EX-99.1 2 ivrq22016-8kxex991.htm EXHIBIT 99.1 Exhibit
Exhibit 99.1

Press Release
For immediate release
Invesco Mortgage Capital Inc. Reports Second Quarter 2016 Financial Results
Atlanta - August 4, 2016 -- Invesco Mortgage Capital Inc. (NYSE: IVR) (the "Company") today announced financial results for the quarter ended June 30, 2016, reporting basic earnings of ($0.10) per common share, core earnings* of $0.42 per common share and book value per diluted common share** of $17.08.

Despite low global growth and continued market uncertainty, credit spreads tightened in the second quarter of 2016. The Company's high quality asset portfolio appreciated, driving our book value per diluted common share** higher by 3.3% for the quarter. "Our equity is allocated 60% to commercial and residential credit assets, and 40% to Agency RMBS as of June 30, 2016. We believe the Company is positioned well, with a high quality asset mix, appropriate capitalization and a balanced risk profile. Assuming reasonable market conditions, we anticipate continued credit spread tightening in our portfolio as global investors search for yield and stability," said Richard King, President and CEO. Available cash flow during the quarter was used primarily to increase holdings of 15 year Agency RMBS in an effort to maintain a neutral interest rate risk profile amid falling interest rates.

"Our assets continue to improve as they season and benefit from growing borrower equity due to property price appreciation," said Mr. King. The Company remains committed to employing capital in strategies intended to optimize risk-adjusted returns to its stockholders. "Improving asset quality, shorter maturities, and modest leverage in our portfolio should continue to reduce book value volatility and improve economic return,***" added Mr. King.
 
Highlights
 
Ÿ
Q2 2016 net loss attributable to common stockholders of $11.6 million or ($0.10) basic and diluted loss per common share reflecting a $90.4 million net loss on interest rate hedges


 
Ÿ
Q2 2016 core earnings* of $47.3 million, core earnings per common share* of $0.42, and a common stock dividend of $0.40 per share


 
Ÿ
Q2 2016 book value per diluted common share** of $17.08 vs. $16.53 at Q1 2016 and $17.14 at Q4 2015


 
Ÿ
Economic return*** for the three and six months ended June 30, 2016 of 5.7% and 4.3%, respectively


 
Ÿ
Q2 2016 comprehensive income attributable to common stockholders was $106.5 million or $0.95 per common share vs. comprehensive loss attributable to common stockholders of $33.9 million or ($0.30) per common share for Q1 2016


 
Ÿ
Funded one commercial loan totaling $13 million in Q2 2016


* Core earnings (and by calculation, core earnings per common share) are non-Generally Accepted Accounting Principles ("GAAP") financial measures. Refer to the section entitled "Non-GAAP Financial Measures" below for important disclosures and a reconciliation to the most comparable U.S. GAAP measures.
**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 June 30, 2016 is defined as the change in book value per diluted common share from March 31, 2016 to June 30, 2016 of $0.55; plus dividends declared of $0.40 per common share; divided by the March 31, 2016 book value per diluted common share of $16.53. Economic return for the six months ended June 30, 2016 is defined as the change in book value per diluted common share from December 31, 2015 to June 30, 2016 of ($0.06); plus dividends declared of $0.80 per common share; divided by the December 31, 2015 book value per diluted common share of $17.14.

 
1
 
Exhibit 99.1

Key performance indicators for the quarters ended June 30, 2016 and March 31, 2016 are summarized in the table below.
($ in millions, except share amounts)
Q2 ‘16
Q1 '16 (1)
 
(unaudited)
(unaudited)
Average earning assets (at amortized costs)

$15,464.3


$15,431.4

Average borrowed funds
13,471.4


$13,532.6

Average equity

$2,027.5


$1,939.2

 
 
 
Total interest income

$118.8


$127.1

Total interest expense
39.6

50.1

Net interest income
79.2

77.0

Total other income (loss)
(74.3
)
(217.8
)
Total expenses
11.0

11.5

Net income (loss)
(6.0
)
(152.3
)
Net income (loss) attributable to non-controlling interest
(0.1
)
(1.9
)
Dividends to preferred stockholders
5.7

5.7

Net income (loss) attributable to common stockholders

($11.6
)

($156.2
)
Comprehensive income (loss) attributable to common stockholders

$106.5


($33.9
)
 
 
 
Average earning asset yield
3.07
%
3.30
%
Cost of funds
1.17
%
1.48
%
Net interest rate margin
1.90
%
1.82
%
Debt-to-equity ratio
6.2
x
6.1x

