EX-99.1 2 ivrq42015-8kxex991.htm EXHIBIT 99.1 Exhibit
Exhibit 99.1

Press Release
For immediate release
Invesco Mortgage Capital Inc. Reports Fourth Quarter 2015 Financial Results
Atlanta - February 22, 2016 -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended December 31, 2015, reporting core earnings* of $0.42 per common share and book value per diluted common share** of $17.14.

During the fourth quarter of 2015, the Company repurchased an additional 5.8 million shares of common stock for $75.6 million and closed a $52 million commercial real estate loan. "Our equity continues to be well diversified with allocations of 37% to Agency RMBS, 33% to commercial credit and 30% to residential credit as of December 31, 2015. We believe IVR is well positioned by owning a collection of high quality assets with attractive yields. While available investment returns are improving, we expect to continue with stock repurchases at current market prices," said Richard King, President and CEO.

For the full year ended December 31, 2015, the Company managed to produce modestly positive economic return*** while further reducing book value volatility. "While financial conditions weakened throughout the year, our asset quality continues to improve, and we anticipate higher economic returns as financial conditions stabilize. The loans underlying our assets continue to season and benefit from growing borrower equity due to property price appreciation," said Mr. King.
 
Highlights
 
Ÿ
Q4 2015 core earnings* of $49.3 million, core earnings per common share* of $0.42, and a common stock dividend of $0.40 per share
 
Ÿ
2015 core earnings per common share of $1.73 and common stock dividends of $1.70 per common share
 
Ÿ
Book value per diluted common share** was $17.14 at 12/31/2015 vs. $17.66 at 9/30/2015, $18.82 at 12/31/2014 and $17.97 at 12/31/2013
 
Ÿ
Repurchased 5.8 million shares of common stock for $75.6 million in Q4 2015. Repurchased 9.5 million shares of common stock in the second half of 2015 (7.75% of shares outstanding as of December 31, 2014) for $125.6 million
 
Ÿ
Economic return*** for the three months and year ended December 31, 2015 of -0.68% and 0.11%, respectively
 
Ÿ
Q4 2015 comprehensive loss attributable to common stockholders was $40.6 million or ($0.35) per common share vs. a loss of $86.2 million or ($0.71) per common share for Q3 2015
 
Ÿ
Q4 2015 net income attributable to common stockholders of $103.2 million or $0.88 basic earnings per common share or $0.81 diluted earnings per common share, reflecting a $68.3 million net gain on interest rate hedges

* 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 are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" for important disclosures and a reconciliation to the most comparable U.S. GAAP measures of net income attributable to common stockholders (and by calculation, basic earnings (loss) per common share), total interest income (and by calculation, yield), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and debt-to-equity ratio.
**Book value per diluted common share is calculated as total equity less the liquidation preference of our Series A Preferred Stock ($140.0 million) and Series B Preferred Stock ($155.0 million); divided by total common shares outstanding plus Operating Partnership Units convertible into shares of common stock (1,425,000 shares).
***Economic return for the quarter ended December 31, 2015 is defined as the change in book value per diluted common share from September 30, 2015 to December 31, 2015 of ($0.52); plus dividends declared of $0.40 per common share; divided by the September 30, 2015 book value per diluted common share of $17.66. Economic return for the twelve months ended December 31, 2015 is defined as the change in book value per diluted common share from December 31, 2014 to December 31, 2015 of ($1.68); plus dividends declared of $1.70 per common share; divided by the December 31, 2014 book value per diluted common share of $18.82.

 
1
 
Exhibit 99.1

Key performance indicators for the quarters ended December 31, 2015 and September 30, 2015 are summarized in the table below.
($ in millions, except share amounts)
Q4 ‘15
Q3 ‘15
 
(unaudited)
(unaudited)
Average earning assets (at amortized costs)

$19,002.2


$20,175.0

Average borrowed funds
16,950.4

18,070.1

Average equity

$2,128.1


$2,292.0

 
 
 
Interest income

$154.5


$161.4

Interest expense
66.0

69.2

Net interest income
88.5

92.2

Total other income (loss)
34.8

(218.0
)
Total expenses
13.1

14.7

Net income (loss)
110.2

(140.5
)
Net income (loss) attributable to non-controlling interest
1.3

(1.6
)
Dividends to preferred stockholders
5.7

5.7

Net income (loss) attributable to common stockholders

$103.2


($144.6
)
 
 
 
Average portfolio yield
3.25
%
3.20
%
Cost of funds
1.56
%
1.53
%
Debt to equity ratio
6.3
x
7.3
x
Book value per common share (diluted)**

$17.14


$17.66

Earnings (loss) per common share (basic)

