in arrears.
Holders of our Series B Preferred Stock are entitled to receive dividends at an annual rate of 7.75% of the liquidation preference of $25.00 per share or $1.9375 per share per annum until December 27, 2024. After December 27, 2024, holders are entitled to receive dividends at a floating rate equal to three-month LIBOR plus a spread of 5.18% of the $25.00 liquidation preference per annum. Dividends are cumulative and payable quarterly in arrears.
Holders of our Series C Preferred Stock are entitled to receive dividends at an annual rate of 7.50% of the liquidation preference of $25.00 per share or $1.875 per share per annum until September 27, 2027. After September 27, 2027, holders are entitled to receive dividends at a floating rate equal to three-month LIBOR plus a spread of 5.289% of the $25.00 liquidation preference per annum. Dividends are cumulative and payable quarterly in arrears.
As of July 27, 2017, we had the option to redeem shares of Series A Preferred Stock for $25.00 per share, plus any accumulated and unpaid dividends through the date of redemption. We have the option to redeem shares of Series B Preferred Stock after December 27, 2024 and shares of Series C Preferred Stock after September 27, 2027 for $25.00 per share, plus any accumulated and unpaid dividends through the date of the redemption. Shares of Series B and Series C Preferred Stock are not redeemable, convertible into or exchangeable for any other property or any other securities of the Company prior to those times, except under circumstances intended to preserve our qualification as a REIT or upon the occurrence of a change in control.
In March 2019, we entered into an equity distribution agreement with a placement agent under which we may sell up to 7,000,000 shares of our preferred stock from time to time in at-the-market or privately negotiated transactions. These shares are registered with the SEC under our automatic shelf registration statement (as amended and/or supplemented). As of March 31, 2019, we have not sold any shares of preferred stock under the equity distribution agreement.

 
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Common Stock
On February 7, 2019, we completed a public offering of 16,100,000 shares of common stock at the price of $15.73 per share. Total net proceeds were approximately $249.5 million after deducting estimated offering costs.
In March 2019, we amended our equity distribution agreement, dated December 18, 2017, with a placement agent under which we may sell up to 17,000,000 shares of our common stock from time to time in at-the-market or privately negotiated transactions. These shares are registered with the SEC under our automatic shelf registration statement (as amended and/or supplemented). During the three months ended March 31, 2019, we issued 572,000 shares of common stock under the equity distribution agreement for proceeds of $9.1 million, net of approximately $193,000 in commissions and fees.
Share Repurchase Program
During the three months ended March 31, 2019 and 2018, we did not repurchase any shares of our common stock. As of March 31, 2019, we had authority to purchase 18,239,082 shares of our common stock through our share repurchase program.
Share-Based Compensation
We established the 2009 Equity Incentive Plan for grants of common stock and other equity based awards to our independent directors and officers and employees of our Manager and its affiliates (the "Incentive Plan"). Under the Incentive Plan, a total of 1,000,000 shares of common stock are authorized for issuance. As of March 31, 2019, 748,492 shares of common stock remain available for future issuance under the Incentive Plan. The Incentive Plan was scheduled to terminate on June 30, 2019 but was amended and restated as of May 3, 2019 extending the term an additional ten years. See Note 15 - "Subsequent Events" for a description of the amended Incentive Plan terms.
We recognized compensation expense of approximately $113,000 (March 31, 2018: $93,000) for shares issued to our independent directors under the Incentive Plan for the three months ended March 31, 2019. During the three months ended March 31, 2019 and 2018, we issued 7,065 shares and 7,177 shares of common stock, respectively, to our independent directors. The fair market value of the shares granted was determined by the closing stock market price on the date of the grant. The grants vested immediately.
We recognized compensation expense of approximately $19,000 (March 31, 2018: $14,000) for the three months ended March 31, 2019 for restricted stock units awarded to employees of our Manager and its affiliates under the Incentive Plan. Our Manager reimburses us for the cost of these restricted stock awards under the terms of our management agreement. At March 31, 2019, there was approximately $185,000 of total unrecognized compensation cost related to restricted stock unit awards that is expected to be recognized over a period of up to 48 months, with a weighted-average remaining vesting period of 24 months.
The following table summarizes the activity related to restricted stock units awarded to employees of our Manager and its affiliates for the three months ended March 31, 2019.
 
Three Months Ended March 31,
 
2019
 
Restricted Stock Units
 
Weighted Average Grant Date Fair Value (1)
Unvested at the beginning of the period
11,051

 
$
14.55

Shares granted during the period
6,189

 
15.92

Shares vested during the period
(4,720
)
 
14.48

Unvested at the end of the period
12,520

 
$
15.25

(1)
The grant date fair value of restricted stock awards is based on the closing market price of our common stock at the grant date.

 
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Accumulated Other Comprehensive Income
The following tables present the components of total other comprehensive income (loss), net and accumulated other comprehensive income ("AOCI") for the three months ended March 31, 2019 and 2018. The tables exclude gains and losses on MBS and GSE CRTs that are accounted for under the fair value option.
 
Three Months Ended March 31, 2019
$ in thousands
Equity method investments
 
Available-for-sale securities
 
Derivatives and hedging
 
Total
Total other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net

 
52,349

 

 
52,349

Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net

 
10,147

 

 
10,147

Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense

 

 
(5,851
)
 
(5,851
)
Currency translation adjustments on investment in unconsolidated venture
(276
)
 

 

 
(276
)
Total other comprehensive income (loss)
(276
)
 
62,496

 
(5,851
)
 
56,369

 
 
 
 
 
 
 
 
AOCI balance at beginning of period
513

 
120,664

 
99,636

 
220,813

Total other comprehensive income (loss)
(276
)
 
62,496

 
(5,851
)
 
56,369

AOCI balance at end of period
237

 
183,160

 
93,785

 
277,182

 
Three Months Ended March 31, 2018
$ in thousands
Equity method investments
 
Available-for-sale securities
 
Derivatives and hedging
 
Total
Total other comprehensive income (loss)
 
 
 
 
 
 
 
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net

 
(132,317
)
 

 
(132,317
)
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net

 
9,237

 

 
9,237

Reclassification of amortization of net deferred (gain) loss on de-designated interest rate swaps to repurchase agreements interest expense

 

 
(6,539
)
 
(6,539
)
Currency translation adjustments on investment in unconsolidated venture
312

 

 

 
312

Total other comprehensive income (loss)
312

 
(123,080
)
 
(6,539
)
 
(129,307
)
 
 
 
 
 
 
 
 
AOCI balance at beginning of period
947

 
136,188

 
123,894

 
261,029

Total other comprehensive income (loss)
312

 
(123,080
)
 
(6,539
)
 
(129,307
)
Other comprehensive income/(loss) attributable to non-controlling interest
(4
)
 
1,552

 
82

 
1,630

AOCI balance at end of period
1,255

 
14,660

 
117,437

 
133,352

 
 
Amounts recorded in AOCI before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining original life of the interest rate swap agreements.

 
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Dividends
We declared the following dividends during the three months ended March 31, 2019 and 2018:
$ in thousands, except per share amounts
Dividends Declared
Series A Preferred Stock
Per Share
 
In Aggregate
 
Date of Payment
2019
 
 
 
 
 
March 18, 2019
0.4844

 
2,713

 
April 25, 2019
2018
 
 
 
 
 
March 15, 2018
0.4844

 
2,713

 
April 25, 2018
$ in thousands, except per share amounts
Dividends Declared
Series B Preferred Stock
Per Share
 
In Aggregate
 
Date of Payment
2019
 
 
 
 
 
February 14, 2019
0.4844

 
3,003

 
March 27, 2019
2018
 
 
 
 
 
February 15, 2018
0.4844

 
3,003

 
March 27, 2018
$ in thousands, except per share amounts
Dividends Declared
Series C Preferred Stock
Per Share
 
In Aggregate
 
Date of Payment
2019
 
 
 
 
 
February 14, 2019
0.46875

 
5,391

 
March 27, 2019
2018
 
 
 
 
 
February 15, 2018
0.46875

 
5,391

 
March 27, 2018
$ in thousands, except per share amounts
Dividends Declared
Common Stock
Per Share
 
In Aggregate
 
Date of Payment
2019
 
 
 
 
 
March 18, 2019
0.45

 
57,720

 
April 26, 2019
2018
 
 
 
 
 
March 15, 2018
0.42

 
46,887

 
April 26, 2018
 

 
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Note 13 – Earnings per Common Share
Earnings per share for the three months ended March 31, 2019 and 2018 is computed as follows: 
 
Three Months Ended March 31,
In thousands except per share amounts
2019
 
2018
Numerator (Income)
 
 
 
Basic Earnings:
 
 
 
Net income available to common stockholders
127,683

 
41,471

Effect of dilutive securities:
 
 
 
Income allocated to exchangeable senior notes

 
1,621

Income allocated to non-controlling interest

 
671

Dilutive net income available to stockholders
127,683

 
43,763

Denominator (Weighted Average Shares)
 
 
 
Basic Earnings:
 
 
 
Shares available to common stockholders
121,098

 
111,629

Effect of dilutive securities:
 
 
 
Restricted stock awards
12

 
20

Non-controlling interest OP units

 
1,425

Exchangeable senior notes

 
4,803

Dilutive Shares
121,110

 
117,877

Earnings per share:
 
 
 
Net income attributable to common stockholders
 
 
 
Basic
1.05

 
0.37

Diluted
1.05

 
0.37

 

Note 14 – Commitments and Contingencies
Commitments and Contingencies
Commitments and contingencies may arise in the ordinary course of business. Our material off-balance sheet commitments as of March 31, 2019 are discussed below.
As discussed in Note 5 - "Other Assets", we have invested in unconsolidated ventures that are sponsored by an affiliate of our Manager. The unconsolidated ventures are structured as partnerships, and we invest in the partnerships as a limited partner. The entities are structured such that capital commitments are to be drawn down over the life of the partnership as investment opportunities are identified. As of March 31, 2019 and December 31, 2018, our undrawn capital and purchase commitments were $7.6 million and $10.0 million, respectively.
As discussed in Note 5 - "Other Assets", we have funded our portion of a commitment in a loan participation. The remainder of our commitment will be funded over the two year term of the loan based upon the financing needs of the borrower. As of March 31, 2019, we have an unfunded commitment of $21.2 million.
As discussed in Note 12 - "Stockholders' Equity", we have programs under which we may sell shares of our common and preferred stock from time to time in at-the-market or privately negotiated transactions. As of March 31, 2019, we had committed to sell 90,000 shares of common stock at an average price of $15.83 per share for total proceeds of $1.4 million, net of approximately $30,000 in commissions and fees that settled in April 2019.
We have entered into agreements with financial institutions to guarantee certain obligations of our subsidiaries. We would be required to perform under these guarantees in the event of certain defaults. We have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote.
Note 15 – Subsequent Events
On May 3, 2019, our shareholders approved the 2009 Equity Incentive Plan (the "Incentive Plan") as amended and restated. Under the amended and restated Incentive Plan, the number of shares of common stock available for issuance to

 
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our independent directors and officers and employees of our Manager and its affiliates was reduced to 200,000, and the term of the Incentive Plan was extended for an additional ten years.