Book value per common share (diluted)**

$17.08


$16.53

Earnings (loss) per common share (basic)

($0.10
)

($1.38
)
Earnings (loss) per common share (diluted)

($0.10
)

($1.38
)
Comprehensive income (loss) attributable to common stockholders per common share (basic)

$0.95


($0.30
)
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

$47.3


$51.0

Core earnings per common share

$0.42


$0.45

Effective interest income

$124.9


$133.5

Effective yield
3.23
%
3.46
%
Effective interest expense

$61.3


$66.3

Effective cost of funds
1.81
%
1.96
%
Effective net interest income

$63.6


$67.2

Effective interest rate margin
1.42
%
1.50
%
Repurchase agreement debt-to-equity ratio
5.8
x
5.8x


* 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-GAAP financial measures. Refer to the section entitled "Non-GAAP Financial Measures" below 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, average earning asset yield), total interest expense (and by calculation, cost of funds), net interest income (and by calculation, net interest rate margin) and debt-to-equity ratio.
**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).
(1) Certain U.S. GAAP and non-GAAP financial measures have been revised to correct immaterial errors in accounting for premiums and discounts on non-Agency RMBS not of high credit quality. For further information, see Note 17 of the Company's condensed consolidated financial statements to be filed in Item 1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.


 
2
 
Exhibit 99.1

Financial Summary
Net loss attributable to common stockholders for the second quarter of 2016 was $11.6 million, compared to $156.2 million for the first quarter of 2016. The second quarter of 2016 net loss attributable to common stockholders decreased primarily due to lower net losses on derivative instruments during the second quarter. The Company recorded a $90.4 million net loss on derivative instruments in the second quarter of 2016 versus a $238.5 million net loss on derivative instruments in the first quarter of 2016. During the first quarter of 2016, the Company incurred unrealized losses on derivative instruments of $166.5 million due to the fall in interest rates, which was the primary driver of the first quarter net loss. Book value per diluted common share for the second quarter of 2016 increased by 3.3% to $17.08, primarily due to higher valuations on the Company's mortgage-backed and credit risk transfer securities.
During the second quarter of 2016, the Company generated $47.3 million in core earnings, a decrease of $3.7 million or 7.3% from the first quarter of 2016. The decrease in core earnings reflects lower effective net interest income on Agency and non-Agency RMBS.
Average earning assets increased slightly to $15.5 billion for the quarter ended June 30, 2016 compared to $15.4 billion for the quarter ended March 31, 2016. During the second quarter, the Company primarily used proceeds from paydowns and sales of investments to purchase 15 year fixed-rate Agency securities. The Company increased its allocation of equity to Agency securities from 34% as of March 31, 2016 to 40% as of June 30, 2016 reflecting its strategy of maintaining a neutral interest rate profile in the current falling interest rate environment. Interest income decreased to $118.8 million for the quarter ended June 30, 2016 compared to $127.1 million during the quarter ended March 31, 2016, reflecting a decrease in average earning asset yield to 3.07% from 3.30% in the quarter ended March 31, 2016. The decrease in average earning asset yield was driven by a higher portfolio allocation to 15 year fixed-rate Agency securities that account for 16% of our investment holdings as of June 30, 2016.
During the second quarter of 2016, the Company also utilized a portion of the proceeds from paydowns and sales of investments to invest $13 million in one new commercial real estate loan. In the six months ended June 30, 2016, the Company invested $83.0 million in five new commercial real estate loans and repurchased 2.1 million shares of its common stock for an aggregate purchase price of $25.0 million.
For the quarter ended June 30, 2016, the Company had average borrowed funds of $13.5 billion compared to $13.5 billion for the first quarter of 2016 and interest expense of $39.6 million compared to $50.1 million during the quarter ended March 31, 2016. The Company's cost of funds was 1.17% and 1.48% for the second quarter of 2016 and first quarter of 2016, respectively. Interest expense and the cost of funds decreased primarily due to a decline in amortization of net deferred losses on de-designated interest rate swaps. The Company repositioned its hedging portfolio during the first quarter of 2016 in response to lower market expectations of an increase in the federal funds interest rate later this year. The Company has maintained a relatively stable debt-to-equity ratio and repurchase agreement debt-to-equity ratio over the last six months.
Total expenses for the second quarter of 2016 were approximately $11.0 million, compared to $11.5 million for the first quarter of 2016. Management fees totaled $9.1 million in the second quarter, down from $9.5 million in the first quarter of 2016. Management fees decreased in the second quarter of 2016 primarily due to the full quarter impact of share repurchases in the first quarter of 2016. General and administrative expenses were $1.9 million in the second quarter of 2016, a decrease of $0.1 million from the first quarter of 2016. General and administrative expenses were slightly higher in the first quarter of 2016 primarily due to costs associated with repositioning the Company's hedging portfolio and closing new commercial loan investments.
The ratio of annualized total expenses to average equity* decreased from 2.38% for the first quarter of 2016 to 2.16% for the second quarter of 2016, reflecting the aforementioned decrease in second quarter expenses and higher average equity.