$0.88


($1.18
)
Dividends declared per common share

$0.40


$0.40

Dividends declared per preferred share on Series A Preferred Stock

$0.4844


$0.4844

Dividends declared per preferred share on Series B Preferred Stock

$0.4844


$0.4844

 
 
 
Non-GAAP Financial Measures*:
 
 
Core earnings

$49.3


$49.2

Core earnings per common share

$0.42


$0.40

Effective interest income

$160.9


$167.8

Effective yield
3.38
%
3.33
%
Effective interest expense

$96.4


$100.3

Effective cost of funds
2.27
%
2.22
%
Effective net interest income

$64.5


$67.5

Effective interest rate margin
1.11
%
1.11
%
Repurchase agreement debt-to-equity ratio
5.7
x
5.7
x

* 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 are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" for important disclosures and a reconciliation to the most comparable U.S. GAAP measures of net income attributable to common stockholders (and by calculation, basic earnings (loss) per common share), total interest income (and by calculation, yield), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and debt-to-equity ratio.
**Book value per diluted common share is calculated as total equity less the liquidation preference of our Series A Preferred Stock ($140.0 million) and Series B Preferred Stock ($155.0 million); divided by total common shares outstanding plus Operating Partnership Units convertible into shares of common stock (1,425,000 shares).

 
2
 
Exhibit 99.1

Financial Summary
During the fourth quarter of 2015, the Company generated $49.3 million in core earnings compared to $49.2 million of core earnings in the third quarter of 2015. Core earnings were relatively stable during the quarter as higher equity in earnings of unconsolidated ventures and lower general and administrative expenses were offset by lower net interest income. Net income attributable to common stockholders for the fourth quarter of 2015 was $103.2 million, compared to a net loss attributable to common stockholders of $144.6 million for the third quarter of 2015. The improvement in fourth quarter of 2015 net income attributable to common stockholders was primarily due to a $68.3 million net gain on interest rate hedges versus a $220.6 million net loss on interest rate hedges in the third quarter of 2015. Book value per diluted common share as of December 31, 2015 decreased to $17.14 driven by modest spread widening in our credit and Agency RMBS portfolio relative to swap rates. Generally weaker market conditions reflected uncertainty from slowing global growth prospects, especially in China and other emerging markets, declining energy prices, and the first increase in the federal funds rate, along with the prospect of further increases in 2016.
For the quarter ended December 31, 2015, average earning assets were $19.0 billion, representing a decrease of $1.2 billion from the third quarter of 2015. The Company's average residential loan balance decreased $752.9 million during the fourth quarter of 2015 due to the deconsolidation of the Company's residential loan securitizations ("Residential Securitizations"). In December 2015, the Company completed the sale of certain beneficial interests issued by the Residential Securitizations and deconsolidated the Residential Securitizations. Separately, the Company’s average mortgage-backed and credit risk transfer securities balance decreased $425.9 million from the third quarter of 2015 primarily due to continued paydowns and sales of securities. During the fourth quarter of 2015, the Company utilized a portion of the proceeds from paydowns and sales of investments to buy back $75.6 million of common stock and invest in a $52 million commercial real estate loan.
The portfolio generated interest income of $154.5 million during the three months ended December 31, 2015, which reflects a decrease of $6.9 million from the three months ended September 30, 2015. The decrease in interest income was primarily due to a $5.5 million decline in residential loan income due to the deconsolidation of the Company's Residential Securitizations. Average portfolio yield rose from 3.20% in the third quarter of 2015 to 3.25% for the three months ended December 31, 2015 reflecting higher portfolio yields in the fourth quarter of 2015 on 15 year and 30 year fixed-rate Agency RMBS.
For the quarter ended December 31, 2015, the Company had average borrowed funds of approximately $17.0 billion and effective interest expense of $96.4 million, compared to $18.1 billion and $100.3 million, respectively, for the third quarter of 2015. The decrease in average borrowed funds for the fourth quarter reflects lower average borrowings for non-Agency RMBS and asset-backed securities issued by securitization trusts. The Company's effective cost of funds was 2.27% and 2.22% for the fourth quarter and third quarter of 2015, respectively. The increase in effective cost of funds was primarily due to the December rate increase by the Federal Reserve. As of December 31, 2015, the Company's leverage decreased primarily due to the deconsolidation of the Company's Residential Securitizations and the asset-backed securities issued by these securitization trusts.