 
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
In this quarterly report on Form 10-Q, or this “Report,” we refer to Invesco Mortgage Capital Inc. and its consolidated subsidiaries as “we,” “us,” “our Company,” or “our,” unless we specifically state otherwise or the context indicates otherwise. We refer to our external manager, Invesco Advisers, Inc., as our “Manager,” and we refer to the indirect parent company of our Manager, Invesco Ltd. together with its consolidated subsidiaries (which does not include us), as “Invesco.”
The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in Item 1 of this Report, as well as the information contained in our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

Forward-Looking Statements
We make forward-looking statements in this Report and other filings we make with the SEC within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements are subject to substantial risks and uncertainties, many of which are difficult to predict and are generally beyond our control. These forward-looking statements include information about possible or assumed future results of our business, investment strategies, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions and future or conditional verbs such as “will,” “may,” “could,” “should,” and “would,” and any other statement that necessarily depends on future events, we intend to identify forward-looking statements. Factors that could cause actual results to differ from those expressed in our forward-looking statements include, but are not limited to:
our business and investment strategy;
our investment portfolio;
our projected operating results;
general volatility of financial markets and effects of governmental responses, including actions and initiatives of the U.S. governmental agencies and changes to U.S. government policies, mortgage loan modification programs, actions and initiatives of foreign governmental agencies and central banks, monetary policy actions of the Federal Reserve, including actions relating to its agency mortgage-backed securities portfolio and the continuation of re-investment of principal payments, and our ability to respond to and comply with such actions, initiatives and changes;
the availability of financing sources, including our ability to obtain additional financing arrangements and the terms of such arrangements;
financing and advance rates for our target assets;
changes to our expected leverage;
our expected investments;
our expected book value per common share;
interest rate mismatches between our target assets and our borrowings used to fund such investments;
the adequacy of our cash flow from operations and borrowings to meet our short-term liquidity needs;
our ability to maintain sufficient liquidity to meet any margin calls;
changes in the credit rating of the U.S. government;
changes in interest rates and interest rate spreads and the market value of our target assets;
changes in prepayment rates on our target assets;
the impact of any deficiencies in foreclosure practices of third parties and related uncertainty in the timing of collateral disposition;
our reliance on third parties in connection with services related to our target assets;
effects of hedging instruments on our target assets;
rates of default or decreased recovery rates on our target assets;

 
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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;
the degree to which derivative contracts expose us to contingent liabilities;
counterparty defaults;
compliance with financial covenants in our financing arrangements;
changes in governmental regulations, zoning, insurance, eminent domain and tax law and rates, and similar matters and our ability to respond to such changes;
our ability to maintain our qualification as a real estate investment trust for U.S. federal income tax purposes;
our ability to maintain our exception from the definition of “investment company” under the Investment Company Act of 1940, as amended (the “1940 Act”);
availability of investment opportunities in mortgage-related, real estate-related and other securities;
availability of U.S. Government Agency guarantees with regard to payments of principal and interest on securities;
the market price and trading volume of our capital stock;
availability of qualified personnel of our Manager;
the relationship with our Manager;
estimates relating to taxable income and our ability to continue to make distributions to our stockholders in the future;
estimates relating to fair value of our target assets and loan loss reserves;
our understanding of our competition;
changes to generally accepted accounting principles in the United States of America (“U.S. GAAP”);
the adequacy of our disclosure controls and procedures and internal controls over financial reporting; and
market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy.
The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. You should not place undue reliance on these forward-looking statements. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us. Some of these factors are described under the headings “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion should be read in conjunction with our condensed consolidated financial statements and the accompanying notes to our condensed consolidated financial statements, which are included in this Report.
Overview
We are a Maryland corporation primarily focused on investing in, financing and managing residential and commercial mortgage-backed securities ("MBS") and mortgage loans. Our objective is to provide attractive risk-adjusted returns to our investors, primarily through dividends and secondarily through capital appreciation. To achieve this objective, we primarily invest in the following:
Residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S. government agency such as the Government National Mortgage Association ("Ginnie Mae") or a federally chartered corporation such as the Federal National Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively "Agency RMBS");
Commercial mortgage-backed securities (“CMBS”) that are guaranteed by a U.S. government agency such as Ginnie Mae or a federally chartered corporation such as Freddie Mac or Fannie Mae (collectively "Agency CMBS");


 
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RMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency RMBS”);
CMBS that are not guaranteed by a U.S. government agency or a federally chartered corporation (“non-Agency CMBS”); 
Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises ("GSE CRT");
Residential and commercial mortgage loans; and
Other real estate-related financing arrangements.
We elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain our REIT qualification, we are generally required to distribute at least 90% of our REIT taxable income to our stockholders annually. We operate our business in a manner that permits our exclusion from the definition of “Investment Company” under the 1940 Act. We are externally managed and advised by Invesco Advisers, Inc., our Manager, which is an indirect, wholly-owned subsidiary of Invesco Ltd.
Capital Activities
On February 7, 2019, we completed a public offering of 16,100,000 shares of common stock at the price of $15.73 per share. Total net proceeds were approximately $249.5 million after deducting estimated offering expenses.
In March 2019, we amended our equity distribution agreement, dated December 17, 2019, with a placement agent under which we may sell up to 17,000,000 shares of our common stock from time to time in at-the-market or privately negotiated transactions. These shares are registered with the SEC under our automatic shelf registration statement (as amended and/or supplemented). During the three months ended March 31, 2019, we issued 572,000 shares of common stock under the equity distribution agreement for proceeds of $9.1 million, net of commissions and fees.
On March 18, 2019, we declared the following dividends:
a dividend of $0.45 per share of common stock paid on April 26, 2019 to stockholders of record as of the close of business on March 29, 2019; and
a dividend of $0.4844 per share of Series A Preferred Stock paid on April 25, 2019 to stockholders of record as of the close of business on April 1, 2019.
On February 14, 2019, we declared the following dividends:
a dividend of $0.4844 per share of Series B Preferred Stock paid on March 27, 2019 to stockholders of record as of the close of business on March 5, 2019; and
a dividend of $0.46875 per share of Series C Preferred Stock paid on March 27, 2019 to stockholders of record as of the close of business on March 5, 2019.
During the three months ended March 31, 2019, we did not repurchase any shares of our common stock.
Factors Impacting Our Operating Results
Our operating results can be affected by a number of factors and primarily depend on the level of our net interest income and the market value of our assets. Our net interest income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates and prepayment speeds, as measured by the constant prepayment rate (“CPR”) on our target assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty. The market value of our assets can be impacted by credit spread premiums (yield advantage over U.S. Treasury notes) and the supply of, and demand for, target assets in which we invest.
Market Conditions
Macroeconomic factors that affect our business include interest rate spread premiums, governmental policy initiatives, residential and commercial real estate prices, credit availability, consumer personal income and spending, corporate earnings, employment conditions, financial conditions and inflation.
Financial conditions eased significantly during the first quarter of 2019, sharply reversing the tightening trend we experienced during the final months of 2018. Volatility fell across the fixed income and equity markets as investors became

 
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more supportive of risk assets and financial markets rebounded from the lows of late December 2018. Equity markets had a strong start to 2019, as the S&P 500 Index returned over 13% during the first quarter, while the NASDAQ returned over 16%. Investor sentiment was bolstered as the Federal Open Market Committee (“FOMC”) signaled that they likely would not raise the Federal Funds rate in the coming quarters. Commodity prices rebounded along with equities, as the CRB Commodity Price Index increased by 8.2% during the first quarter and WTI Crude increased by 29.3%.
The U.S. economy appears to be growing at a moderate pace, and the labor market remains positive. Monthly gains in Nonfarm Payrolls averaged 180,000 for the first quarter, slowing from the 2018 average of 223,000. The unemployment rate remained close to multi-year lows at 3.8%. The consensus forecast for GDP growth in 2019 is 2.4%, with the consensus estimates for 2020 and 2021 at 1.9% and 1.8%, respectively.
Inflation remained subdued, with the U.S. Personal Consumption Expenditure Core Price Index remaining below the Federal Reserve’s inflation target of 2% in January. Implied breakeven rates on Treasury Inflation Protected securities, which reflect the markets' expectation of future inflation rates, rose during the quarter, with the implied 2- and 5-year inflation rates ending the first quarter at 1.83% and 1.79%, respectively. The FOMC did not take any action during its January and March meetings, and communication out of the central bank caused market expectations for further FOMC policy action to readjust once again. Over the course of the first quarter, the pricing of federal funds futures contracts went from implying no policy action during 2019 to implying one cut in each of 2019 and 2020. This caused Treasury rates to fall across the maturity spectrum, with the 2-year Treasury rate ending the first quarter down 25 basis points at 2.26% and 10-year Treasury rates falling 28 basis points to 2.41%.
Mortgage-backed securities performed well during the first quarter of 2019. Agency mortgages outperformed similar duration Treasuries during the quarter, with agency pools backed by collateral that offered protection against prepayment risk performing particularly well. The outlook for Agency RMBS is mixed, as prepayment risk is expected to increase in the coming quarters due to the seasonal impact of housing activity and the increase in refinance activity given lower mortgage rates. However, the shift in monetary policy by the Federal Reserve has reduced volatility and funding costs, providing a favorable environment for the sector. Beginning in October of this year, the Federal Reserve will begin reinvesting paydowns from the MBS portion of their balance sheet into Treasuries, which should produce a modest headwind for the sector as the balance sheet slowly shifts into an all-Treasury portfolio.
During the first quarter, spreads (defined as the yield in excess of risk-free rates) on Agency CMBS, non-Agency CMBS and GSE CRT securities tightened steadily as volatility fell and investor’s risk appetites returned. Fundamentals in both commercial and residential housing remain solid, lending further support to asset prices. Financing markets remained accommodative and repurchase agreement rates settled down after experiencing typical year end bank balance sheet pressures.
We expect the U.S. will continue to experience moderate, albeit slowing, economic growth, and that core inflation will remain close to the Federal Reserve’s policy objective of 2%. Other concerns include the actions of central banks and their impact on the global economy, the sustainability of China's economic growth, and the potential impact of the Brexit process and resulting stress in the European banking system.
In addition, the regulatory landscape for our repurchase agreement counterparties continues to evolve, which may affect their funding methods and lending practices. While we are not directly subject to compliance with the implementation of rules regarding financial institutions, the effect of these regulations and others could impact our ability to finance our assets in the future.
Proposed Changes to LIBOR
On July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority (the "FCA" ), which regulates LIBOR, announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of the LIBOR benchmark after 2021.  This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021, and it appears likely that LIBOR will be phased out or the methodology for determining LIBOR will be modified by 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR, and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to USD-LIBOR.
We have material contracts that are indexed to USD-LIBOR and are monitoring this activity and evaluating the related risks.  However, it is not possible to predict the effect of any of these developments, and any future initiatives to regulate, reform or change the manner of administration of LIBOR could result in adverse consequences to the rate of interest payable and receivable on, market value of and market liquidity for LIBOR-based financial instruments.

 
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Investment Activities
The table below shows the allocation of our equity as of March 31, 2019, December 31, 2018 and March 31, 2018:
 
As of
$ in thousands
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Agency RMBS and Agency CMBS
50
%
 
49
%
 
44
%
Commercial Credit (1)
32
%
 
33
%
 
36
%
Residential Credit (2)
18
%
 
18
%
 
20
%
Total
100
%
 
100
%
 
100
%
(1)
Commercial credit includes non-Agency CMBS, commercial loans and investments in unconsolidated ventures.
(2)
Residential credit includes non-Agency RMBS, GSE CRTs and a loan participation interest.

The table below shows the breakdown of our investment portfolio as of March 31, 2019, December 31, 2018 and March 31, 2018:
 
As of
$ in thousands
March 31, 2019
 
December 31, 2018
 
March 31, 2018
Agency RMBS:
 
 
 
 
 
30 year fixed-rate, at fair value
12,716,636

 
9,772,769

 
7,662,038

15 year fixed-rate, at fair value
352,102

 
424,254

 
2,609,552

Hybrid ARM, at fair value
173,521

 
554,201

 
1,623,538

ARM, at fair value
6,404

 
105,747

 
227,666

Agency CMO, at fair value
327,151

 
267,691

 
253,954

Agency CMBS, at fair value
2,001,553

 
1,002,510

 

Non-Agency CMBS, at fair value
3,455,806

 
3,286,459

 
3,189,281

Non-Agency RMBS, at fair value
1,186,896

 
1,163,682

 
1,194,952

GSE CRT, at fair value
907,529

 
819,329

 
861,253

Loan participation interest, at fair value
53,827

 
54,981

 

Commercial loans, at amortized cost
24,454

 
31,582

 
184,255

Investments in unconsolidated ventures
24,129

 
24,012

 
28,168

Total Investment portfolio
21,230,008

 
17,507,217

 
17,834,657


During the three months ended March 31, 2019, we purchased $4.1 billion of Agency RMBS and Agency CMBS, $143.9 million of non-Agency CMBS, $75.6 million of non-Agency RMBS and $94.6 million of GSE CRT. We funded these purchases with proceeds from our common stock issuances and paydowns and sales of securities. During the three months ended March 31, 2019, we continued to actively manage our investment portfolio, selling most of our ARM and Hybrid ARM securities. We primarily reinvested the proceeds into fixed rate Agency RMBS and Agency CMBS.
As of March 31, 2019 our holdings of 30 year fixed-rate Agency RMBS represent approximately 60% of our total investment portfolio versus 56% as of December 31, 2018 and 43% as of March 31, 2018. Most of our holdings of 30 year fixed-rate Agency RMBS are in specified pools with attractive prepayment characteristics. We have continued to increase our holdings of 30 year fixed-rate Agency RMBS over the past 12 months as the return on equity profile for these securities remained attractive. Return on equity for 30 year fixed-rate Agency RMBS remained accretive due to lower funding costs given changes in the outlook for short-term interest rates. We have focused our purchases on 30 year specified pools priced at modest pay-ups to generic Agency RMBS because those securities have characteristics that reduce prepayment risk. 