 
3
 
Exhibit 99.1

The Company's average assets, average borrowings, interest income, and income expense are significantly lower in 2016 than in 2015 due to the deconsolidation of the residential securitizations in December 2015.
As previously announced, the Company declared the following dividends on June 15, 2016: a common stock dividend of $0.40 per share paid on July 26, 2016; a Series A preferred stock dividend of $0.4844 per share paid on July 25, 2016; and a Series B preferred stock dividend of $0.4844 per share that will be paid on September 27, 2016.

*The ratio of annualized total 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.


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 Friday, August 5, 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 August 19, 2016 by calling:

800-274-8308 (North America) or 1-203-369-3678 (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
(Unaudited) 
 
Three Months Ended
 
Six Months Ended
$ in thousands, except share amounts
June 30, 2016
 
March 31, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Interest Income

 
 
 

 

 

Mortgage-backed and credit risk transfer securities
112,860

 
122,246

 
128,491

 
235,106

 
267,539

Residential loans (1)
—

 
—

 
30,247

 
—

 
59,621

Commercial loans
5,947

 
4,893

 
4,491

 
10,840

 
7,606

Total interest income
118,807

 
127,139

 
163,229

 
245,946

 
334,766

Interest Expense
 
 
 
 
 
 
 
 
 
Repurchase agreements
31,260

 
41,800

 
40,931

 
73,060

 
84,241

Secured loans
2,688

 
2,715

 
1,553

 
5,403

 
3,017

Exchangeable senior notes
5,614

 
5,613

 
5,613

 
11,227

 
11,220

Asset-backed securities (1)
—

 
—

 
22,329

 
—

 
44,227

Total interest expense
39,562

 
50,128

 
70,426

 
89,690

 
142,705

Net interest income
79,245

 
77,011

 
92,803

 
156,256

 
192,061

Reduction in provision for loan losses
—

 
—

 
70

 
—

 
132

Net interest income after reduction in provision for loan losses
79,245

 
77,011

 
92,873

 
156,256

 
192,193

Other Income (loss)
 
 
 
 
 
 
 
 
 
Gain (loss) on investments, net
1,414

 
11,601

 
10,896

 
13,015

 
12,986

Equity in earnings of unconsolidated ventures
202

 
1,061

 
1,231

 
1,263

 
7,237

Gain (loss) on derivative instruments, net
(90,363
)
 
(238,543
)
 
56,003

 
(328,906
)
 
(66,742
)
Realized and unrealized credit derivative income (loss), net
17,228

 
8,410

 
614

 
25,638

 
21,976

Other investment income (loss), net
(2,745
)
 
(318
)
 
1,673

 
(3,063
)
 
779

Total other income (loss)
(74,264
)
 
(217,789
)
 
70,417

 
(292,053
)
 
(23,764
)
Expenses
 
 
 
 
 
 
 
 
 
Management fee – related party
9,061

 
9,512

 
9,343

 
18,573

 
18,758

General and administrative
1,896

 
2,037

 
1,952

 
3,933

 
3,679

Consolidated securitization trusts (1)
—

 
—

 
2,256

 
—

 
4,412

Total expenses
10,957

 
11,549

 
13,551

 
22,506

 
26,849

Net income (loss)
(5,976
)
 
(152,327
)
 
149,739

 
(158,303
)
 
141,580

Net income (loss) attributable to non-controlling interest
(75
)
 
(1,883
)
 
1,712

 
(1,958
)
 
1,618

Net income (loss) attributable to Invesco Mortgage Capital Inc.
(5,901
)
 
(150,444
)
 
148,027

 
(156,345
)
 
139,962

Dividends to preferred stockholders
5,716

 
5,716

 
5,716

 
11,432

 
11,432

Net income (loss) attributable to common stockholders
(11,617
)
 
(156,160
)
 
142,311

 
(167,777
)
 
128,530

Earnings (loss) per share:
 
 
—

 
 
 
 
 
 
Net income (loss) attributable to common stockholders
 
 
—

 
 
 
 
 
 
Basic
(0.10
)
 
(1.38
)
 
1.16

 
(1.49
)
 
1.04

Diluted
(0.10
)
 
(1.38
)
 
1.06

 
(1.49
)
 
1.00

Dividends declared per common share
0.40

 
0.40

 
0.45

 
0.80

 
0.90

(1)
The condensed consolidated statements of operations for the three and six months ended June 30, 2015 include income and expenses of consolidated variable interest entities.