Total expenses for the fourth quarter of 2015 were approximately $13.1 million, compared to $14.7 million for the third quarter of 2015. Expenses include management fees, general and administrative expenses and securitization trust expenses associated with consolidated Residential Securitizations. Expenses decreased $1.6 million for the fourth quarter of 2015 primarily due to a $0.9 million decrease in general and administrative expenses, a $0.5 million decrease in securitization trust expenses due to the deconsolidation of the Residential Securitizations in December 2015, and $0.2 million reduction in management fees due to share repurchases.  General and administrative expenses in the third quarter of 2015 included $750,000 of restatement-related expenses.The ratio of consolidated operating expenses to average equity* for the fourth quarter of 2015 was 2.14%, a decrease of 5 basis points from the third quarter of 2015.
In the fourth quarter of 2015, the Company repurchased 5.8 million shares of its common stock for $75.6 million. In the second half of 2015, the Company repurchased 9.5 million shares of its common stock (7.75% of shares outstanding as of December 31, 2014) for $125.6 million.

 
3
 
Exhibit 99.1

The Company declared the following dividends during the fourth quarter: a common stock dividend of $0.40 per share paid on January 26, 2016; a Series A preferred stock dividend of $0.4844 per share paid on January 25, 2016; and a Series B preferred stock dividend of $0.4844 per share that will be paid on March 28, 2016.
On February 18, 2016, the Company's board of directors authorized an additional 15,000,000 shares of common stock for the existing share repurchase program with no stated expiration date.
 
*The ratio of consolidated operating expenses to average equity is calculated as the annualized sum of management fees plus general and administrative expenses divided by average equity. Average equity is calculated based on a weighted balance basis. The Company excludes expenses of consolidated securitization trusts from this calculation to facilitate comparison of the Company's operating expenses to peers.


About Invesco Mortgage Capital Inc.
Invesco Mortgage Capital Inc. is a real estate investment trust that focuses on financing and managing residential and commercial mortgage-backed securities and mortgage loans. Invesco Mortgage Capital Inc. is externally managed and advised by Invesco Advisers, Inc., a subsidiary of Invesco Ltd., a leading independent global investment management firm.


 
4
 
Exhibit 99.1

Earnings Call

Members of the investment community and the general public are invited to listen to the Company’s earnings conference call on Tuesday, February 23, 2016, at 9:00 a.m. ET, by calling one of the following numbers:

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

An audio replay will be available until 5:00 pm ET on March 8, 2016 by calling:

866-501-0087 (North America) or 1-203-369-1816 (International)

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

Cautionary Notice Regarding Forward-Looking Statements

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

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

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

Investor Relations Contact: Tony Semak, 800-241-5477


 
5
 
Exhibit 99.1

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
Three Months Ended 
 December 31,
 
Three Months Ended 
 September 30,
 
Years Ended 
 December 31,
In thousands, except share amounts
2015
 
2015
 
2015
 
2014
 
(unaudited)
 
(unaudited)
 
 
 
 
Interest Income
 
 
 
 
 
 
 
Mortgage-backed and credit risk transfer securities
127,633

 
129,260

 
518,256

 
579,062

Residential loans (1)
22,907

 
28,380

 
110,908

 
88,073

Commercial loans
3,982

 
3,743

 
15,331

 
9,508

Total interest income
154,522

 
161,383

 
644,495

 
676,643

Interest Expense
 
 
 
 
 
 
 
Repurchase agreements
41,348

 
41,303

 
166,892

 
188,699

Secured loans
1,940

 
1,622

 
6,579

 
2,576

Exchangeable senior notes
5,621

 
5,620

 
22,461

 
22,461

Asset-backed securities (1)
17,128

 
20,686

 
82,041

 
68,159

Total interest expense
66,037

 
69,231

 
277,973

 
281,895

Net interest income
88,485

 
92,152

 
366,522

 
394,748

(Reduction in) provision for loan losses
—

 
(81
)
 
(213
)
 
(142
)
Net interest income after (reduction in) provision for loan losses
88,485

 
92,233

 
366,735

 
394,890

Other Income (loss)
 
 
 
 
 
 
 
Gain (loss) on investments, net
(31,302
)
 
(2,958
)
 
(21,212
)
 
(87,168
)
Equity in earnings of unconsolidated ventures
3,499

 
1,894

 
12,630

 
6,786

Gain (loss) on derivative instruments, net
68,296

 
(220,602
)
 
(219,048
)
 
(487,469
)
Realized and unrealized credit derivative income (loss), net
(5,122
)
 
2,928

 
19,782

 
(2,866
)
Other investment income (loss), net
(574
)
 
739

 
944

 
(2,045
)
Total other income (loss)
34,797

 
(217,999
)
 
(206,904
)
 
(572,762
)
Expenses
 
 
 
 
 
 
 
Management fee – related party
9,816

 
10,058

 
38,632

 
37,599

General and administrative
1,583

 
2,507

 
7,769

 
9,191

Consolidated securitization trusts (1)
1,675

 
2,132

 
8,219

 
6,076

Total expenses
13,074

 
14,697

 
54,620

 
52,866

Net income (loss)
110,208

 
(140,463
)
 
