What changed in this filing

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Item 1. Business

2023-02-21 compared with 2022-02-17 · 51 added, 44 removed, 238 unchanged (29% of the section changed)

Invesco Mortgage Capital Inc.

(the “Company”) is a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities (“MBS”) and other mortgage-related assets.

(the “Company” or “we”) is a Maryland corporation primarily focused on investing in, financing and managing mortgage-backed securities (“MBS”) and other mortgage-related assets.

Our objective is to provide attractive risk-adjusted returns to our stockholders, primarily through dividends and secondarily through capital appreciation.

To achieve this objective, we currently invest in the following:

As of December 31, 2022, we were invested in:

• residential mortgage-backed securities (“RMBS”) that are guaranteed by a U.S.

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• to-be-announced securities forward contracts (“TBAs”) to purchase Agency RMBS;

• Commercial mortgage loans;

• other real estate-related financing arrangements.

We have also historically invested in:

During the periods presented in this Report, we also invested in:

• CMBS that are guaranteed by a U.S.

government agency such as Ginnie Mae or a federally chartered corporation such as Freddie Mac or Fannie Mae (collectively “Agency CMBS”);

government agency such as Ginnie Mae or a federally chartered corporation such as Fannie Mae or Freddie Mac (collectively “Agency CMBS”);

• credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (“GSE CRT”);

• Residential mortgage loans.

• a commercial mortgage loan;

Treasury securities.

We continuously evaluate new investment opportunities to complement our current investment portfolio by expanding our target assets and portfolio diversification.

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We do not have any employees.

Our Manager's long-term success, including its success in managing our business, relies on its ability to attract, develop and retain talent.

Our Manager invests significantly in talent development, health and welfare programs, technology and other resources that support its employees.

Our Manager is committed to improving diversity at all levels and in all functions across its global business and remains focused on increasing representation of women and other underrepresented employees.

Our Manager is not obligated to dedicate any of its employees exclusively to us, and our Manager and its employees are not obliga ted to dedicate any specific portion of time to our business.

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“Certain Relationships and Related Transactions, and Director Independence” in Part III of this Report for a discussion of our relationship with our Manager.

Human Capital

As previously discussed, we do not have employees and our Manager is responsible for providing us with our management team.

Our Manager's long-term success, including its success in managing our business, relies on its ability to attract, develop and retain talent.

Our Manager invests significantly in talent development, health and welfare programs, technology and other resources that support its employees.

Table of Conten t s

Our Competitive Advantages

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We have invested in a diversified pool of mortgage assets that generate attractive risk-adjusted returns.

Our current investment portfolio includes Agency RMBS, non-Agency RMBS, non-Agency CMBS, TBAs, and a commercial mortgage loan.

Our assets have also historically included, and may in the future include, Agency CMBS, GSE CRT, residential mortgage loans and other real estate-related investments.

Our current investment portfolio includes Agency RMBS, non-Agency RMBS, non-Agency CMBS and TBAs.

Our assets have also historically included, and may in the future include, Agency CMBS, GSE CRT, residential mortgage loans, commercial mortgage loans and other real estate-related investments.

We refer to all of these investment types collectively as our target assets.

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In effect, these payments are a

Table of Conten t s

“pass-through” of scheduled and unscheduled principal payments and the monthly interest payments made by the individual borrowers on the mortgage loans, net of any fees paid to the servicers, guarantors or other related parties of the securities.

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We have also historically invested in non-Agency RMBS collateralized by subprime and reperforming mortgage loans.

Table of Conten t s

Prime and Jumbo Prime Mortgage Loans

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A Re-REMIC is a transaction in which an existing security or securities is transferred to a special purpose entity that has formed a securitization vehicle that has issued multiple classes of securities secured by and payable from cash flows on the underlying securities.

TBAs are forward contracts to purchase or sell Agency RMBS.

TBAs specify the price, issuer, term and coupon of the securities to be delivered, but the actual securities are not identified until shortly before the TBA settlement date.

We generally do not intend to physically settle TBAs that are used for investment purposes.

Commercial Mortgage Loans

Commercial mortgage loans are mortgage loans secured by first or second liens on commercial properties such as regional malls, retail space, office buildings, industrial or warehouse properties, hotels, apartments, nursing homes and senior living facilities.

These loans, which tend to range in term from two to ten years, can carry either fixed or floating interest rates.

They generally permit pre-payments before final maturity but may require the payment to the lender of yield maintenance or pre-payment penalties.

First lien loans represent the senior lien on a property while second lien loans or second mortgages represent a subordinate or second lien on a property.

Mezzanine Loans

Mezzanine loans are generally structured to represent a senior position in the borrower’s equity in a property, and are subordinate to a first mortgage loan.

These loans are generally secured by pledges of ownership interests, in whole or in part, in entities that directly or indirectly own the real property.

At times, mezzanine loans may be secured by additional collateral, including letters of credit, personal guarantees, or collateral unrelated to the property.

Mezzanine loans may be structured to carry either fixed or floating interest rates as well as carry a right to participate in a percentage of gross revenues and a percentage of the increase in the fair market value of the property securing the loan.

Mezzanine loans may also contain prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns to the lender.