 
6
 
Exhibit 99.1


INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
In thousands
June 30, 2016
 
March 31, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Net income (loss)
(5,976
)
 
(152,327
)
 
149,739

 
(158,303
)
 
141,580

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) on mortgage-backed and credit risk transfer securities, net
117,116

 
121,460

 
(195,715
)
 
238,576

 
(73,544
)
Reclassification of unrealized (gain) loss on sale of mortgage-backed and credit risk transfer securities to gain (loss) on investments, net
(1,037
)
 
(10,544
)
 
(1,689
)
 
(11,581
)
 
(4,541
)
Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
3,238

 
12,924

 
16,313

 
16,162

 
35,458

Currency translation adjustments on investment in unconsolidated venture
274

 
(49
)
 
—

 
225

 
—

Total other comprehensive income (loss)
119,591

 
123,791

 
(181,091
)
 
243,382

 
(42,627
)
Comprehensive income (loss)
113,615

 
(28,536
)
 
(31,352
)
 
85,079

 
98,953

Less: Comprehensive income (loss) attributable to non-controlling interest
(1,435
)
 
341

 
357

 
(1,094
)
 
(1,133
)
Less: Dividends to preferred stockholders
(5,716
)
 
(5,716
)
 
(5,716
)
 
(11,432
)
 
(11,432
)
Comprehensive income (loss) attributable to common stockholders
106,464

 
(33,911
)
 
(36,711
)
 
72,553

 
86,388



 
7
 
Exhibit 99.1

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
  
As of
 $ in thousands except share amounts
June 30, 2016
 
December 31, 2015
ASSETS
 
Mortgage-backed and credit risk transfer securities, at fair value
15,625,027

 
16,065,935

Commercial loans, held-for-investment
272,502

 
209,062

U.S. Treasury securities, at fair value
152,701

 
—

Cash and cash equivalents
144,084

 
53,199

Due from counterparties
267,015

 
110,009

Investment related receivable
37,186

 
154,594

Accrued interest receivable
49,282

 
50,779

Derivative assets, at fair value
5,502

 
8,659

Other assets
108,283

 
115,072

Total assets
16,661,582

 
16,767,309

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Repurchase agreements
11,768,647

 
12,126,048

Secured loans
1,650,000

 
1,650,000

Exchangeable senior notes
395,800

 
394,573

Derivative liabilities, at fair value
447,738

 
238,148

Dividends and distributions payable
50,919

 
51,734

Investment related payable
87,668

 
167

Accrued interest payable
17,625

 
21,604

Collateral held payable
5,560

 
4,900

Accounts payable and accrued expenses
2,080

 
2,376

Due to affiliate
10,094

 
10,851

Total liabilities
14,436,131

 
14,500,401

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; 111,583,435 and 113,619,471 shares issued and outstanding, respectively
1,116

 
1,136

Additional paid in capital
2,382,689

 
2,407,372

Accumulated other comprehensive income
558,954

 
318,624

Retained earnings (distributions in excess of earnings)
(1,028,354
)
 
(771,313
)
Total stockholders’ equity
2,199,621

 
2,241,035

Non-controlling interest
25,830

 
25,873

Total equity
2,225,451

 
2,266,908

Total liabilities and equity
16,661,582

 
16,767,309



 
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.   Certain prior period U.S. GAAP and non-GAAP financial measures have been revised to correct immaterial errors in accounting for premiums and discounts on non-Agency RMBS not of high credit quality. For further information, see Note 17 of the Company's condensed consolidated financial statements to be filed in Item 1 of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016.

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 swap 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, excluding securities for which we elected the fair value option 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
 
Six Months Ended
$ in thousands, except per share data
June 30, 2016
 
March 31, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Net income (loss) attributable to common stockholders
(11,617
)
 
(156,160
)
 
142,311

 
(167,777
)
 
128,530

Adjustments:
 
 
 
 
 
 
 
 
 
(Gain) loss on investments, net
(1,414
)
 
(11,601
)
 
(10,896
)
 
(13,015
)
 
(12,986
)
Realized (gain) loss on derivative instruments, net (excluding contractual net interest on interest rate swaps of $24,985, $29,091, $46,011, $54,076, $91,619, respectively)
20,584