 
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We began investing in Agency CMBS issued by Freddie Mac and Fannie Mae in 2018 and have continued to invest in these securities in 2019. We purchased these securities because we believe they have an attractive convexity and return on equity profile. They offer targeted exposure to multi-family loans and benefit from a guarantee of principal and interest payments from governmental agencies and federally chartered corporations. Further, the hedging costs are economical as they are less sensitive to interest rate risk given limited extension beyond initial expected maturity dates and underlying loan prepayment protection.
Our portfolio of investments that have credit exposure includes non-Agency CMBS, non-Agency RMBS, GSE CRTs, a commercial real estate loan, and a loan participation interest. Rather than relying on the rating agencies, we utilize proprietary models as well as third party applications to quantify and monitor the credit risk associated with our portfolio holdings. Our analysis generally begins at the underlying asset level, where we gather detailed information on loan, borrower, and property characteristics that inform our expectations for future performance. In addition to base case cash flow projections, we perform a range of scenario stresses to gauge the sensitivity of returns to potential deviations in underlying asset behavior. We perform this detailed credit analysis at the time of initial purchase and regularly throughout the holding period of each investment.
Our non-Agency CMBS portfolio generally consists of assets originated during and after 2010. These assets continue to benefit from rating agency upgrades, property price appreciation and limited supply. Non-Agency CMBS investments represent approximately 16% of our total investment portfolio as of March 31, 2019.
With respect to our non-Agency RMBS portfolio, we primarily invest in securities collateralized by prime and Alt-A loans. In addition, we have invested in re-securitizations of real estate mortgage investment conduit ("Re-REMIC") RMBS and securitizations of reperforming mortgage loans that we expect to provide attractive risk adjusted returns. We also invest in GSE CRTs, which have the added benefit of paying a floating rate coupon, reducing our need to hedge interest rate risk. The majority of our GSE CRT holdings are concentrated in 2013 and 2014 vintages, where reference loans have significant embedded home price appreciation. From a fundamental perspective, we continue to view GSE CRT as an attractive asset class based on the strength of the U.S. housing market and the strong performance of reference mortgage loans to date.
During the third quarter of 2018, we acquired a participation interest in a secured loan collateralized by mortgage servicing rights associated with Fannie Mae, Freddie Mac, and Ginnie Mae loans. The loan has a two year term subject to a one year extension at the borrower's option. We funded $53.8 million of the loan as of March 31, 2019 and have committed to fund up to an additional $21.2 million.
As of March 31, 2019, our commercial real estate loan portfolio consists of one mezzanine loan that we originated with a weighted average maturity of approximately two years and a loan-to-value ratio of approximately 74.2%. One commercial loan was repaid during the three months ended March 31, 2019. The commercial real estate loan had a weighted average yield of 11.08% during the three months ended March 31, 2019 and continued to benefit from favorable fundamentals.
We have also invested in two joint ventures that invest in our target assets.
Portfolio Characteristics
The table below illustrates the vintage distribution of our non-Agency RMBS, GSE CRT and non-Agency CMBS portfolio as of March 31, 2019 as a percentage of the fair value: 
 
2003-2007
 
2008-2010
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
 
Total
Prime
18.1
%
 
0.6
%
 
—%

 
—%

 
12.5
%
 
10.0
%
 
2.4
%
 
0.3
%
 
—%

 
15.1
%
 
6.2
%
 
65.2
%
Alt-A
26.2
%
 
—%

 
—%

 
—%

 
—%

 
—%

 
—%

 
—%

 
—%

 
—%

 
—%

 
26.2
%
Re-REMIC (1)
0.6
%
 
4.2
%
 
1.7
%
 
1.4
%
 
0.6
%
 
—%

 
—%

 
—%

 
—%

 
—%

 
—%

 
8.5
%
Subprime/RPL
0.1
%
 
—%

 
—%

 
—%

 
—%

 
—%

 
—%

 
—%

 
—%

 
—%

 
—%

 
0.1
%
Total Non-Agency
45.0
%
 
4.8
%
 
1.7
%
 
1.4
%
 
13.1
%
 
10.0
%
 
2.4
%
 
0.3
%
 
%
 
15.1
%
 
6.2
%
 
100.0
%
GSE CRT
—%

 
—%

 
—%

 
—%

 
27.4
%
 
31.8
%
 
5.7
%
 
20.3
%
 
3.3
%
 
6.2
%
 
5.3
%
 
100.0
%
Non-Agency CMBS
—%

 
2.5
%
 
16.4
%
 
10.9
%
 
12.0
%
 
31.9
%
 
7.8
%
 
3.2
%
 
8.2
%
 
4.8
%
 
2.3
%
 
100.0
%
(1)
Reflects the year in which the re-securitizations were issued. The vintage distribution of the securities that collateralize our Re-REMIC investments is 4.5% for 2005, 1.8% for 2006, and 93.7% for 2007.

 
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The following table summarizes the credit enhancement provided to our Re-REMIC holdings as of March 31, 2019 and December 31, 2018.
  
Percentage of Re-REMIC 
Holdings at Fair Value
Re-REMIC Subordination(1)
March 31, 2019
 
December 31, 2018
0% - 10%
52.3
%
 
49.8
%
10% - 20%
3.4
%
 
3.4
%
20% - 30%
17.3
%
 
16.9
%
30% - 40%
12.9
%
 
14.9
%
40% - 50%
1.3
%
 
1.8
%
50% - 60%
12.4
%
 
12.5
%
60% - 70%
0.4
%
 
0.7
%
Total
100.0
%
 
100.0
%
(1)
Subordination refers to the credit enhancement provided to the Re-REMIC tranche held by us by any junior Re-REMIC tranche or tranches in a resecuritization. This figure reflects the percentage of the balance of the underlying securities represented by any junior tranche or tranches at the time of resecuritization. Generally, principal losses on the underlying securities in excess of the subordination amount would result in principal losses on the Re-REMIC tranche held by us. As of March 31, 2019, 71.5% of our Re-REMIC holdings are not senior tranches.

The tables below represent the geographic concentration of the underlying collateral for our non-Agency RMBS, GSE CRT and non-Agency CMBS portfolio as of March 31, 2019: 
Non-Agency RMBS
State
 
Percentage
 
GSE CRT
State
 
Percentage
 
Non-Agency CMBS
State
 
Percentage
California
 
46.0
%
 
California
 
18.4
%
 
California
 
15.2
%
New York
 
8.5
%
 
Texas
 
6.2
%
 
New York
 
14.7
%
Florida
 
6.0
%
 
Florida
 
4.6
%
 
Texas
 
9.0
%
New Jersey
 
3.8
%
 
New York
 
4.4
%
 
Florida
 
6.5
%
Massachusetts
 
3.3
%
 
Virginia
 
4.2
%
 
Illinois
 
4.1
%
Virginia
 
2.9
%
 
Illinois
 
3.9
%
 
Pennsylvania
 
3.7
%
Washington
 
2.8
%
 
Washington
 
3.4
%
 
Ohio
 
3.1
%
Maryland
 
2.6
%
 
Massachusetts
 
3.3
%
 
Virginia
 
3.1
%
Colorado
 
2.6
%
 
New Jersey
 
3.3
%
 
Georgia
 
3.0
%
Illinois
 
2.4
%
 
Pennsylvania
 
3.1
%
 
New Jersey
 
3.0
%
Other
 
19.1
%
 
Other
 
45.2
%
 
Other
 
34.6
%
Total
 
100.0
%
 
Total
 
100.0
%
 
Total
 
100.0
%
Financing and Other Liabilities
We enter into repurchase agreements to finance the majority of our target assets. These agreements are secured by our mortgage-backed and credit risk transfer securities and an investment in a loan participation interest. Repurchase agreements are generally settled on a short-term basis, usually from one to twelve months, and bear interest at rates that have historically moved in close relationship to LIBOR. At each settlement date, we refinance each repurchase agreement at the market interest rate at that time. As of March 31, 2019, we had entered into repurchase agreements totaling $16.8 billion (December 31, 2018: $13.6 billion).
Our wholly-owned captive insurance subsidiary, IAS Services, is a member of the Federal Home Loan Bank of Indianapolis ("FHLBI"). As a member of the FHLBI, IAS Services has borrowed funds from the FHLBI in the form of secured loans. As of March 31, 2019, IAS Services had $1.65 billion in outstanding secured loans. For the three months ended March 31, 2019, IAS Services had weighted average borrowings of $1.65 billion with a weighted average borrowing rate of 2.70% and a weighted average maturity of 5.1 years.

 
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The following table presents the amount of collateralized borrowings outstanding under repurchase agreements and secured loans as of the end of each quarter, the average amount outstanding during the quarter and the maximum balance outstanding during the quarter:
$ in thousands
Collateralized borrowings under repurchase agreements and secured loans
Quarter Ended
Quarter-end balance
 
Average quarterly balance
 
Maximum balance of any quarter-end
March 31, 2018
15,561,137

 
15,536,093

 
15,561,137

June 30, 2018
15,352,321

 
15,275,972

 
15,352,321

September 30, 2018
16,028,518

 
15,973,428

 
16,078,388

December 31, 2018
15,252,484

 
15,836,597

 
16,144,062

March 31, 2019
18,474,387

 
17,229,809

 
18,474,387

In 2013, our wholly-owned subsidiary, IAS Operating Partnership LP, issued $400.0 million in aggregate principal amount of Exchangeable Senior Notes (the "Notes"). We retired a portion of the Notes prior to their maturity and fully retired the Notes upon their maturity on March 15, 2018. We utilized proceeds from repurchase agreement borrowings to retire the Notes.
We have invested in and partially funded our portion of a commitment in a loan participation. The remainder of our commitment under the agreement will be funded over the two year term of the loan based upon the financing needs of the borrower. As of March 31, 2019, we have unfunded commitments of $21.2 million.
We have also committed to invest up to $122.5 million in unconsolidated ventures that are sponsored by an affiliate of our Manager. As of March 31, 2019, $114.9 million of our commitment to these unconsolidated ventures has been called. We are committed to fund $7.6 million in additional capital to fund future investments and cover future expenses should they occur.
Hedging Instruments.
As of March 31, 2019, we have entered into interest rate swap agreements designed to mitigate the effects of increases in interest rates for a portion of our borrowings. Under these swap agreements, we pay fixed interest rates and receive floating interest rates indexed off of one- or three-month LIBOR, effectively fixing the floating interest rates on $12.9 billion (December 31, 2018: $12.4 billion) of borrowings. As of March 31, 2019, we received interest based on one-month LIBOR on $8.4 billion of our swaps and interest based on three-month LIBOR on $4.5 billion of our swaps.
During the three months ended March 31, 2019, we terminated existing swaps with a notional amount of $4.1 billion and entered into new swaps with a notional amount of $4.6 billion to hedge repurchase agreement debt associated with purchases of Agency RMBS and Agency CMBS securities during the quarter. Daily variation margin payment for interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations. We realized a net loss of $165.9 million on interest rate swaps during the three months ended March 31, 2019 primarily due to falling interest rates in the first quarter of 2019.
As of March 31, 2019 we held $1.6 billion (December 31, 2018: $1.7 billion) in notional amount of futures contracts. During the three months ended March 31, 2019, we settled futures contracts with a notional amount of $1.7 billion and realized a net loss of $66.7 million due to falling interest rates in the first quarter of 2019. Daily variation margin payment for futures is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations.
We enter into currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on investments denominated in foreign currencies. During the three months ended March 31, 2019, we settled currency forward contracts of $23.1 million (March 31, 2018: $76.9 million) in notional amount and realized a net gain of $185,000 (March 31, 2018: $3.4 million net loss). As of March 31, 2019, we had $25.5 million (December 31, 2018: $23.1 million) of notional amount of forward contracts denominated in Euro related to our investment in an unconsolidated venture.
 


 
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Book Value per Common Share
We calculate book value per common share as follows:

As of
In thousands except per share amounts
March 31, 2019
 
December 31, 2018
Numerator (adjusted equity):
 
 
 
Total equity
2,671,714

 
2,286,697

Less: Liquidation preference of Series A Preferred Stock
(140,000
)
 
(140,000
)
Less: Liquidation preference of Series B Preferred Stock
(155,000
)
 
(155,000
)
Less: Liquidation preference of Series C Preferred Stock
(287,500
)
 
(287,500
)
Total adjusted equity
2,089,214

 
1,704,197

 
 
 
 
Denominator (number of shares):
 
 
 
Common stock outstanding
128,267

 
111,585

 
 
 
 
Book value per common share
16.29

 
15.27

Our book value per common share increased 6.7% as of March 31, 2019 compared to December 31, 2018 primarily due to interest rate spread tightening in both Agency and credit assets. Refer to Item 3. "Quantitative and Qualitative Disclosures About Market Risk" for interest rate risk and its impact on fair value.

 
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Critical Accounting Policies
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. All of these estimates reflect our best judgment about current, and for some estimates, future economic and market conditions and their effects based on information available as of the date of these financial statements. If conditions change from those expected, it is possible that the judgments and estimates described below could change, which may result in a change in valuation of our investment portfolio, future impairments of our MBS and GSE CRTs, change in our interest income recognition, allowance for loan losses, and a change in our tax liability among other effects.
There have been no significant changes to our critical accounting policies that are disclosed in our most recent Form 10-K for the year ended December 31, 2018.
Recent Accounting Standards
See Part I, Item 1, Financial Statements Note 2 - "Accounting Pronouncements Recently Adopted" and "Pending Accounting Pronouncements".