105,211

 
(230,738
)
Net income (loss) attributable to non-controlling interest
1,321

 
(1,629
)
 
1,241

 
(2,632
)
Net income (loss) attributable to Invesco Mortgage Capital Inc.
108,887

 
(138,834
)
 
103,970

 
(228,106
)
Dividends to preferred stockholders
5,716

 
5,716

 
22,864

 
17,378

Net income (loss) attributable to common stockholders
103,171

 
(144,550
)
 
81,106

 
(245,484
)
Earnings (loss) per share:
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders
 
 
 
 
 
 
 
Basic
0.88

 
(1.18
)
 
0.67

 
(1.99
)
Diluted
0.81

 
(1.18
)
 
0.67

 
(1.99
)
(1)
The condensed consolidated statements of operations include income and expenses of consolidated variable interest entities ("VIEs"). The Company deconsolidated these VIEs in 2015.

 
6
 
Exhibit 99.1



INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended 
 December 31,
 
Three Months Ended 
September 30,
 
Years Ended 
December 31,
In thousands
2015
 
2015
 
2015
 
2014
 
(unaudited)
 
(unaudited)
 
 
 
 
Net income (loss)
110,208

 
(140,463
)
 
105,211

 
(230,738
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net
(160,026
)
 
41,978

 
(185,416
)
 
431,198

Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net
(1,055
)
 
1,380

 
(4,277
)
 
80,659

Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
15,576

 
15,724

 
66,757

 
85,176

Currency translation adjustments on investment in unconsolidated venture
1

 
(33
)
 
(32
)
 
—

Total other comprehensive income (loss)
(145,504
)
 
59,049

 
(122,968
)
 
597,033

Comprehensive income (loss)
(35,296
)
 
(81,414
)
 
(17,757
)
 
366,295

Less: Comprehensive income (loss) attributable to non-controlling interest
433

 
942

 
245

 
(4,188
)
Less: Dividends to preferred stockholders
(5,716
)
 
(5,716
)
 
(22,864
)
 
(17,378
)
Comprehensive income (loss) attributable to common stockholders
(40,579
)
 
(86,188
)
 
(40,376
)
 
344,729





 
7
 
Exhibit 99.1

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
As of

December 31, 2015
 
December 31, 2014
In thousands except share amounts
 
ASSETS
 
 
 
Mortgage-backed and credit risk transfer securities, at fair value
16,065,935

 
17,248,895

Residential loans, held-for-investment (1)
—

 
3,365,003

Commercial loans, held-for-investment
209,062

 
145,756

Cash and cash equivalents
53,199

 
164,144

Due from counterparties
110,009

 
57,604

Investment related receivable
154,594

 
38,717

Accrued interest receivable
50,779

 
66,044

Derivative assets, at fair value
8,659

 
24,178

Deferred securitization and financing costs
5,587

 
13,080

Other investments
113,788

 
106,498

Other assets
1,124

 
1,098

Total assets (1)
16,772,736

 
21,231,017

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Repurchase agreements
12,126,048

 
13,622,677

Secured loans
1,650,000

 
1,250,000

Asset-backed securities issued by securitization trusts (1)
—

 
2,929,820

Exchangeable senior notes
400,000

 
400,000

Derivative liabilities, at fair value
238,148

 
254,026

Dividends and distributions payable
51,734

 
61,757

Investment related payable
167

 
17,008

Accrued interest payable
21,604

 
29,670

Collateral held payable
4,900

 
14,890

Accounts payable and accrued expenses
2,376

 
2,439

Due to affiliate
10,851

 
9,880

Total liabilities (1)
14,505,828

 
18,592,167

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

Common Stock, par value $0.01 per share; 450,000,000 shares authorized; 113,619,471 and 123,110,454 shares issued and outstanding, respectively
1,136

 
1,231

Additional paid in capital
2,407,372

 
2,532,130

Accumulated other comprehensive income (loss)
303,110

 
424,592

Retained earnings (distributions in excess of earnings)
(755,799
)
 
(632,854
)
Total stockholders’ equity
2,241,035

 
2,610,315

Non-controlling interest
25,873

 
28,535

Total equity
2,266,908

 
2,638,850

Total liabilities and equity
16,772,736

 
21,231,017

(1)
As of December 31, 2014, the consolidated balance sheet included assets and liabilities of consolidated variable interest entities (“VIEs”) totaling $3,380,597 and $2,938,512, respectively. The Company deconsolidated these VIEs in 2015.

 
8
 
Exhibit 99.1

Non-GAAP Financial Measures

In addition to the results presented in accordance with U.S. GAAP, this release contains the non-GAAP financial measures of 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 Company’s management uses these non-GAAP financial measures in its internal analysis of results and believes these measures are useful to investors for the reasons explained below. The most directly comparable U.S. GAAP measures are net income attributable to common stockholders (and by calculation basic earnings (loss) per common share), total interest income (and by calculation, yield), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and debt-to-equity ratio.