 
42,985

 
15,212

 
63,569

 
41,315

Unrealized (gain) loss on derivative instruments, net
44,794

 
166,467

 
(117,226
)
 
211,261

 
(66,192
)
Realized and unrealized change in fair value of GSE CRT embedded derivatives, net
(11,116
)
 
(2,096
)
 
6,591

 
(13,212
)
 
(8,655
)
(Gain) loss on foreign currency transactions, net
3,542

 
1,125

 
(996
)
 
4,667

 
529

Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
3,238

 
12,924

 
16,313

 
16,162

 
35,458

Subtotal
59,628

 
209,804

 
(91,002
)
 
269,432

 
(10,531
)
Adjustment attributable to non-controlling interest
(752
)
 
(2,597
)
 
1,041

 
(3,349
)
 
119

Core earnings
47,259

 
51,047

 
52,350

 
98,306

 
118,118

Basic income (loss) per common share
(0.10
)
 
(1.38
)
 
1.16

 
(1.49
)
 
1.04

Core earnings per share attributable to common stockholders (1)
0.42

 
0.45

 
0.43

 
0.87

 
0.96

(1)
Core earnings per share attributable to common stockholders is equal to core earnings divided by the basic weighted average number of common shares outstanding.

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 recorded as realized and unrealized credit derivative income (loss), net. The Company accounts for GSE CRTs purchased prior to August 24, 2015 as hybrid financial instruments, but has elected the fair value option for GSE CRTs purchased on or after August 24, 2015. Under U.S. GAAP, coupon interest on GSE CRTs accounted for using the fair value option is recorded as interest income, whereas coupon interest on GSE CRTs accounted for as hybrid financial instruments is recorded as realized and unrealized credit derivative income (loss). The Company adds back GSE CRT embedded derivative coupon interest to its total interest income because the Company considers GSE CRT embedded derivative coupon interest a current component of its total interest income and believes coupon interest should be consistently considered a component of interest income irrespective of whether the Company has elected the fair value option for the GSE CRT or accounted for the GSE CRT as a hybrid financial instrument.
The Company calculates effective interest expense (and by calculation, effective cost of funds) as U.S. GAAP total interest expense adjusted for net interest paid on its interest rate swaps that is recorded as 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 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 as 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 recorded as realized and unrealized credit derivative income (loss), net.

 
10
 
Exhibit 99.1

The Company believes the presentation of effective interest income, effective yield, effective interest expense, effective cost of funds, effective net interest income and effective interest rate margin measures, when considered together with U.S. GAAP financial measures, provide information that is useful to investors in understanding the Company's borrowing costs and operating performance.
The following table reconciles total interest income to effective interest income and yield to effective yield for the following periods:
 
Three Months Ended 
 June 30, 2016
 
Three Months Ended 
 March 31, 2016
 
Three months ended 
 June 30, 2015
$ in thousands
Reconciliation
 
Yield/Effective Yield
 
Reconciliation
 
Yield/Effective Yield
 
Reconciliation
 
Yield/Effective Yield
Total interest income
118,807

 
3.07
%
 
127,139

 
3.30
%
 
163,229

 
3.18
%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
6,112

 
0.16
%
 
6,314

 
0.16
%
 
6,157

 
0.12
%
Effective interest income
124,919

 
3.23
%
 
133,453

 
3.46
%
 
169,386

 
3.30
%
 
Six Months Ended June 30,
 
2016
 
2015
$ in thousands
Reconciliation
 
Yield/Effective Yield
 
Reconciliation
 
Yield/Effective Yield
Total interest income
245,946

 
3.18
%
 
334,766

 
3.27
%
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
12,426

 
0.16
%
 
12,070

 
0.12
%
Effective interest income
258,372

 
3.34
%
 
346,836

 
3.39
%
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 
 June 30, 2016
 
Three Months Ended 
 March 31, 2016
 
Three months ended 
 June 30, 2015
$ in thousands
Reconciliation
 
Cost of Funds / Effective Cost of Funds
 
Reconciliation
 
Cost of Funds / Effective Cost of Funds
 
Reconciliation
 
Cost of Funds / Effective Cost of Funds
Total interest expense
39,562

 
1.17
 %
 
50,128

 
1.48
 %
 
70,426

 
1.54
 %
Less: Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
(3,238
)
 
(0.10
)%
 
(12,924
)
 
(0.38
)%
 
(16,313
)
 
(0.36
)%
Add: Net interest paid - interest rate swaps recorded as gain (loss) on derivative instruments, net
24,985