 
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Results of Operations
The table below presents certain information from our condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018. 
 
Three Months Ended March 31,
$ in thousands, except share data
2019
 
2018
Interest Income
 
 
 
Mortgage-backed and credit risk transfer securities
185,492

 
149,003

Commercial and other loans
1,582

 
4,222

Total interest income
187,074

 
153,225

Interest Expense
 
 
 
Repurchase agreements
101,875

 
59,585

Secured loans
11,144

 
6,927

Exchangeable senior notes

 
1,621

Total interest expense
113,019

 
68,133

Net interest income
74,055

 
85,092

Other Income (loss)
 
 
 
Gain (loss) on investments, net
268,382

 
(160,370
)
Equity in earnings (losses) of unconsolidated ventures
692

 
896

Gain (loss) on derivative instruments, net
(201,460
)
 
133,367

Realized and unrealized credit derivative income (loss), net
7,884

 
3,165

Net loss on extinguishment of debt

 
(26
)
Other investment income (loss), net
1,029

 
3,102

Total other income (loss)
76,527

 
(19,866
)
Expenses
 
 
 
Management fee – related party
9,534

 
10,221

General and administrative
2,258

 
1,756

Total expenses
11,792

 
11,977

Net income
138,790

 
53,249

Net income attributable to non-controlling interest

 
671

Net income attributable to Invesco Mortgage Capital Inc.
138,790

 
52,578

Dividends to preferred stockholders
11,107

 
11,107

Net income attributable to common stockholders
127,683

 
41,471

Earnings per share:
 
 
 
Net income (loss) attributable to common stockholders
 
 
 
Basic
1.05

 
0.37

Diluted
1.05

 
0.37

Weighted average number of shares of common stock:
 
 
 
Basic
121,097,686

 
111,629,105

Diluted
121,109,259

 
117,876,995


 
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Interest Income and Average Earning Asset Yields
The table below presents information related to our average earning assets and earning asset yields for the three months ended March 31, 2019 and 2018. 
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Average Balances (1):
 
 
 
Agency RMBS:
 
 
 
15 year fixed-rate, at amortized cost
371,228

 
2,879,696

30 year fixed-rate, at amortized cost
11,780,005

 
7,830,802

ARM, at amortized cost
19,355

 
231,303

Hybrid ARM, at amortized cost
224,458

 
1,666,890

Agency - CMO, at amortized cost
291,914

 
273,884

Agency CMBS, at amortized cost
1,129,227

 

Non-Agency CMBS, at amortized cost
3,361,132

 
3,193,575

Non-Agency RMBS, at amortized cost
1,084,721

 
1,084,584

GSE CRT, at amortized cost
808,296

 
776,742

Loan participation interest
54,763

 

Commercial loans, at amortized cost
27,375

 
193,540

Average earning assets
19,152,474

 
18,131,016

Average Earning Asset Yields (2):
 
 
 
Agency RMBS:
 
 
 
15 year fixed-rate
3.50
%
 
2.04
%
30 year fixed-rate
3.38
%
 
2.96
%
ARM
3.70
%
 
2.32
%
Hybrid ARM
3.47
%
 
2.24
%
Agency - CMO
3.56
%
 
2.51
%
Agency CMBS
3.52
%
 
%
Non-Agency CMBS
4.98
%
 
4.85
%
Non-Agency RMBS
6.71
%
 
7.08
%
GSE CRT (3)
3.67
%
 
3.00
%
Loan participation interest
6.14
%
 
%
Commercial loans
11.08
%
 
8.85
%
Average earning asset yields
3.91
%
 
3.38
%
(1)
Average balances for each period are based on weighted month-end average earning assets.
(2)
Average earning asset yields for the period were calculated by dividing interest income, including amortization of premiums and discounts, by the average month-end earning assets based on the amortized cost of the investments. All yields are annualized.
(3)
GSE CRT average earning asset yields exclude coupon interest associated with embedded derivatives on securities not accounted for under the fair value option that is recorded as realized and unrealized credit derivative income (loss), net under U.S. GAAP.
Our primary source of income is interest earned on our investment portfolio. We had average earning assets of approximately $19.2 billion for the three months ended March 31, 2019 (March 31, 2018: $18.1 billion). Average earning assets increased for the three months ended March 31, 2019 primarily because we invested $258.6 million in net proceeds from common stock issuances and $168.1 million in proceeds from commercial loan repayments in 2018 and the first quarter of 2019 into newly issued 30 year fixed-rate Agency RMBS and Agency CMBS securities.

 
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We earned total interest income of $187.1 million (March 31, 2018: $153.2 million) for the three months ended March 31, 2019. Our interest income includes coupon interest and net premium amortization on MBS and GSE CRTs as well as interest income on commercial and other loans as shown in the table below.
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Interest Income
 
 
 
MBS and GSE CRT - coupon interest
192,442

 
166,319

MBS and GSE CRT - net premium amortization
(6,950
)
 
(17,316
)
MBS and GSE CRT - interest income
185,492

 
149,003

Commercial and other loans
1,582

 
4,222

Total interest income
187,074

 
153,225

MBS and GSE CRT interest income increased $36.5 million for the three months ended March 31, 2019 compared to 2018 primarily due to higher average earnings assets and lower net premium amortization. Net premium amortization decreased $10.4 million for the three months ended March 31, 2019 compared to 2018 primarily due to slower prepayment speeds on 30 year fixed-rate Agency RMBS and purchases of non-Agency CMBS securities at a discount over the last twelve months.
Interest income on our commercial and other loans decreased $2.6 million during the three months ended March 31, 2019 primarily due to commercial loan repayments over the past twelve months. The balance of our commercial loans held-for-investment decreased to $24.5 million as of March 31, 2019 compared to $184.3 million as of March 31, 2018.
Our average earning asset yields increased 53 basis points during the three months ended March 31, 2019 compared to 2018 due to purchases of new securities at higher yields, slower prepayment speeds and higher index rates on floating and adjustable assets.
Prepayment Speeds
Our RMBS and GSE CRT portfolio is subject to inherent prepayment risk primarily driven by changes in interest rates, which impacts the amount of premium and discount on the purchase of these securities that is recognized into interest income. Expected future prepayment speeds on our RMBS and GSE CRT portfolio are estimated on a quarterly basis. Generally, in an environment of falling interest rates, prepayment speeds will increase as homeowners are more likely to prepay their existing mortgage and refinance into a lower borrowing rate. If the actual prepayment speed during the period is faster than estimated, the amortization on securities purchased at a premium to par value will be accelerated, resulting in lower interest income recognized. Conversely, for securities purchased at a discount to par value, interest income will be reduced in periods where prepayment speeds were slower than expected. The standard measure of prepayment speeds is the constant prepayment rate, also known as the conditional prepayment rate or "CPR". CPR measures prepayments as a percentage of the current outstanding loan balance and is expressed as a compound annual rate. The table below provides the three month constant prepayment rate for our RMBS and GSE CRTs as of March 31, 2019, December 31, 2018, September 30, 2018 and June 30, 2018.
 
As of
 
March 31, 2019
 
December 31, 2018
 
September 30, 2018
 
June 30, 2018
15 year fixed-rate Agency RMBS
7.1

 
8.8

 
10.9

 
10.6

30 year fixed-rate Agency RMBS
4.9

 
6.2

 
7.4

 
8.2

ARM/ Hybrid ARM Agency RMBS
15.7

 
13.8

 
16.6

 
15.7

Non-Agency RMBS
8.3

 
9.1

 
10.5

 
12.0

GSE CRT
6.6

 
8.7

 
10.9

 
9.8

Weighted average CPR
5.7

 
7.3

 
8.9

 
10.2


 
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The following table presents net premium amortization recognized on our MBS and GSE CRT portfolio for the three months ended March 31, 2019 and 2018.
 
Three Months Ended March 31,
$ in thousands, except share data
2019
 
2018
Agency RMBS and Agency CMBS
(12,725
)
 
(23,222
)
Non-Agency CMBS
3,031

 
1,426

Non-Agency RMBS
3,922

 
5,177

GSE CRT
(1,178
)
 
(697
)
Net (premium amortization) discount accretion
(6,950
)
 
(17,316
)
Net premium amortization decreased compared to the same period in 2018 primarily due to slower prepayment speeds on 30 year fixed-rate Agency RMBS in the three months ended March 31, 2019 and purchases of non-Agency CMBS securities at a discount over the last 12 months.
Our interest income is subject to interest rate risk. Refer to Item 3. "Quantitative and Qualitative Disclosures about Market Risk" for more information relating to interest rate risk and its impact on our operating results.
Interest Expense and the Cost of Funds
The table below presents the components of interest expense for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Interest Expense
 
 
 
Interest expense on repurchase agreement borrowings
107,726

 
66,124

Amortization of net deferred (gain) loss on de-designated interest rate swaps
(5,851
)
 
(6,539
)
Repurchase agreements interest expense
101,875

 
59,585

Secured loans
11,144

 
6,927

Exchangeable senior notes

 
1,621

Total interest expense
113,019

 
68,133

We enter into repurchase agreements to finance the majority of our target assets. These agreements are secured by our mortgage-backed and credit risk transfer securities. These agreements are generally settled on a short-term basis, usually from one to twelve months, and bear interest at rates that have historically moved in close relationship to LIBOR. At each settlement date, we typically refinance each repurchase agreement at the market interest rate at that time.
Our interest expense on repurchase agreement borrowings rose $41.6 million for the three months ended March 31, 2019 compared to 2018 due to higher average borrowings and increases in the federal funds rate over the past twelve months. We increased our average borrowings in the first quarter of 2019 after investing $258.6 million in net proceeds from common stock issuances and $168.1 million in proceeds from commercial loan repayments in 2018 and the first quarter of 2019 into newly issued 30 year fixed-rate Agency RMBS and Agency CMBS securities.
Our repurchase agreement interest expense as reported in our condensed consolidated statement of operations includes amortization of net deferred gains and losses on de-designated interest rate swaps as summarized in the table above. Amortization of net deferred gains on de-designated interest rate swaps decreased our total interest expense by $5.9 million during the three months ended March 31, 2019 and $6.5 million during the three months ended March 31, 2018. Amounts recorded in AOCI before we discontinued cash flow hedge accounting for our interest rate swaps are reclassified to interest expense on repurchase agreements on the condensed consolidated statements of operations as interest is accrued and paid on the related repurchase agreements over the remaining life of the interest rate swap agreements. During the next twelve months, we estimate that $23.8 million of net deferred gains on de-designated interest rate swaps will be reclassified from other comprehensive income and recorded as a decrease to interest expense.
During the three months ended March 31, 2019, interest expense for our secured loans increased $4.2 million compared to the same period in 2018 due to higher borrowing rates. Borrowing rates on our secured loans are based on the three-month FHLB swap rate plus a spread. For the three months ended March 31, 2019, the weighted average borrowing rate on our secured loans was 2.70% as compared to 1.68% for the three months ended March 31, 2018.

 
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During the three months ended March 31, 2019, interest expense on exchangeable senior notes decreased $1.6 million compared to the same period in 2018 because the Notes were retired on March 15, 2018.
Our total interest expense during the three months ended March 31, 2019 increased $44.9 million from the same period in 2018 primarily due to the $45.8 million increase in interest expense on repurchase agreements borrowings and secured loans in the 2019 period offset by a $1.6 million decrease in interest expense on the Notes as discussed above.
The table below presents information related to our borrowings and cost of funds for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Average Borrowings(1):
 
 
 
Agency RMBS (2)
11,664,156

 
11,427,614

Agency CMBS 
1,074,917

 

Non-Agency CMBS (2)
2,663,941

 
2,542,722

Non-Agency RMBS
886,554

 
891,202

GSE CRT
717,482

 
674,555

Exchangeable senior notes

 
116,176

Loan participation interest
41,072

 

Total average borrowings
17,048,122

 
15,652,269

Maximum borrowings during the period (3)
18,474,387

 
15,674,202

Average Cost of Funds (4):
 
 
 
Agency RMBS (2)
2.59
%
 
1.65
%
Agency CMBS
2.64
%
 
%
Non-Agency CMBS (2)
3.24
%
 
2.28
%
Non-Agency RMBS
3.54
%
 
2.91
%
GSE CRT
3.49
%
 
2.87
%
Exchangeable senior notes
%
 
5.58
%
Loan participation interest
4.15
%
 
%
Cost of funds
2.65
%
 
1.74
%
Effective cost of funds (non-GAAP measure) (5)
2.68
%
 
2.22
%
(1)
Average borrowings for each period are based on weighted month-end balances.
(2)
Agency RMBS and non-Agency CMBS average borrowings and average cost of funds include borrowings under repurchase agreements and secured loans.
(3)
Amount represents the maximum borrowings at month-end during each of the respective periods.
(4)
Average cost of funds is calculated by dividing annualized interest expense excluding amortization of net deferred gain (loss) on de-designated interest rate swaps by our average borrowings.
(5)
For a reconciliation of cost of funds to effective cost of funds, see "Non-GAAP Financial Measures."
Total average borrowings rose $1.4 billion in the three months ended March 31, 2019 compared to 2018 primarily because we entered into repurchase agreements to finance our increased holdings of 30 year fixed-rate Agency RMBS, Agency CMBS and non-Agency CMBS. The increase in our average cost of funds for three months ended March 31, 2019 versus 2018 was primarily due to increases in the federal funds rate over the past twelve months.