These non-GAAP financial measures should not be considered as substitutes for any measures derived in accordance with U.S. GAAP and may not be comparable to other similarly titled measures of other companies. An analysis of any non-GAAP financial measure should be made in conjunction with results presented in accordance with U.S. GAAP. Additional reconciling items may be added in the future to these non-GAAP measures if deemed appropriate.

Core Earnings

The Company calculates core earnings as U.S. GAAP net income (loss) attributable to common stockholders adjusted for (gain) loss on investments, net; realized (gain) loss on derivative instruments, net (excluding contractual net interest on interest rate swaps); unrealized (gain) loss on derivative instruments, net; realized and unrealized change in fair value of GSE CRT embedded derivatives, net; (gain) loss on foreign currency transactions, net; reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense; and an adjustment attributable to non-controlling interest. The Company records changes in the valuation of its mortgage-backed securities and the valuation assigned to the debt host contract associated with its GSE CRTs in other comprehensive income on its consolidated balance sheets. The Company believes the presentation of core earnings provides a consistent measure of operating performance by excluding the impact of gains and losses described above from operating results.

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



 
9
 
Exhibit 99.1

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
 
Years Ended
 
December 31, 2015
 
September 30, 2015 
 
December 31, 2015
 
December 31, 2014
$ in thousands, except per share data
 
 
 
Net income (loss) attributable to common stockholders
103,171

 
(144,550
)
 
81,106

 
(245,484
)
Adjustments:
 
 
 
 
 
 
 
(Gain) loss on investments, net
31,302

 
2,958

 
21,212

 
87,168

Realized (gain) loss on derivative instruments, net (excluding contractual net interest on interest rate swaps of $45,969, $46,785, $184,373 and $199,783, respectively)
(122
)
 
3,079

 
44,272

 
72,187

Unrealized (gain) loss on derivative instruments, net
(114,143
)
 
170,738

 
(9,597
)
 
215,499

Realized and unrealized change in fair value of GSE CRT embedded derivatives, net
11,502

 
3,564

 
6,411

 
21,495

(Gain) loss on foreign currency transactions, net
1,345

 
—

 
1,875

 
2,746

Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
15,575

 
15,724

 
66,757

 
85,176

Subtotal
(54,541
)
 
196,063

 
130,930

 
484,271

Adjustment attributable to non-controlling interest
652

 
(2,272
)
 
(1,500
)
 
(5,532
)
Core earnings
49,282

 
49,241

 
210,536

 
233,255

Basic earnings (loss) per common share
0.88

 
(1.18
)
 
0.67

 
(1.99
)
Core earnings per share attributable to common stockholders
0.42

 
0.40

 
1.73

 
1.89


Effective Interest Income/ Effective Yield/ Effective Interest Expense/Effective Cost of Funds/Effective Net Interest Income/Effective Interest Rate Margin
The Company calculates effective interest income (and by calculation, effective yield) as U.S. GAAP total interest income adjusted for GSE CRT embedded derivative coupon interest that is recorded in realized and unrealized credit derivative income (loss), net. The Company adds back GSE CRT embedded derivative coupon interest to its total interest income because the Company considers GSE CRT embedded derivative coupon interest a current component of its total interest income.
The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for net interest paid on its interest rate swaps that is recorded in gain (loss) on derivative instruments and the reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense. The Company views its interest rate swaps as an economic hedge against increases in future market interest rates on its floating rate borrowings. The Company adds back the net payments it makes on its interest rate swap agreements to its total U.S. GAAP interest expense because the Company uses interest rate swaps to add stability to interest expense. The Company subtracts amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense because the Company does not consider the amortization a current component of its borrowing costs.
The Company calculates effective net interest income (and by calculation, effective interest rate margin) as U.S. GAAP net interest income adjusted for net interest paid on its interest rate swaps that is recorded in gain (loss) on derivative instruments, the amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense and GSE CRT embedded derivative coupon interest that is recorded in realized and unrealized credit derivative income (loss), net.
The Company believes the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provide information that is useful to investors in understanding the Company's borrowing costs and operating performance.