 
0.74
 %
 
29,091

 
0.86
 %
 
46,011

 
1.01
 %
Effective interest expense
61,309

 
1.81
 %
 
66,295

 
1.96
 %
 
100,124

 
2.19
 %

 
11
 
Exhibit 99.1

 
Six Months Ended June 30,
 
2016
 
2015
$ in thousands
Reconciliation
 
Cost of Funds / Effective Cost of Funds
 
Reconciliation
 
Cost of Funds / Effective Cost of Funds
Total interest expense
89,690

 
1.33
 %
 
142,705

 
1.57
 %
Less: Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
(16,162
)
 
(0.24
)%
 
(35,458
)
 
(0.39
)%
Add: Net interest paid - interest rate swaps recorded as gain (loss) on derivative instruments, net
54,076

 
0.80
 %
 
91,619

 
1.01
 %
Effective interest expense
127,604

 
1.89
 %
 
198,866

 
2.19
 %

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 
 June 30, 2016
 
Three Months Ended 
 March 31, 2016
 
Three months ended 
 June 30, 2015
$ in thousands
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
 
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
 
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income
79,245

 
1.90
 %
 
77,011

 
1.82
 %
 
92,803

 
1.64
 %
Add: Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
3,238

 
0.10
 %
 
12,924

 
0.38
 %
 
16,313

 
0.36
 %
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
6,112

 
0.16
 %
 
6,314

 
0.16
 %
 
6,157

 
0.12
 %
Less: Net interest paid - interest rate swaps recorded as gain (loss) on derivative instruments, net
(24,985
)
 
(0.74
)%
 
(29,091
)
 
(0.86
)%
 
(46,011
)
 
(1.01
)%
Effective net interest income
63,610

 
1.42
 %
 
67,158

 
1.50
 %
 
69,262

 
1.11
 %
 
Six Months Ended June 30,
 
2016
 
2015
$ in thousands
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
 
Reconciliation
 
Net Interest Rate Margin / Effective Interest Rate Margin
Net interest income
156,256

 
1.85
 %
 
192,061

 
1.70
 %
Add: Reclassification of amortization of net deferred losses on de-designated interest rate swaps to repurchase agreements interest expense
16,162

 
0.24
 %
 
35,458

 
0.39
 %
Add: GSE CRT embedded derivative coupon interest recorded as realized and unrealized credit derivative income (loss), net
12,426

 
0.16
 %
 
12,070

 
0.12
 %
Less: Net interest paid - interest rate swaps recorded as gain (loss) on derivative instruments, net
(54,076
)
 
(0.80
)%
 
(91,619
)
 
(1.01
)%
Effective net interest income
130,768

 
1.45
 %
 
147,970

 
1.20
 %


 
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 June 30, 2016 and March 31, 2016. The Company presents 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. The Company believes presenting the Company's repurchase agreement debt-to-equity ratio when considered together with U.S. GAAP financial measure of debt-to-equity ratio, 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.
June 30, 2016
$ in thousands
Agency
RMBS (1)
Residential Credit (2)
Commercial Credit (3)
Exchangeable Senior Notes
Total
Investments
10,182,071

2,862,215

3,038,981

—

16,083,267

Cash and cash equivalents (4)
65,938

40,720

37,426

—

144,084

Derivative assets, at fair value (5)
—

—

5,502

—

5,502

Other assets
355,728

7,834

65,167

—

428,729

Total assets
10,603,737

2,910,769

3,147,076

—

16,661,582

 
 
 
 
 
 
Repurchase agreements
8,504,046

2,232,236

1,032,365

—

11,768,647

Secured loans (6)
475,349

—

1,174,651

—

1,650,000

Exchangeable senior notes
—

—

—

395,800

395,800

Derivative liabilities, at fair value
447,658

—

80

—

447,738

Other liabilities
131,059

19,900

17,098

5,889

173,946

Total liabilities
9,558,112

2,252,136

2,224,194

401,689

14,436,131

 
 
 
 
 
 
Total equity (allocated)
1,045,625

658,633

922,882

(401,689
)
2,225,451

Adjustments to calculate repurchase agreement debt-to-equity:
 
 
 
 
 