 
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Net Interest Income
The table below presents the components of net interest income for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Interest Income
 
 
 
Mortgage-backed and credit risk transfer securities
185,492

 
149,003

Commercial and other loans
1,582

 
4,222

Total interest income
187,074

 
153,225

Interest Expense
 
 
 
Interest expense on repurchase agreement borrowings
107,726

 
66,124

Amortization of net deferred (gain) loss on de-designated interest rate swaps
(5,851
)
 
(6,539
)
Repurchase agreements interest expense
101,875

 
59,585

Secured loans
11,144

 
6,927

Exchangeable senior notes

 
1,621

Total interest expense
113,019

 
68,133

Net interest income
74,055

 
85,092

Net interest rate margin
1.26
%
 
1.64
%
Our net interest income, which equals interest income less interest expense, totaled $74.1 million (March 31, 2018: $85.1 million) for the three months ended March 31, 2019. The decrease in net interest income for the three months ended March 31, 2019 was primarily due to an increase in interest expense driven by higher average borrowings and borrowing rates exceeding the increase in interest income on higher average earning assets.
Our net interest rate margin, which equals the yield on our average assets for the period less the average cost of funds for the period, was 1.26% (March 31, 2018: 1.64%) for the three months ended March 31, 2019. The decrease in net interest rate margin for the three months ended March 31, 2019 compared to the same periods in 2018 was primarily due to increases in the federal funds rate in 2018 that had a greater impact on our average cost of funds than on our average earning asset yields. Our cost of funds on all of our borrowings is influenced by changes in short term interest rates, whereas approximately 91% of the Company’s investments were fixed rate assets as of March 31, 2019.
Gain (Loss) on Investments, net
The table below summarizes the components of gain (loss) on investments, net for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Net realized gains (losses) on sale of investments
(11,115
)
 
(9,237
)
Other-than-temporary impairment losses
(1,776
)
 
(4,359
)
Net unrealized gains (losses) on MBS accounted for under the fair value option
280,039

 
(147,195
)
Net unrealized gains (losses) on GSE CRT accounted for under the fair value option
1,234

 
434

Net unrealized gains (losses) on trading securities

 
(13
)
Gain (loss) on investments, net
268,382

 
(160,370
)
As part of our investment process, our mortgage-backed and credit risk transfer securities are continuously reviewed to determine if they continue to meet our risk and return targets. This process involves looking at changing market assumptions and the impact those assumptions will have on the individual securities. During the three months ended March 31, 2019, we continued to actively manage our investment portfolio and sold most of our ARM and Hybrid ARM securities. We sold $745.9 million of mortgage-backed securities (March 31, 2018: $198.5 million) and realized net losses of $11.1 million (March 31, 2018: net losses of $9.2 million).

 
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We assess our investment securities for other-than-temporary impairment on a quarterly basis. Our determination of whether a security is other-than-temporarily impaired involves judgment and assumptions based on subjective and objective factors. We consider (i) whether we intend to sell the security and whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost and (ii) the financial condition and near-term prospects of recovery in fair value of the security. This includes a determination of estimated future cash flows through an evaluation of the characteristics of the underlying loans and the structural features of the investment. When the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either "temporary" or "other-than-temporary." For additional information regarding our assessment analysis of other-than temporary impairment on our investment securities, refer to Note 4 – “Mortgage-Backed and Credit Risk Transfer Securities” of our condensed consolidated financial statements.
We have elected the fair value option for all of our RMBS IOs, our MBS purchased on or after September 1, 2016 and our GSE CRTs purchased on or after August 24, 2015. Under the fair value option, changes in fair value are recognized in income in the condensed consolidated statements of operations and are reported as a component of gain (loss) on investments, net. As of March 31, 2019, $16.1 billion (December 31, 2018: $11.6 billion) or 76% (December 31, 2018: 67%) of our MBS and GSE CRT are accounted for under the fair value option. We recorded net unrealized gains on our MBS portfolio accounted for under the fair value option of $280.0 million in the three months ended March 31, 2019 compared to net losses of $147.2 million in the three months ended March 31, 2018. Net unrealized gains in the three months ended March 31, 2019 reflect tighter interest rate spreads across the Company's credit assets and Agency CMBS, and valuation gains in the Company's specified pool Agency RMBS. Most of our holdings of 30 year fixed-rate Agency RMBS are in specified pools with attractive prepayment characteristics.
Equity in Earnings (Losses) of Unconsolidated Ventures
For the three months ended March 31, 2019, we recorded equity in earnings of unconsolidated ventures of $692,000 (March 31, 2018: equity in earnings of $896,000). We recorded equity in earnings for the three months ended March 31, 2019 and 2018 primarily due to realized and unrealized gains on the underlying portfolio investments.
Gain (Loss) on Derivative Instruments, net
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements on our floating rate repurchase agreements and secured loans. To accomplish these objectives, we primarily use interest rate derivative instruments, including interest rate swaps, interest rate swaptions, U.S. Treasury futures contracts and TBAs as part of our interest rate risk management strategy.
We also use currency forward contracts to help mitigate the potential impact of changes in foreign currency exchange rates on our investments denominated in foreign currencies.
The tables below summarize our realized and unrealized gain (loss) on derivative instruments, net for the following periods:
$ in thousands
Three months ended March 31, 2019
Derivative
not designated as
hedging instrument
Realized gain (loss) on derivative instruments, net
 
 Contractual net interest income (expense)
 
Unrealized gain (loss), net
 
Gain (loss) on derivative instruments, net
Interest Rate Swaps
(165,884
)
 
4,509

 
12,991

 
(148,384
)
Futures Contracts
(66,688
)
 

 
12,944

 
(53,744
)
Currency Forward Contracts
185

 

 
483

 
668

Total
(232,387
)
 
4,509

 
26,418

 
(201,460
)
$ in thousands
Three months ended March 31, 2018
Derivative
not designated as
hedging instrument
Realized gain (loss) on derivative instruments, net
 
 Contractual net interest income (expense)
 
Unrealized gain (loss), net
 
Gain (loss) on derivative instruments, net
Interest Rate Swaps
122,273

 
(12,112
)
 
32,374

 
142,535

Futures Contracts
(5,277
)
 

 
(1,612
)
 
(6,889
)
Currency Forward Contracts
(3,418
)
 

 
1,139

 
(2,279
)
Total
113,578

 
(12,112
)
 
31,901

 
133,367

 
 

 
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As of March 31, 2019 and December 31, 2018, we held the following interest rate swaps whereby we receive interest at a one-month and three-month LIBOR rate:
$ in thousands
As of March 31, 2019
 
As of December 31, 2018
Derivative instrument
Notional Amounts
 
Average Fixed Pay Rate
 
Average Receive Rate
 
Average Maturity (Years)
 
Notional Amounts
 
Average Fixed Pay Rate
 
Average Receive Rate
 
Average Maturity (Years)
Interest Rate Swaps
12,895,000

 
2.37
%
 
2.55
%
 
4.4
 
12,370,000

 
2.46
%
 
2.55
%
 
3.7

During the three months ended March 31, 2019, we terminated existing swaps with a notional amount of $4.1 billion and entered into new swaps with a notional amount of $4.6 billion to hedge repurchase agreement debt associated with purchases of Agency RMBS and Agency CMBS securities during the quarter. Daily variation margin payment for interest rate swaps is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations. We realized a net loss of $165.9 million on interest rate swaps during the three months ended March 31, 2019 primarily due to falling interest rates in the first quarter of 2019.
As of March 31, 2019 we held $1.6 billion (December 31, 2018: $1.7 billion) in notional amount of futures contracts. During the three months ended March 31, 2019, we settled futures contracts with a notional amount of $1.7 billion and realized a net loss of $66.7 million due to falling interest rates in the first quarter of 2019. Daily variation margin payment for futures is characterized as settlement of the derivative itself rather than collateral and is recorded as a realized gain or loss in our condensed consolidated statement of operations.


Realized and Unrealized Credit Derivative Income (Loss), net
The table below summarizes the components of realized and unrealized credit derivative income (loss), net for the three months ended March 31, 2019 and 2018.
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
GSE CRT embedded derivative coupon interest
5,350

 
5,633

Change in fair value of GSE CRT embedded derivatives
2,534

 
(2,468
)
Total realized and unrealized credit derivative income (loss), net
7,884

 
3,165

In the three months ended March 31, 2019, we recorded an increase of $4.7 million in realized and unrealized credit derivative income (loss), net compared to the same period in 2018 because the increases in the valuation of the GSE CRT debt host contracts exceeded the increases in valuation of the hybrid financial instruments.


 
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Net Loss on Extinguishment of Debt
We fully retired our Exchangeable Senior Notes (the "Notes") upon their maturity on March 15, 2018 and recognized a net loss on extinguishment of debt of $26,000.
Other Investment Income (Loss), net
Our other investment income (loss), net during the three months ended March 31, 2019 consists of quarterly dividends from FHLBI stock. Our other investment income (loss), net during the three months ended March 31, 2018 consisted of (i) quarterly dividends from FHLBI stock and an investment in an exchange-traded fund, and (ii) foreign exchange rate gains and losses related to a commercial loan investment denominated in a foreign currency. The table below summarizes the components of other investment income (loss), net for the three months ended March 31, 2019 and 2018.
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Dividend income
1,029

 
1,288

Gain (loss) on foreign currency transactions, net

 
1,814

Total
1,029

 
3,102

We are required to purchase and hold a certain amount of FHLBI stock, which is based, in part, upon the outstanding principal balance of secured advances from the FHLBI. We earn dividend income on our investment in FHLBI stock, and the amount of our dividend income varies based upon the number of shares that we are required to own and the dividend declared per share.
We incurred foreign exchange gains on the revaluation of a commercial loan investment (notional amount of £34.5 million) for the three months ended March 31, 2018 due to the fluctuation in the Pound Sterling/ U.S. Dollar foreign exchange rate. The loan was repaid in the third quarter of 2018. We enter into currency forward contracts as an economic hedge against our foreign currency exposure. Changes in the fair value of our currency forward contracts are recognized in gain (loss) derivative instruments, net in the condensed consolidated statements of operations. During the three months ended March 31, 2018, we recognized net losses of $2.3 million on our currency forward contracts.
Expenses
We incurred management fees of $9.5 million (March 31, 2018: $10.2 million) for the three months ended March 31, 2019. Management fees decreased for the three ended March 31, 2019 compared to the same periods in 2018 primarily due to a lower shareholders' equity management fee base in 2019. Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for a discussion of our relationship with our Manager and a description of how our fees are calculated.
Our general and administrative expenses not covered under our management agreement amounted to $2.3 million (March 31, 2018: $1.8 million) for the three months ended March 31, 2019. General and administrative expenses not covered under our management agreement primarily consist of directors and officers insurance, legal costs, accounting, auditing and tax services, filing fees, and miscellaneous general and administrative costs. General and administrative costs were higher for the three months ended March 31, 2019 versus 2018 primarily due to higher fees for derivative transactions in the 2019 period and the write-off of previously deferred costs associated with the Company's at-the-market program.