 
10
 
Exhibit 99.1

The following table reconciles total interest income to effective interest income and yield to effective yield for the following periods:
 
Three Months Ended 
 December 31, 2015
 
Three Months Ended 
 September 30, 2015
$ in thousands
Reconciliation
 
Yield/Effective Yield
 
Reconciliation
 
Yield/Effective Yield
Total interest income
154,522

 
3.25
%
 
161,383

 
3.20
%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
6,379

 
0.13
%
 
6,373

 
0.13
%
Effective interest income
160,901

 
3.38
%
 
167,756

 
3.33
%
 
Years Ended December 31,
 
2015
 
2014 
$ in thousands
Reconciliation
 
Yield/Effective Yield
 
Reconciliation
 
Yield/Effective Yield
Total interest income
644,495

 
3.22
%
 
676,643

 
3.41
%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
24,822

 
0.12
%
 
17,536

 
0.09
%
Effective interest income
669,317

 
3.34
%
 
694,179

 
3.50
%

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 
 December 31, 2015
 
Three Months Ended 
September 30, 2015
$ in thousands
Reconciliation
 
Cost of Funds / Effective Cost of Funds
 
Reconciliation
 
Cost of Funds / Effective Cost of Funds
Total interest expense
66,037

 
1.56
 %
 
69,231

 
1.53
 %
Less: Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
(15,576
)
 
(0.37
)%
 
(15,724
)
 
(0.35
)%
Add: Net interest paid - interest rate swaps
45,969

 
1.08
 %
 
46,785

 
1.04
 %
Effective interest expense
96,430

 
2.27
 %
 
100,292

 
2.22
 %

 
Years Ended December 31,
 
2015
 
2014 
$ in thousands
Reconciliation
 
Cost of Funds / Effective Cost of Funds
 
Reconciliation
 
Cost of Funds / Effective Cost of Funds
Total interest expense
277,973

 
1.56
 %
 
281,895

 
1.61
 %
Less: Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
(66,757
)
 
(0.37
)%
 
(85,176
)
 
(0.48
)%
Add: Net interest paid - interest rate swaps
184,373

 
1.03
 %
 
199,783

 
1.14
 %
Effective interest expense
395,589

 
2.22
 %
 
396,502

 
2.27
 %



 
11
 
Exhibit 99.1

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 
 December 31, 2015
 
Three Months Ended 
 September 30, 2015
$ in thousands
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
 
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income
88,485

 
1.69
 %
 
92,152

 
1.67
 %
Add: Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
15,576

 
0.37
 %
 
15,724

 
0.35
 %
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
6,379

 
0.13
 %
 
6,373

 
0.13
 %
Less: Net interest paid - interest rate swaps
(45,969
)
 
(1.08
)%
 
(46,785
)
 
(1.04
)%
Effective net interest income
64,471

 
1.11
 %
 
67,464

 
1.11
 %
 
Years Ended December 31,
 
2015
 
2014 
$ in thousands
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
 
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income
366,522

 
1.66
 %
 
394,748

 
1.80
 %
Add: Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
66,757

 
0.37
 %
 
85,176

 
0.48
 %
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
24,822

 
0.12
 %
 
17,536

 
0.09
 %
Less: Net interest paid - interest rate swaps
(184,373
)
 
(1.03
)%
 
(199,783
)
 
(1.14
)%
Effective net interest income
273,728

 
1.12
 %
 
297,677

 
1.23
 %

 
12
 
Exhibit 99.1

Repurchase Agreement Debt-to-Equity Ratio
The following tables show the allocation of the Company's equity to its target assets, the Company's debt-to-equity ratio, and the Company's repurchase agreement debt-to-equity ratio as of December 31, 2015 and September 30, 2015. The Company presents a repurchase agreement debt-to-equity ratio because the mortgage REIT industry primarily uses repurchase agreements, which typically mature within one year, to finance investments. The Company believes that presenting the Company's repurchase agreement debt-to-equity ratio, a non-GAAP financial measure of leverage, when considered together with its U.S. GAAP financial measure, provides information that is useful to investors in understanding the Company's 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.
December 31, 2015
$ in thousands
Agency RMBS
Residential Credit(4)
Commercial Credit(5)
Exchangeable Senior Notes
Total
Investments
9,799,257

3,350,714

3,163,439

—

16,313,410

Cash and cash equivalents (1)
23,484

16,586

13,129

—

53,199

Derivative assets, at fair value (2)
6,795

—

1,864

—

8,659

Other assets
316,072

9,780

71,616

—

397,468

Total assets
10,145,608

3,377,080

3,250,048

—

16,772,736

 
 
 
 
 
 
Repurchase agreements
8,389,643

2,565,515

1,170,890

—

12,126,048

Secured loans (3)
472,983

—

1,177,017

—

1,650,000

Exchangeable senior notes
—

—

—

400,000

400,000

Derivative liabilities, at fair value
238,045

—

103

—

238,148

Other liabilities
46,165

22,540

22,927

—

91,632

Total liabilities
9,146,836

2,588,055

2,370,937

400,000

14,505,828

 
 
 
 
 
 
Total equity (allocated)
998,772

789,025

879,111

(400,000
)
2,266,908

Adjustments to calculate repurchase agreement debt-to-equity:
 