Net equity in unsecured assets and exchangeable senior notes (7)
—

—

(305,539
)
401,689

96,150

Collateral pledged against secured loans
(563,450
)
—

(1,392,360
)
—

(1,955,810
)
Secured loans
475,349

—

1,174,651

—

1,650,000

Equity related to repurchase agreement debt
957,524

658,633

399,634

—

2,015,791

Debt-to-equity ratio (8)
8.6

3.4

2.4

NA

6.2

Repurchase agreement debt-to-equity ratio (9)
8.9

3.4

2.6

NA

5.8

(1)
Investments in U.S. Treasury securities are included in agency RMBS.
(2)
Investments in non-Agency RMBS and GSE CRT are included in residential credit.
(3)
Investments in CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.
(4)
Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, residential credit and commercial credit.
(5)
Derivative assets are allocated based on the hedging strategy for each class.
(6)
Secured loans are allocated based on amount of collateral pledged.
(7)
Net equity in unsecured assets and exchangeable senior notes includes commercial loans, investments in unconsolidated joint ventures and exchangeable senior notes.
(8)
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.
(9)
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

March 31, 2016
$ in thousands
Agency
RMBS (1)
Residential Credit (2)
Commercial Credit (3)
Exchangeable Senior Notes
Total
Investments
9,396,359

3,035,757

3,019,192

—

15,451,308

Cash and cash equivalents (4)
21,955

16,794

12,587

—

51,336

Derivative assets, at fair value (5)
—

—

702

—

702

Other assets
306,249

17,781

65,728

—

389,758

Total assets
9,724,563

3,070,332

3,098,209

—

15,893,104

 
 
 
 
 
 
Repurchase agreements
7,916,802

2,257,422

1,012,935

—

11,187,159

Secured loans (6)
492,621

—

1,157,379

—

1,650,000

Exchangeable senior notes
—

—

—

395,187

395,187

Derivative liabilities, at fair value
397,923

—

220

—

398,143

Other liabilities
52,634

30,183

16,302

889

100,008

Total liabilities
8,859,980

2,287,605

2,186,836

396,076

13,730,497

 
 
 
 
 
 
Total equity (allocated)
864,583

782,727

911,373

(396,076
)
2,162,607

Adjustments to calculate repurchase agreement debt-to-equity:
 
 
 
 
 
Net equity in unsecured assets and exchangeable senior notes (7)
—

—

(317,242
)
396,076

78,834

Collateral pledged against secured loans
(587,957
)
—

(1,381,364
)
—

(1,969,321
)
Secured loans
492,621

—

1,157,379

—

1,650,000

Equity related to repurchase agreement debt
769,247

782,727

370,146

—

1,922,120

Debt-to-equity ratio (8)
9.7

2.9

2.4

NA

6.1

Repurchase agreement debt-to-equity ratio (9)
10.3

2.9

2.7

NA

5.8

(1)
Investments in U.S. Treasury securities are included in Agency RMBS.
(2)
Investments in non-Agency RMBS and GSE CRT are included in residential credit.
(3)
Investments in CMBS, commercial loans and investments in unconsolidated joint ventures are included in commercial credit.
(4)
Cash and cash equivalents is allocated based on a percentage of equity for Agency RMBS, residential credit and commercial credit.
(5)
Derivative assets are allocated based on the hedging strategy for each class.
(6)
Secured loans are allocated based on amount of collateral pledged.
(7)
Net equity in unsecured assets and exchangeable senior notes includes commercial loans, investments in unconsolidated joint ventures and exchangeable senior notes.
(8)
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.
(9)
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 earning assets for the following periods.
 
Three Months Ended
 
Six Months Ended
$ in thousands
June 30, 2016
 
March 31, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
Average Balances*:
 
 
 
 
 
 
 
 
 
Agency RMBS:
 
 
 
 
 
 
 
 
 
15 year fixed-rate, at amortized cost
2,245,998

 
1,560,925

 
1,747,623

 
1,903,463

 
1,748,306

30 year fixed-rate, at amortized cost
3,797,400

 
3,945,655

 
4,400,782

 
3,871,527

 
4,490,257

ARM, at amortized cost
362,067

 
410,749

 
446,754

 
386,408

 
453,651

Hybrid ARM, at amortized cost
2,883,494

 
3,096,649

 
3,270,461

 
2,990,071

 
3,069,675

Agency - CMO, at amortized cost
384,949

 
404,443

 
438,549

 
394,696

 
442,374

Non-Agency RMBS, at amortized cost
2,231,510

 
2,422,438

 
2,754,926

 
2,326,974

 
2,811,950

GSE CRT, at amortized cost
635,953

 
676,169

 
662,188

 
656,061

 
656,298

CMBS, at amortized cost
2,623,578

 
2,675,219

 
3,195,123

 
2,649,398

 
3,233,156

U.S. Treasury securities, at amortized cost
23,682

 
—

 
—

 
11,842

 
—

Residential loans, at amortized cost
—

 
—

 
3,480,101

 
—

 
3,422,035

Commercial loans, at amortized cost
275,631

 
239,201

 
158,312

 
258,961

 
152,231

Average earning assets
15,464,262

 
15,431,448

 
20,554,819

 
15,449,401

 
20,479,933

Average Earning Asset Yields (1):
 