 
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Net Income (Loss) attributable to Common Stockholders
For the three months ended March 31, 2019, our net income attributable to common stockholders was $127.7 million (March 31, 2018: $41.5 million net income attributable to common stockholders) or $1.05 basic and diluted net income per average share available to common stockholders (March 31, 2018: $0.37 basic and diluted net income per average share available to common stockholders). The change in net income attributable to common stockholders was primarily due to (i) a net gain on investments of $268.4 million in the 2019 period compared to a net loss on investments of $160.4 million in the 2018 period, (ii) a net loss on derivative instruments of $201.5 million in the 2019 period compared to a net gain on derivative instruments of $133.4 million in the 2018 period, (iii) credit derivative net income of $7.9 million in the 2019 period compared to credit derivative net income of $3.2 million in the 2018 period and (iv) a $11.0 million decrease in net interest income.
For further information on the changes in net gain (loss) on investments, net gains (loss) on derivative instruments, realized and unrealized credit derivative income (loss), net and net interest income, see preceding discussion under "Gain (Loss) on Investments, net," "Gain (Loss) on Derivative Instruments, net," "Realized and Unrealized Credit Derivative Income (Loss), net," and "Net Interest Income."
Non-GAAP Financial Measures
We use the following non-GAAP financial measures to analyze the Company's operating results and believe these financial measures are useful to investors in assessing our 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
repurchase agreement 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 yields),
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 non-GAAP financial measures used by 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 our peer companies.
Core Earnings
We calculate 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; 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; net loss on extinguishment of debt; and cumulative adjustments attributable to non-controlling interest. We may add and have added additional reconciling items to our core earnings calculation as appropriate.
We believe 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. We exclude 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 our mortgage-backed securities are classified as available-for-sale securities, and we record changes in the valuation of these securities in other comprehensive income on our condensed consolidated balance sheets. We elected the fair value option for our mortgage-backed securities purchased on or after September 1, 2016, and changes in the valuation of these securities are recorded in

 
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other income (loss) in our condensed consolidated statements of operations. In addition, certain gains and losses represent one-time events.
We believe that providing transparency into core earnings enables our investors to consistently measure, evaluate and compare our operating performance to that of our peers over multiple reporting periods. However, we caution 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 our cash flow from operating activities (determined in accordance with U.S. GAAP), a measure of our liquidity, or as an indication of amounts available to fund our cash needs, including our 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:
 
Three Months Ended March 31,
$ in thousands, except per share data
2019
 
2018
Net income attributable to common stockholders
127,683

 
41,471

Adjustments:
 
 
 
(Gain) loss on investments, net
(268,382
)
 
160,370

Realized (gain) loss on derivative instruments, net (1)
232,387

 
(113,578
)
Unrealized (gain) loss on derivative instruments, net (1)
(26,418
)
 
(31,901
)
Realized and unrealized (gain) loss on GSE CRT embedded derivatives, net (2)
(2,534
)
 
2,468

(Gain) loss on foreign currency transactions, net (3)

 
(1,814
)
Amortization of net deferred (gain) loss on de-designated interest rate swaps(4) 
(5,851
)
 
(6,539
)
Net loss on extinguishment of debt

 
26

Subtotal
(70,798
)
 
9,032

Cumulative adjustments attributable to non-controlling interest

 
(114
)
Core earnings attributable to common stockholders
56,885

 
50,389

Basic income per common share
1.05

 
0.37

Core earnings per share attributable to common stockholders (5)
0.47

 
0.45

(1)
U.S. GAAP gain (loss) on derivative instruments, net on the condensed consolidated statements of operations includes the following components:
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Realized gain (loss) on derivative instruments, net
(232,387
)
 
113,578

Unrealized gain (loss) on derivative instruments, net
26,418

 
31,901

Contractual net interest income (expense) on interest rate swaps
4,509

 
(12,112
)
Gain (loss) on derivative instruments, net
(201,460
)
 
133,367

(2)
U.S. GAAP realized and unrealized credit derivative income (loss), net on the condensed consolidated statements of operations includes the following components:
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Realized and unrealized gain (loss) on GSE CRT embedded derivatives, net
2,534

 
(2,468
)
GSE CRT embedded derivative coupon interest
5,350

 
5,633

Realized and unrealized credit derivative income (loss), net
7,884

 
3,165


 
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(3)
U.S. GAAP other investment income (loss) net on the condensed consolidated statements of operations includes the following components:
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Dividend income
1,029

 
1,288

Gain (loss) on foreign currency transactions, net

 
1,814

Other investment income (loss), net
1,029

 
3,102

(4)
U.S. GAAP repurchase agreements interest expense on the condensed consolidated statements of operations includes the following components:
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Interest expense on repurchase agreements borrowings
107,726

 
66,124

Amortization of net deferred (gain) loss on de-designated interest rate swaps
(5,851
)
 
(6,539
)
Repurchase agreements interest expense
101,875

 
59,585

(5)
Core earnings per share attributable to common stockholders is equal to core earnings divided by the basic weighted average number of common shares outstanding.
The components of core income for the three months ended March 31, 2019 are:
 
Three Months Ended March 31,
$ in thousands
2019
 
2018
Effective net interest income(1)
78,063

 
72,074

Dividend income
1,029

 
1,288

Equity in earnings (losses) of unconsolidated ventures
692

 
896

Total expenses
(11,792
)
 
(11,977
)
Total core earnings
67,992

 
62,281

Dividends to preferred stockholders
(11,107
)
 
(11,107
)
Core earnings attributable to non-controlling interest

 
(785
)
Core earnings attributable to common stockholders
56,885

 
50,389

(1)
See below for a reconciliation of net interest income to effective net interest income, a non-GAAP measure.

Core earnings increased $6.5 million in the three months ended March 31, 2019 compared to the same period in 2018 primarily due to a $6.0 million increase in effective net interest income driven by lower effective net interest expense. See below for a discussion of the increase in effective net interest income in the three months ended March 31, 2019 compared to the same period in 2018.



 
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Effective Interest Income / Effective Yield / Effective Interest Expense / Effective Cost of Funds / Effective Net Interest Income / Effective Interest Rate Margin
We calculate 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. We include our GSE CRT embedded derivative coupon interest in effective interest income because GSE CRT coupon interest is not accounted for consistently under U.S. GAAP. We account for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but we have 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). We add back GSE CRT embedded derivative coupon interest to our total interest income because we consider GSE CRT embedded derivative coupon interest a current component of our total interest income irrespective of whether we elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.
We calculate 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 our 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. We view our interest rate swaps as an economic hedge against increases in future market interest rates on our floating rate borrowings. We add back the net payments we make on our interest rate swap agreements to our total U.S. GAAP interest expense because we use interest rate swaps to add stability to interest expense. We exclude the amortization of net deferred gains (losses) on de-designated interest rate swaps from our calculation of effective interest expense because we do not consider the amortization a current component of our borrowing costs.
We calculate effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for net interest income (expense) on our interest rate swaps that is recorded as gain (loss) on derivative instruments, 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.
We believe 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 our 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:
 
Three Months Ended March 31,
 
2019
 
2018
$ in thousands
Reconciliation
 
Yield/Effective Yield
 
Reconciliation
 
Yield/Effective Yield
Total interest income
187,074

 
3.91
%
 
153,225

 
3.38
%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
5,350

 
0.11
%
 
5,633

 
0.12
%
Effective interest income
192,424

 
4.02
%
 
158,858

 
3.50
%
 
Our effective interest income increased in the three months ended March 31, 2019 versus the same periods in 2018 primarily due to higher average earning assets and higher effective yield. Our average earning assets increased to $19.2 billion for the three month period ended March 31, 2019 from $18.1 billion for the same period in 2018 primarily because we invested $258.6 million in net proceeds from common stock issuances and $168.1 million in proceeds from commercial loan repayments in 2018 and the first quarter of 2019 into newly issued 30 year fixed-rate Agency RMBS and Agency CMBS securities. The increase in effective yield for the three months ended March 31, 2019 compared to the same period in 2018 was primarily due to slower prepayment speeds and higher index rates on floating and adjustable rate assets.

 
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The following tables reconcile total interest expense to effective interest expense and cost of funds to effective cost of funds for the following periods.
 
Three Months Ended March 31,
 
2019
 
2018
$ in thousands
Reconciliation
 
Cost of Funds / Effective Cost of Funds
 
Reconciliation
 
Cost of Funds / Effective Cost of Funds
Total interest expense
113,019

 
2.65
 %
 
68,133

 
1.74
%
Add (Less): Amortization of net deferred gain (loss) on de-designated interest rate swaps
5,851

 
0.14
 %
 
6,539

 
0.17
%
Add (Less): Contractual net interest expense (income) on interest rate swaps recorded as gain (loss) on derivative instruments, net
(4,509
)
 
(0.11
)%
 
12,112

 
0.31
%
Effective interest expense
114,361

 
2.68
 %
 
86,784

 
2.22
%
 
Our effective interest expense and effective cost of funds increased during the three months ended March 31, 2019 compared to the same period in 2018 primarily due to increased borrowings and higher interest rates. See the preceding caption "Interest Expense and Cost of Funds" for further discussion of these variances.
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.
 
Three Months Ended March 31,
 
2019
 
2018
$ in thousands
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
 
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income
74,055

 
1.26
 %
 
85,092

 
1.64
 %
Add (Less): Amortization of net deferred (gain) loss on de-designated interest rate swaps
(5,851
)
 
(0.14
)%
 
(6,539
)
 
(0.17
)%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
5,350

 
0.11
 %
 
5,633

 
0.12
 %
Add (Less): Contractual net interest income (expense) on interest rate swaps recorded as gain (loss) on derivative instruments, net
4,509

 
0.11
 %
 
(12,112
)
 
(0.31
)%
Effective net interest income
78,063

 
1.34
 %
 
72,074

 
1.28
 %
 
Effective net interest income for the three months ended March 31, 2019 increased primarily due to higher effective net interest expense. We earned contractual net interest income on interest rate swaps of $4.5 million in the three months ended March 31, 2019 compared to incurring contractual net interest expense of $12.1 million in the three months ended March 31, 2018 primarily as a result of higher LIBOR rates in 2019.
Effective interest rate margin increased for the three months ended March 31, 2019 compared to the same periods in 2018 primarily due to increases in the federal funds rate over the past twelve months that had a greater impact on our average earning asset yields than on our average cost of funds.

 
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Repurchase Agreement Debt-to-Equity Ratio
The tables below show the allocation of our equity to our target assets, our debt-to-equity ratio, and our repurchase agreement debt-to-equity ratio as of March 31, 2019 and December 31, 2018. Our debt-to-equity ratio is calculated in accordance with U.S. GAAP and is the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) to total equity. We present a repurchase agreement debt-to-equity ratio, a non-GAAP financial measure of leverage, because the mortgage REIT industry primarily uses repurchase agreements, which typically mature within one year, to finance investments. We believe that presenting our repurchase agreement debt-to-equity ratio, when considered together with our U.S. GAAP financial measure of debt-to-equity ratio, provides information that is useful to investors in understanding our refinancing risks, and gives investors a comparable statistic to those other mortgage REITs who almost exclusively borrow using short-term repurchase agreements that are subject to refinancing risk.
March 31, 2019
$ in thousands
Agency RMBS and Agency CMBS
Commercial Credit (1)
Residential Credit (2)
Total
Mortgage-backed and credit risk transfer securities
15,577,369

3,455,805

2,094,424

21,127,598

Cash and cash equivalents (3)
39,708

25,869

12,905

78,482

Restricted cash
5,025



5,025

Derivative assets, at fair value (4)
26,268

312


26,580

Other assets
91,933

109,886

59,883

261,702

Total assets
15,740,303

3,591,872

2,167,212

21,499,387

 
 
 
 
 
Repurchase agreements
13,508,022

1,642,106

1,674,259

16,824,387

Secured loans (5)
581,896

1,068,104


1,650,000

Derivative liabilities, at fair value (4)
8,463



8,463

Other liabilities
300,843

28,468

15,512

344,823

Total liabilities
14,399,224

2,738,678

1,689,771

18,827,673

 
 
 
 
 
Total equity (allocated)
1,341,079

853,194

477,441

2,671,714

Adjustments to calculate repurchase agreement debt-to-equity ratio:
 
 
 
 
Net equity in unsecured assets (6)

(48,583
)

(48,583
)
Collateral pledged against secured loans
(686,656
)
(1,260,396
)

(1,947,052
)
Secured loans
581,896

1,068,104


1,650,000

Equity related to repurchase agreement debt
1,236,319

612,319

477,441

2,326,079

Debt-to-equity ratio (7)
10.5

3.2

3.5

6.9

Repurchase agreement debt-to-equity ratio (8)
10.9

2.7

3.5

7.2

(1)
Investments in non-Agency CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.
(2)
Investments in non-Agency RMBS, GSE CRT and a loan participation interest are included in residential credit.
(3)
Cash and cash equivalents are allocated based on a percentage of equity for each asset class.
(4)
Derivative assets and liabilities are allocated based on the hedging strategy for each asset class.
(5)
Secured loans are allocated based on amount of collateral pledged.
(6)
Net equity in unsecured assets includes commercial loans, investments in unconsolidated joint ventures and other.
(7)
Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements and secured loans) to total equity.
(8)
Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt.