 
 
 
 
Net equity in unsecured assets and exchangeable senior notes (6)
—

—

(250,060
)
400,000

149,940

Collateral pledged against Secured loans
(558,894
)
—

(1,390,805
)
—

(1,949,699
)
Secured loans
472,983

—

1,177,017

—

1,650,000

Equity related to repurchase agreement debt
912,861

789,025

415,263

—

2,117,149

Debt-to-equity ratio (7)
8.9

3.3

2.7

NA

6.3

Repurchase agreement debt-to-equity ratio (8)
9.2

3.3

2.8

NA

5.7

(1)
Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, Residential Credit and Commercial Credit.
(2)
Derivative assets are allocated based on the hedging strategy for each asset class.
(3)
Secured loans are allocated based on amount of collateral pledged.
(4)
Non-Agency RMBS and GSE CRT are considered residential credit.
(5)
CMBS, Commercial Loans and Investments in unconsolidated ventures are considered commercial credit.
(6)
Net equity in unsecured assets and exchangeable senior notes includes commercial loans, investments in unconsolidated ventures and exchangeable senior notes.
(7)
Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) 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.

 
13
 
Exhibit 99.1

September 30, 2015
$ in thousands
Agency RMBS
Residential Credit (4)
Commercial Credit (5)
Exchangeable Senior Notes
Total
Investments
10,234,434

6,583,562

3,529,174

—

20,347,170

Cash and cash equivalents (1)
33,879

21,834

20,945

—

76,658

Derivative assets, at fair value (2)
72

1,044

192

—

1,308

Other assets
251,765

29,005

75,440

—

356,210

Total assets
10,520,150

6,635,445

3,625,751

—

20,781,346

 
 
 
 
 
 
Repurchase agreements
8,637,589

2,860,198

1,414,344

—

12,912,131

Secured loans (3)
439,264

—

1,235,736

—

1,675,000

Asset-backed securities issued by securitization trusts (ABS)
—

2,859,423

—

—

2,859,423

Exchangeable senior notes
—

—

—

400,000

400,000

Derivative liabilities, at fair value
343,847

—

50

—

343,897

Other liabilities
100,966

40,116

20,446

—

161,528

Total liabilities
9,521,666

5,759,737

2,670,576

400,000

18,351,979

 
 
 
 
 
 
Total equity (allocated)
998,484

875,708

955,175

(400,000
)
2,429,367

Adjustments to calculate repurchase agreement debt-to-equity:
 
 
 
 
 
Net equity in unsecured assets and exchangeable senior notes (6)
—

(12,484
)
(231,361
)
400,000

156,155

Collateral pledged against Secured loans
(519,597
)
—

(1,461,730
)
—

(1,981,327
)
Secured loans
439,264

—

1,235,736

—

1,675,000

Equity related to repurchase agreement debt
918,151

863,224

497,820

—

2,279,195

Debt-to-equity ratio (7)
9.1

6.5

2.8

NA

7.3

Effective debt-to-equity ratio (8)
9.4

3.3

2.8

NA

5.7

(1)
Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, Residential Credit and Commercial Credit.
(2)
Derivative assets are allocated based on the hedging strategy for each asset class.
(3)
Secured loans are allocated based on amount of collateral pledged.
(4)
Non-Agency RMBS and GSE CRT are considered residential credit.
(5)
CMBS, Commercial Loans and Investments in unconsolidated ventures are considered commercial credit.
(6)
Net equity in unsecured assets and exchangeable senior notes includes consolidated VIEs, commercial loans, investments in unconsolidated ventures and exchangeable senior notes.
(7)
Debt-to-equity ratio is calculated as the ratio of total debt (sum of repurchase agreements, secured loans and exchangeable senior notes) 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.




 
14
 
Exhibit 99.1

Average Balances
The table below presents certain information for the Company's portfolio for the following periods.
 
Three Months Ended 
 December 31,
 
Three Months Ended 
 September 30,
 
Years Ended 
 December 31,
$ in thousands
2015
 
2015
 
2015
 
2014
Average Balances*:
 
 
 
 
 
 
 
Agency RMBS:
 
 
 
 
 
 
 
15 year fixed-rate, at amortized cost
1,625,689

 
1,673,615

 
1,698,573

 
1,450,316

30 year fixed-rate, at amortized cost
4,269,697

 
4,228,400

 
4,368,662

 
5,723,270

ARM, at amortized cost
429,087

 
450,691

 
446,714

 
475,401

Hybrid ARM, at amortized cost
3,330,564

 
3,403,052

 
3,219,463

 
2,452,062

MBS-CMO, at amortized cost
395,197

 
414,310

 
423,409

 
476,636

Non-Agency RMBS, at amortized cost
2,455,782

 
2,603,949

 
2,680,493

 
3,245,701

GSE CRT, at amortized cost
680,350

 
668,639

 
665,471

 
478,929

CMBS, at amortized cost
3,030,482

 
3,200,091

 
3,173,737

 
2,947,733

Residential loans, at amortized cost
2,602,506

 
3,355,373

 
3,198,666

 
2,473,258

Commercial loans, at amortized cost
182,829

 
176,857

 
166,150

 
109,551

Average Investment portfolio
19,002,183

 
20,174,977

 
20,041,338

 
19,832,857

Average Portfolio Yields (1):
 