 
 
 
 
 
 
 
 
Agency RMBS:
 
 
 
 
 
 
 
 
 
15 year fixed-rate
1.87
%
 
2.40
%
 
2.04
%
 
2.08
%
 
2.13
%
30 year fixed-rate
2.74
%
 
2.97
%
 
2.69
%
 
2.86
%
 
2.85
%
ARM
2.30
%
 
2.42
%
 
1.99
%
 
2.36
%
 
2.35
%
Hybrid ARM
2.10
%
 
2.28
%
 
1.88
%
 
2.19
%
 
2.06
%
Agency - CMO
2.55
%
 
2.80
%
 
3.15
%
 
2.68
%
 
3.44
%
Non-Agency RMBS
4.74
%
 
4.90
%
 
4.77
%
 
4.82
%
 
4.84
%
GSE CRT(2)
0.86
%
 
0.85
%
 
0.51
%
 
0.85
%
 
0.50
%
CMBS
4.37
%
 
4.38
%
 
4.40
%
 
4.38
%
 
4.37
%
U.S. Treasury securities
1.05
%
 
—
%
 
—
%
 
1.05
%
 
—
%
Residential loans
—
%
 
—
%
 
3.48
%
 
—
%
 
3.49
%
Commercial loans
8.44
%
 
8.09
%
 
8.55
%
 
8.28
%
 
8.54
%
Average earning asset yields
3.07
%
 
3.30
%
 
3.18
%
 
3.18
%
 
3.27
%
Average Borrowings*:
 
 
 
 
 
 
 
 
 
Agency RMBS (3)
8,584,572

 
8,546,280

 
9,166,962

 
8,565,425

 
9,099,236

Non-Agency RMBS
1,805,286

 
1,952,569

 
2,534,973

 
1,878,927

 
2,584,839

GSE CRT
473,270

 
451,248

 
495,605

 
462,259

 
475,057

CMBS (3)
2,162,450

 
2,187,472

 
2,663,097

 
2,174,962

 
2,664,131

U.S. Treasury securities
50,192

 
—

 
—

 
25,096

 
—

Exchangeable senior notes
395,596

 
394,982

 
393,129

 
395,289

 
392,823

Asset-backed securities issued by securitization trusts
—

 
—

 
3,018,775

 
—

 
2,969,238

Total borrowed funds
13,471,366

 
13,532,551

 
18,272,541

 
13,501,958

 
18,185,324

Maximum borrowings during the period (4)
13,814,447

 
13,896,215

 
18,364,746

 
13,896,215

 
18,416,608


 
15
 
Exhibit 99.1

Average Cost of Funds (5):
 
 
 
 
 
 
 
 
 
Agency RMBS (3)
0.65
%
 
0.66
%
 
0.35
%
 
0.65
%
 
0.35
%
Non-Agency RMBS
1.85
%
 
1.80
%
 
1.57
%
 
1.82
%
 
1.54
%
GSE CRT
2.08
%
 
2.19
%
 
1.63
%
 
2.13
%
 
1.66
%
CMBS (3)
1.11
%
 
1.14
%
 
0.92
%
 
1.13
%
 
0.91
%
U.S. Treasury securities
0.14
%
 
—
%
 
—
%
 
0.19
%
 
—
%
Exchangeable senior notes
5.68
%
 
5.68
%
 
5.71
%
 
5.68
%
 
5.71
%
Asset-backed securities issued by securitization trusts
—
%
 
—
%
 
2.96
%
 
—
%
 
2.98
%
Unhedged cost of funds (6)
1.07
%
 
1.10
%
 
1.18
%
 
1.09
%
 
1.18
%
Hedged / Effective cost of funds (non-GAAP measure)
1.81
%
 
1.96
%
 
2.19
%
 
1.89
%
 
2.19
%
Average Equity (7):
2,027,490

 
1,939,249

 
2,458,210

 
1,983,370

 
2,455,590

Average debt-to-equity ratio (average during period)
6.6x

 
7.0
x
 
7.4
x
 
6.8
x
 
7.4x

Debt-to-equity ratio (as of period end)
6.2x

 
6.1
x
 
6.9
x
 
6.2
x
 
6.9x

*
Average amounts for each period are based on weighted month-end balances; all percentages are annualized. Average balances are presented on an amortized cost basis.

(1)
Average earning asset 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 earning asset yield excludes coupon interest associated with embedded derivatives not accounted for under the fair value option 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