 
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December 31, 2018
$ in thousands
Agency RMBS and Agency CMBS
Commercial Credit (1)
Residential Credit (2)
Total
Mortgage-backed and credit risk transfer securities
12,127,173

3,286,459

1,983,010

17,396,642

Cash and cash equivalents (3)
68,689

45,632

21,296

135,617

Derivative assets, at fair value (4)
15,089



15,089

Other assets
88,517

115,908

61,732

266,157

Total assets
12,299,468

3,447,999

2,066,038

17,813,505

 
 
 
 
 
Repurchase agreements
10,339,802

1,616,473

1,646,209

13,602,484

Secured loans (5)
600,856

1,049,144


1,650,000

Exchangeable senior notes




Derivative liabilities, at fair value (4)
23,219

171


23,390

Other liabilities
212,057

25,819

13,058

250,934

Total liabilities
11,175,934

2,691,607

1,659,267

15,526,808

 
 
 
 
 
Total equity (allocated)
1,123,534

756,392

406,771

2,286,697

Adjustments to calculate repurchase agreement debt-to-equity ratio:
 
 
 
 
Net equity in unsecured assets (6)

(55,594
)

(55,594
)
Collateral pledged against secured loans
(702,952
)
(1,227,412
)

(1,930,364
)
Secured loans
600,856

1,049,144


1,650,000

Equity related to repurchase agreement debt
1,021,438

522,530

406,771

1,950,739

Debt-to-equity ratio (7)
9.7

3.5

4.0

6.7

Repurchase agreement debt-to-equity ratio (8)
10.1

3.1

4.0

7.0

(1)
Investments in non-Agency CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.
(2)
Investments in non-Agency RMBS and GSE CRT are included in residential credit.
(3)
Cash and cash equivalents are allocated based on a percentage of equity for each asset class.
(4)
Derivative assets and liabilities are allocated based on the hedging strategy for each asset class.
(5)
Secured loans are allocated based on amount of collateral pledged.
(6)
Net equity in unsecured assets includes commercial loans, investments in unconsolidated joint ventures and other.
(7)
Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements and secured loans) to total equity.
(8)
Repurchase agreement debt-to-equity ratio is calculated as the ratio of repurchase agreements to equity related to repurchase agreement debt.

Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to pay dividends, fund investments, repayment of borrowings and other general business needs. Our primary sources of funds for liquidity consist of the net proceeds from our common and preferred equity offerings, net cash provided by operating activities, proceeds from repurchase agreements and other financing arrangements and future issuances of equity and/or debt securities.
We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings, margin requirements and the payment of cash dividends as required for continued qualification as a REIT. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of these borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our condensed consolidated balance sheets is significantly less important than our potential liquidity available under borrowing arrangements. However, there can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls.
We held cash, cash equivalents and restricted cash of $83.5 million at March 31, 2019 (March 31, 2018: $119.5 million). Our cash, cash equivalents and restricted cash increased due to normal fluctuations in cash balances related to the timing of

 
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principal and interest payments, repayments of debt, and asset purchases and sales. Our operating activities provided net cash of $68.4 million for the three months ended March 31, 2019 (March 31, 2018: $76.8 million).
Our investing activities used net cash of $3.5 billion in the three months ended March 31, 2019 compared to net cash provided by investing activities of $325.5 million in the three months ended March 31, 2018. We invested $4.3 billion in mortgage-backed and credit risk transfer securities during the three months ended March 31, 2019 compared to investments of $298.9 million in mortgage-backed and credit risk transfer securities in the three months ended March 31, 2018. We generated $300.2 million from principal payments of mortgage-backed and credit risk transfer securities during the three months ended March 31, 2019 (March 31, 2018: $488.1 million) and $734.8 million from sales of mortgage-backed and credit risk transfer securities. We used cash of $232.4 million to settle derivative contracts in the three months ended March 31, 2019 compared to cash provided of $113.6 million in the three months ended March 31, 2018. We also generated $7.1 million in proceeds from commercial loan repayments in the three months ended March 31, 2019 (March 31, 2018: $10.0 million).
Our financing activities provided net cash of $3.4 billion for the three months ended March 31, 2019 compared to net cash used by financing activities of $371.8 million in the three months ended March 31, 2018. Proceeds from issuance of common stock provided $259.0 million for the three months ended March 31, 2019. Repurchase agreement borrowings provided net proceeds of $3.2 billion (March 31, 2018: net use of $169.7 million). We used cash of $143.4 million to retire our exchangeable senior notes in the three months ended March 31, 2018. We also used cash of $58.0 million for the three months ended March 31, 2019 (March 31, 2018: $58.6 million) to pay dividends.
As of March 31, 2019, our wholly-owned subsidiary, IAS Services, had $1.65 billion in outstanding secured loans from the FHLBI. As of March 31, 2019, the FHLBI secured loans were collateralized by non-Agency CMBS and Agency RMBS with a fair value of $1.3 billion and $686.7 million, respectively.
As of March 31, 2019, the average margin requirement (weighted by borrowing amount), or the percentage amount by which the collateral value must exceed the loan amount (also refer to as the "haircut") under our repurchase agreements was 5.0% for Agency RMBS, 5.2% for Agency CMBS, 18.1% for non-Agency RMBS, 18.3% for GSE CRT and 19.0% for non-Agency CMBS. Across our repurchase agreement facilities, the haircuts range from a low of 3.0% to a high of 20.0% for Agency RMBS, a low of 5% to a high of 10% for Agency CMBS, a low of 8.0% to a high of 35.0% for non-Agency RMBS, a low of 15% to a high of 25% for GSE CRT, a low of 10.0% to a high of 30.0% for non-Agency CMBS. Declines in the value of our securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event would give some of our counterparties the option to terminate all repurchase transactions existing with us and require any amount due by us to the counterparties to be payable immediately.
Effects of Margin Requirements, Leverage and Credit Spreads
Our securities have values that fluctuate according to market conditions and, as discussed above, the market value of our securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan or a secured loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a margin call, which means that the lender will require us to pay the margin call in cash or pledge additional collateral to meet that margin call. Under our repurchase facilities and secured loans, our lenders have full discretion to determine the value of the securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled paydowns are announced monthly.
We experience margin calls and increased collateral requirements in the ordinary course of our business. In seeking to effectively manage the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, then the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline, we will experience margin calls, and we will use our liquidity to meet the margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls or increased collateral requirements. If our haircuts increase, our liquidity will proportionately decrease. In addition, if we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness.
We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls and increased collateral requirements but that also allows us to be substantially invested in securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.

 
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We are subject to financial covenants in connection with our lending, derivatives and other agreements we enter into in the normal course of our business. We intend to continue to operate in a manner which complies with all of our financial covenants. Our lending and derivative agreements provide that we may be declared in default of our obligations if our leverage ratio exceeds certain thresholds and we fail to maintain stockholders’ equity or market value above certain thresholds over specified time periods.
Forward-Looking Statements Regarding Liquidity
Based upon our current portfolio, leverage rate and available borrowing arrangements, we believe that cash flow from operations and available borrowing capacity will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements to fund our investment activities, pay fees under our management agreement, fund our distributions to stockholders and for other general corporate expenses.
Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing. We may increase our capital resources by obtaining long-term credit facilities or through public or private offerings of equity or debt securities, possibly including classes of preferred stock, common stock, and senior or subordinated notes. Such financing will depend on market conditions for capital raises and our ability to invest such offering proceeds. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.
Contractual Obligations
We have entered into an agreement with our Manager pursuant to which our Manager is entitled to receive a management fee and the reimbursement of certain expenses. The management fee is calculated and payable quarterly in arrears in an amount equal to 1.50% of our stockholders’ equity, per annum. Refer to Note 11 - "Related Party Transactions" of our condensed consolidated financial statements for a description of adjustments made to our stockholders' equity for purposes of calculating our management fee. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and personnel who, notwithstanding that certain of those individuals are also our officers, receive no cash compensation directly from us. We are required to reimburse our Manager for operating expenses related to us incurred by our Manager, including certain salary expenses and other expenses relating to legal, accounting, due diligence and other services. Our reimbursement obligation is not subject to any dollar limitation. Refer to Note 11 – "Related Party Transactions" of our condensed consolidated financial statements for details of our reimbursements to our Manager.
As of March 31, 2019, we had the following contractual obligations:
 
Payments Due by Period
$ in thousands
Total
 
Less than 1
year
 
1-3 years
 
3-5 years
 
After 5
years
Repurchase agreements
16,824,387

 
16,784,017

 
40,370

 

 

Secured loans
1,650,000

 

 
400,000

 

 
1,250,000

Total (1)
18,474,387

 
16,784,017

 
440,370

 

 
1,250,000

 
(1)
Excluded from total contractual obligations are the amounts due to our Manager under the management agreement, as those obligations do not have fixed and determinable payments.
As of March 31, 2019, we have approximately $121.9 million and $234.8 million in contractual interest payments related to our repurchase agreements and secured loans, respectively.
Off-Balance Sheet Arrangements
We have committed to invest up to $122.5 million in unconsolidated ventures that are sponsored by an affiliate of our Manager. As of March 31, 2019, $114.9 million of our commitment to these unconsolidated ventures has been called. We are committed to fund $7.6 million in additional capital to fund future investments and cover future expenses should they occur.
As of March 31, 2019, we have an unfunded commitment on a loan participation interest of $21.2 million.

 
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Share-Based Compensation
We established the 2009 Equity Incentive Plan for grants of common stock and other equity based awards to our independent directors and officers and employees of our Manager and its affiliates (the "Incentive Plan"). Under the Incentive Plan, a total of 1,000,000 shares of common stock are authorized for issuance. As of March 31, 2019, 748,492 shares of common stock remain available for future issuance under the Incentive Plan. The Incentive Plan was initially scheduled to terminate on June 30, 2019 but was amended and restated as of May 3, 2019 extending the term an additional ten years.
We recognized compensation expense of approximately $113,000 (March 31, 2018: $93,000) for shares issued to our independent directors under the Incentive Plan for the three months ended March 31, 2019. During the three months ended March 31, 2019 and 2018, we issued 7,065 shares and 7,177 shares of common stock, respectively, to our independent directors. The fair market value of the shares granted was determined by the closing stock market price on the date of the grant. The grants vested immediately.
We recognized compensation expense of approximately $19,000 (March 31, 2018: $14,000) for the three months ended March 31, 2019 for restricted stock units awarded to employees of our Manager and its affiliates under the Incentive Plan. Our Manager reimburses us for the cost of these restricted stock awards under the terms of our management agreement. At March 31, 2019 there was approximately $185,000 of total unrecognized compensation cost related to restricted stock unit awards that is expected to be recognized over a period of up to 48 months, with a weighted-average remaining vesting period of 24 months.
The following table summarizes the activity related to restricted stock units awarded to employees of our Manager and its affiliates for the three months ended March 31, 2019.
 
Three Months Ended March 31,
 
2019
 
Restricted Stock Units
 
Weighted Average Grant Date Fair Value (1)
Unvested at the beginning of the period
11,051

 
$
14.55

Shares granted during the period
6,189

 
15.92

Shares vested during the period
(4,720
)
 
14.48

Unvested at the end of the period
12,520

 
$
15.25

(1)
The grant date fair value of restricted stock awards is based on the closing market price of our common stock at the grant date.
Dividends
We intend to continue regular quarterly distributions to holders of our common stock and preferred stock. U.S. federal income tax law generally requires that a REIT distribute at least 90% of its REIT taxable income annually, determined without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions, or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.
Inflation
Virtually all of our assets and liabilities are sensitive to interest rates. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
Unrelated Business Taxable Income
We have not engaged in transactions that would result in a portion of our income being treated as unrelated business taxable income.