 
 
 
 
 
 
Agency RMBS:
 
 
 
 
 
 
 
15 year fixed-rate
2.40
%
 
2.26
%
 
2.23
%
 
2.66
%
30 year fixed-rate
2.82
%
 
2.68
%
 
2.80
%
 
3.05
%
ARM
2.26
%
 
2.22
%
 
2.30
%
 
2.30
%
Hybrid ARM
2.22
%
 
2.18
%
 
2.13
%
 
2.28
%
MBS - CMO
3.42
%
 
2.31
%
 
3.16
%
 
3.56
%
Non-Agency RMBS
4.80
%
 
4.94
%
 
4.61
%
 
4.54
%
GSE CRT (2)
0.62
%
 
0.53
%
 
0.54
%
 
0.50
%
CMBS
4.35
%
 
4.38
%
 
4.37
%
 
4.47
%
Residential loans
3.52
%
 
3.39
%
 
3.47
%
 
3.57
%
Commercial loans
8.16
%
 
8.39
%
 
8.36
%
 
8.56
%
Average Investment portfolio
3.25
%
 
3.20
%
 
3.22
%
 
3.41
%
Average Borrowings*:
 
 
 
 
 
 
 
Agency RMBS (3)
9,101,071

 
9,172,106

 
9,118,307

 
9,444,028

Non-Agency RMBS
2,184,489

 
2,405,227

 
2,439,849

 
2,821,132

GSE CRT
485,989

 
501,554

 
484,414

 
351,900

CMBS (3)
2,514,693

 
2,686,395

 
2,632,338

 
2,305,970

Exchangeable senior notes
400,000

 
400,000

 
400,000

 
400,000

Asset-backed securities issued by securitization trusts
2,264,129

 
2,904,831

 
2,779,268

 
2,178,362

Total borrowed funds
16,950,371

 
18,070,113

 
17,854,176

 
17,501,392

Maximum borrowings during the period (4)
17,945,795

 
18,183,099

 
18,416,608

 
18,202,497


 
15
 
Exhibit 99.1

Average Cost of Funds (5):
 
 
 
 
 
 
 
Agency RMBS (3)
0.45
%
 
0.40
%
 
0.39
%
 
0.34
%
Non-Agency RMBS
1.65
%
 
1.60
%
 
1.58
%
 
1.54
%
GSE CRT
1.83
%
 
1.75
%
 
1.73
%
 
1.52
%
CMBS (3)
0.98
%
 
0.93
%
 
0.93
%
 
1.11
%
Exchangeable senior notes
5.62
%
 
5.62
%
 
5.62
%
 
5.62
%
Asset-backed securities issued by securitization trusts
3.03
%
 
2.85
%
 
2.95
%
 
3.13
%
Unhedged cost of funds (6)
1.19
%
 
1.18
%
 
1.18
%
 
1.13
%
Hedged / Effective cost of funds (non-GAAP measure)
2.27
%
 
2.22
%
 
2.22
%
 
2.27
%
Average Equity (7):
2,128,074

 
2,291,967

 
2,331,796

 
2,416,078

Average debt/equity ratio (average during period)
8.0
x
 
7.9x

 
7.7
x
 
7.2x

Debt/equity ratio (as of period end)
6.3
x
 
7.3x

 
6.3
x
 
6.9x

*
Average amounts for each period are based on weighted month-end balances; all percentages are annualized. For the three and twelve months ended December 31, 2015, the average balances are presented on an amortized cost basis.

(1)
Average portfolio yield for the period was calculated by dividing interest income, including amortization of premiums and discounts, by the Company's average of the amortized cost of the investments. All yields are annualized.
(2)
GSE CRT average portfolio yield excludes embedded derivative coupon interest recorded as realized and unrealized
credit derivative income (loss), net
(3)
Agency RMBS and CMBS average borrowing and cost of funds include borrowings under repurchase agreements and secured loans.
(4)
Amount represents the maximum borrowings at month-end during each of the respective periods.
(5)
Average cost of funds is calculated by dividing annualized interest expense by the Company's average borrowings.
(6)
Excludes reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase
agreements interest expense.
(7)
Average equity is calculated based on a weighted balance basis.


 
16