 
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Exposure to Financial Counterparties
We finance a substantial portion of our investment portfolio through repurchase agreements. Under these agreements, we pledge assets from our investment portfolio as collateral. Additionally, certain counterparties may require us to provide cash collateral in the event the market value of the assets declines to maintain a contractual repurchase agreement collateral ratio. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the fair value of collateral pledged by us to the counterparty including any accrued interest receivable on such collateral exceeded the amount loaned to us by the counterparty plus interest due to the counterparty.
We also use bilateral interest rate swaps to manage our interest rate risk. Under these agreements, we pledge assets from our investment portfolio and cash as collateral. If a counterparty were to default on its obligations, we would be exposed to potential losses to the extent the amount of securities or cash pledged exceeded the unrealized loss for the associated derivative, including the impact of any accrued interest due to or from the counterparty. Additionally if a derivative was in an unrealized gain position, we would be exposed to potential losses to the extent that the unrealized gain for the associated derivative exceeded the amount of collateral received, including the impact of any accrued interest due to or from the counterparty.
The following table summarizes our exposure to counterparties by geographic concentration as of March 31, 2019:
$ in thousands
Number of Counterparties
 
Repurchase Agreement Financing
 
Interest Rate Swaps at Fair Value
 
Exposure
North America
17

 
6,740,444

 
(2,620
)
 
776,950

Europe (excluding United Kingdom)
6

 
2,983,373

 

 
417,647

Asia
5

 
3,818,497

 

 
267,638

United Kingdom
4

 
3,282,073

 
(2,520
)
 
185,980

Total
32

 
16,824,387

 
(5,140
)
 
1,648,215


Other Matters
We believe that we satisfied each of the asset tests in Section 856(c)(4) of the Internal Revenue Code of 1986, as amended (the "Code") for the period ended March 31, 2019, and that our proposed method of operation will permit us to satisfy the asset tests, gross income tests, and distribution and stock ownership requirements for our taxable year that will end on December 31, 2019.
At all times, we intend to conduct our business so that neither we nor our Operating Partnership nor the subsidiaries of our Operating Partnership are required to register as an investment company under the 1940 Act. If we were required to register as an investment company, then our use of leverage would be substantially reduced. Because we are a holding company that conducts our business through our Operating Partnership and the Operating Partnership’s wholly-owned or majority-owned subsidiaries, the securities issued by these subsidiaries that are excepted from the definition of "investment company" under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities the Operating Partnership may own, may not have a combined value in excess of 40% of the value of the Operating Partnership’s total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis, which we refer to as the 40% test. This requirement limits the types of businesses in which we are permitted to engage in through our subsidiaries. In addition, we believe neither we nor the Operating Partnership are considered an investment company under Section 3(a)(1)(A) of the 1940 Act because they do not engage primarily or hold themselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through the Operating Partnership’s wholly-owned or majority-owned subsidiaries, we and the Operating Partnership are primarily engaged in the non-investment company businesses of these subsidiaries. IAS Asset I LLC and certain of the Operating Partnership’s other subsidiaries that we may form in the future rely upon the exclusion from the definition of "investment company" under the 1940 Act provided by Section 3(c)(5)(C) of the 1940 Act, which is available for entities "primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate." This exclusion generally requires that at least 55% of each subsidiary’s portfolio be comprised of qualifying assets and at least 80% be comprised of qualifying assets and real estate-related assets (and no more than 20% comprised of miscellaneous assets). We calculate that as of March 31, 2019, we conducted our business so as not to be regulated as an investment company under the 1940 Act.

 
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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary components of our market risk are related to interest rate, principal prepayment and market value. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and we seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including governmental, monetary and tax policies, domestic and international economic and political considerations, and other factors beyond our control. We are subject to interest rate risk in connection with our investments and our repurchase agreements. Our repurchase agreements are typically of limited duration and will be periodically refinanced at current market rates. We mitigate this risk through utilization of derivative contracts, primarily interest rate swap agreements, TBAs and futures contracts.
Interest Rate Effect on Net Interest Income
Our operating results depend in large part upon differences between the yields earned on our investments and our cost of borrowing and interest rate hedging activities. Most of our repurchase agreements provide financing based on a floating rate of interest calculated on a fixed spread over LIBOR. The fixed spread will vary depending on the type of underlying asset which collateralizes the financing. Accordingly, the portion of our portfolio which consists of floating interest rate assets are match-funded utilizing our expected sources of short-term financing, while our fixed interest rate assets are not match-funded. During periods of rising interest rates, the borrowing costs associated with our investments tend to increase while the income earned on our fixed interest rate investments may remain substantially unchanged. This increase in borrowing costs results in the narrowing of the net interest spread between the related assets and borrowings and may even result in losses. Further, during this portion of the interest rate and credit cycles, defaults could increase and result in credit losses to us, which could adversely affect our liquidity and operating results. Such delinquencies or defaults could also have an adverse effect on the spread between interest-earning assets and interest-bearing liabilities.
Hedging techniques are partly based on assumed levels of prepayments of our RMBS. If prepayments are slower or faster than assumed, the life of the RMBS will be longer or shorter, which would reduce the effectiveness of any hedging strategies we may use and may cause losses on such transactions. Hedging strategies involving the use of derivative securities are highly complex and may produce volatile returns.
Interest Rate Effects on Fair Value
Another component of interest rate risk is the effect that changes in interest rates will have on the market value of the assets that we acquire. We face the risk that the market value of our assets will increase or decrease at different rates than those of our liabilities, including our hedging instruments.
We primarily assess our interest rate risk by estimating the duration of our assets and the duration of our liabilities. Duration measures the market price volatility of financial instruments as interest rates change. We generally calculate duration using various financial models and empirical data. Different models and methodologies can produce different duration numbers for the same securities.
The impact of changing interest rates on fair value can change significantly when interest rates change materially. Therefore, the volatility in the fair value of our assets could increase significantly in the event interest rates change materially. In addition, other factors impact the fair value of our interest rate-sensitive investments and hedging instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, changes in actual interest rates may have a material adverse effect on us.

 
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Spread Risk
We employ a variety of spread risk management techniques that seek to mitigate the influences of spread changes on our book value and our liquidity to help us achieve our investment objectives. We refer to the difference between interest rates on our investments and interest rates on risk free instruments as spreads. The yield on our investments changes over time due to the level of risk free interest rates, the creditworthiness of the security, and the price of the perceived risk. The change in the market yield of our interest rate hedges also changes primarily with the level of risk free interest rates. We manage spread risk through careful asset selection, sector allocation, regulating our portfolio value-at-risk, and maintaining adequate liquidity. Changes in spreads impact our book value and our liquidity and could cause us to sell assets and to change our investment strategy in order to maintain liquidity and preserve book value.
Prepayment Risk
As we receive prepayments of principal on our investments, premiums paid on these investments are amortized against interest income. In general, an increase in prepayment rates will accelerate the amortization of purchase premiums, thereby reducing the interest income earned on the investments. Conversely, discounts on such investments are accreted into interest income. In general, an increase in prepayment rates will accelerate the accretion of purchase discounts, thereby increasing the interest income earned on the investments.
Extension Risk
We compute the projected weighted average life of our investments based upon assumptions regarding the rate at which the borrowers will prepay the underlying mortgages. In general, when a fixed-rate or hybrid adjustable-rate security is acquired with borrowings, we may, but are not required to, enter into an interest rate swap agreement or other hedging instrument that effectively fixes our borrowing costs for a period close to the anticipated average life of the fixed-rate portion of the related assets. This strategy is designed to protect us from rising interest rates, because the borrowing costs are fixed for the duration of the fixed-rate portion of the related target asset.
However, if prepayment rates decrease in a rising interest rate environment, then the life of the fixed-rate portion of the related assets could extend beyond the term of the swap agreement or other hedging instrument. This could have a negative impact on our results from operations, as borrowing costs would no longer be fixed after the end of the hedging instrument, while the income earned on the hybrid adjustable-rate assets would remain fixed. This situation may also cause the market value of our hybrid adjustable-rate assets to decline, with little or no offsetting gain from the related hedging transactions. In extreme situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.
Market Risk
Market Value Risk
Our available-for-sale securities are reflected at their estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income pursuant to ASC Topic 320. The estimated fair value of these securities fluctuates primarily due to changes in interest rates and other factors. Generally, in a rising interest rate environment, the estimated fair value of these securities would be expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of these securities would be expected to increase.
The sensitivity analysis table presented below shows the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments and net interest income, including net interest paid or received under interest rate swaps, at March 31, 2019, assuming a static portfolio. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our Manager’s expectations. The analysis presented utilized assumptions, models and estimates of our Manager based on our Manager’s judgment and experience.
Change in Interest Rates
 
Percentage Change in Projected
Net Interest Income
 
Percentage Change in Projected
Portfolio Value
+1.00%
 
(9.13
)%
 
(1.08
)%
+0.50%
 
(1.90
)%
 
(0.37
)%
-0.50%
 
(0.52
)%
 
(0.16
)%
-1.00%
 
(7.07
)%
 
(0.94
)%
Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not

 
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occur that would affect the outcomes. The base interest rate scenario assumes interest rates at March 31, 2019. Furthermore, while we generally expect to retain such assets and the associated interest rate risk to maturity, future purchases and sales of assets could materially change our interest rate risk profile.
Given the low interest rates at March 31, 2019, we applied a floor of 0% for all anticipated interest rates included in our assumptions. Because of this floor, we anticipate that any hypothetical interest rate shock decrease would have a limited positive impact on our funding costs; however, because prepayment speeds are unaffected by this floor, we expect that any increase in our prepayment speeds (occurring as a result of any interest rate decrease or otherwise) could result in an acceleration of our premium amortization on securities purchased at a premium, and accretion of discount on our securities purchased at a discount. As a result, because this floor limits the positive impact of any interest rate decrease on our funding costs, hypothetical interest rate decreases could cause the fair value of our financial instruments and our net interest income to decline.
The information set forth in the interest rate sensitivity table above and all related disclosures constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table.
Real Estate Risk
Residential and commercial property values are subject to volatility and may be adversely affected by a number of factors, including, but not limited to: national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors); local real estate conditions (such as the supply of housing stock); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses.
Credit Risk
We believe that our investment strategy will generally keep our credit losses and financing costs low. However, we retain the risk of potential credit losses on all of our residential and commercial mortgage investments. We seek to manage this risk through our pre-acquisition due diligence process. In addition, we re-evaluate the credit risk inherent in our investments on a regular basis pursuant to fundamental considerations such as GDP, unemployment, interest rates, retail sales, store closings/openings, corporate earnings, housing inventory, affordability and regional home price trends. We also review key loan credit metrics including, but not limited to, payment status, current loan-to-value ratios, current borrower credit scores and debt yields. These characteristics assist in determining the likelihood and severity of loan loss as well as prepayment and extension expectations. We then perform structural analysis under multiple scenarios to establish likely cash flow profiles and credit enhancement levels relative to collateral performance projections. This analysis allows us to quantify our opinions of credit quality and fundamental value, which are key drivers of portfolio management decisions.
Foreign Exchange Rate Risk
We have an investment in a commercial loan denominated in foreign currency and an investment in an unconsolidated joint venture whose net assets and results of operations are exposed to foreign currency translation risk when translated in U.S. dollars upon consolidation. We seek to hedge our foreign currency exposures by purchasing currency forward contracts.
Risk Management
To the extent consistent with maintaining our REIT qualification, we seek to manage risk exposure to protect our investment portfolio against the effects of major interest rate changes. We generally seek to manage this risk by:
monitoring and adjusting, if necessary, the reset index and interest rate related to our target assets and our financings;
attempting to structure our financing agreements to have a range of different maturities, terms, amortizations and interest rate adjustment periods;
using hedging instruments, primarily interest rate swap agreements but also financial futures, options, interest rate cap agreements, floors and forward sales to adjust the interest rate sensitivity of our target assets and our borrowings; and
actively managing, on an aggregate basis, the interest rate indices, interest rate adjustment periods, and gross reset margins of our target assets and the interest rate indices and adjustment periods of our financings.

 
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ITEM 4.
CONTROLS AND PROCEDURES.

Our management is responsible for establishing and maintaining disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
We have evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures as of March 31, 2019. Based upon our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Changes in Internal Control over Financial Reporting    
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


 
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PART II – OTHER INFORMATION
 
ITEM 1.
LEGAL PROCEEDINGS.
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of March 31, 2019, we were not involved in any such legal proceedings.
ITEM 1A.
RISK FACTORS.
There were no material changes during the period covered by this Report to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 20, 2019. Additional risks not presently known, or that we currently deem immaterial, also may have a material adverse effect on our business, financial condition and results of operations.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended March 31, 2019, we did not repurchase any shares of our common stock.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5.
OTHER INFORMATION.
None.

ITEM 6.
EXHIBITS.
A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.


 
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
INVESCO MORTGAGE CAPITAL INC.
 
 
 
May 8, 2019
By:
/s/ John M. Anzalone
 
 
John M. Anzalone
 
 
Chief Executive Officer
 
 
 
May 8, 2019
By:
/s/ R. Lee Phegley, Jr.
 
 
R. Lee Phegley, Jr.
 
 
Chief Financial Officer


 
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EXHIBIT INDEX
Item 6.        Exhibits
 
Exhibit
No.
  
Description
 
 
3.1

  
 
 
3.2

  
 
 
3.3

 
 
 
 
3.4

  
 
 
3.5

 
 
 
 
3.6

 
 
 
 
3.7

 
 
 
 
3.8

  
 
 
 
10.1

 
 
 
 
10.2

 
 
 
 
10.3

 
 
 
 
10.4

 
 
 
 
31.1

  
 
 
31.2

  
 
 
32.1

  
 
 
32.2

  
 
 

 
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101

  
The following series of unaudited XBRL-formatted documents are collectively included herewith as Exhibit 101. The financial information is extracted from Invesco Mortgage Capital Inc.’s unaudited condensed consolidated interim financial statements and notes that are included in this Form 10-Q Report.
 
101.INS XBRL Instance Document
 
101.SCH XBRL Taxonomy Extension Schema Document
 
101.CAL XBRL Taxonomy Calculation Linkbase Document
 
101.LAB XBRL Taxonomy Label Linkbase Document
 
101.PRE XBRL Taxonomy Presentation Linkbase Document
 
101.DEF XBRL Taxonomy Definition Linkbase Document


 
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