Mezzanine loans usually have maturities that match the maturity of the related mortgage loan but may have shorter or longer terms.

Unconsolidated Ventures

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Under the equity method of accounting, the initial investment is increased each period for additional capital contributions and a proportionate share of the entity’s earnings and decreased for cash distributions and a proportionate share of the entity’s losses.

As of December 31, 2022, our unconsolidated ventures were in liquidation and plan to sell or settle their remaining investments as expeditiously as possible.

Agency CMBS are structured pass-through certificates representing interests in pools of commercial loans that are secured by commercial property and issued by a U.S.

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Ginnie Mae does not guarantee the payment of prepayment penalties.

Table of Conten t s

Government-Sponsored Enterprises Credit Risk Transfer Securities

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To date, all GSE CRTs have paid a floating interest rate benchmarked to one-month London Interbank Offered Rate (“LIBOR”) or the Secured Overnight Financing Rate (“SOFR”).

TBAs are forward contracts to purchase or sell Agency RMBS.

TBAs specify the price, issuer, term and coupon of the securities to be delivered, but the actual securities are not identified until shortly before the TBA settlement date.

We generally do not intend to physically settle TBAs that are used for investment purposes.

Commercial Mortgage Loans

These loans, which tend to range in term from two to ten years, can carry either fixed or floating interest rates.

They generally permit prepayments before final maturity but may require the payment to the lender of yield maintenance or prepayment penalties.

First lien loans represent the senior lien on a property while second lien loans or second mortgages represent a subordinate or second lien on a property.

Mezzanine Loans

Mezzanine loans are generally structured to represent a senior position in the borrower’s equity in a property, and are subordinate to a first mortgage loan.

These loans are generally secured by pledges of ownership interests, in whole or in part, in entities that directly or indirectly own the real property.

At times, mezzanine loans may be secured by additional collateral, including letters of credit, personal guarantees, or collateral unrelated to the property.

Mezzanine loans may also contain prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns to the lender.

Mezzanine loans usually have maturities that match the maturity of the related mortgage loan but may have shorter or longer terms.

Loan Participation Interest

In August 2018, we invested in a loan participation interest in a secured loan to a non-bank servicer that is collateralized by mortgage servicing rights associated with Fannie Mae, Freddie Mac, and Ginnie Mae loans.

Mortgage servicing rights represent the right to perform and control the servicing of mortgage loans in exchange for a fee.

In August 2018, we invested in a loan participation interest in a secured loan to a non-bank servicer that was collateralized by mortgage servicing rights associated with Fannie Mae, Freddie Mac, and Ginnie Mae loans.

Mortgage servicing rights represented the right to perform and control the servicing of mortgage loans in exchange for a fee.

We sold our loan participation interest in April 2020.

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The amount of financing we receive under a repurchase agreement is limited to a specified percentage of the estimated market value of the assets we sell to the buyer.

The difference between the sale price and repurchase price is the cost, or interest expense, of financing under a repurchase agreement.

Under repurchase agreement

financing arrangements, certain buyers require us to provide additional cash collateral in the event the market value of the asset declines to maintain the ratio of value of the collateral to the amount of borrowing.

The difference between the sale price and

Table of Conten t s

repurchase price is the cost, or interest expense, of financing under a repurchase agreement.

Under repurchase agreement financing arrangements, certain buyers require us to provide additional cash collateral in the event the market value of the asset declines to maintain the ratio of value of the collateral to the amount of borrowing.

We use leverage on our assets to achieve our return objectives, which are adjusted as our investment and financing opportunities change.

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Treasury securities to hedge all or a portion of the interest rate risk associated with the financing of our investment portfolio.

Refer to Item 7.

“Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Conditions” in Part II of this Report for a discussion of our transition away from LIBOR.

We employ a variety of spread risk management techniques that seek to mitigate the influences of spread changes on our book value per common share and our liquidity to help us achieve our investment objectives.

We refer to the difference between interest rates on our investments and interest rates on risk free instruments as spreads.

The yield on our investments changes over time due to the level of risk free interest rates, the creditworthiness of the security, and the price of the perceived risk.

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Changes in spreads impact our book value per common share and our liquidity and could cause us to sell assets and to change our investment strategy to maintain liquidity and preserve book value per common share.

Unprecedented government responses to the COVID-19 pandemic, including fiscal stimulus, monetary policy actions, and various purchase and financing programs have impacted and will continue to impact credit spreads.

Elevated inflation and the resulting acceleration of monetary policy tightening by the Federal Reserve have impacted and will continue to impact credit spreads.

Table of Conten t s

We believe that our investment strategy will generally keep our credit losses and financing costs low.

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This analysis allows us to quantify our opinions of credit quality and fundamental value, which are key drivers of portfolio management decisions.

Amid the COVID-19 vaccine program and progress toward controlling the pandemic, the U.S.

economy has strengthened despite elevated case counts largely fueled by the Omicron variant.

This pick-up in economic activity has translated to improving employment levels and increased activity in residential and commercial real estate.

While loan delinquencies remain elevated, they continue to decline from their post-pandemic peak levels.

In particular, multi-family and single-family housing have been aided by government support and generous forbearance practices.

Further, stimulative monetary policies have helped support real estate activity and property valuations.

Despite these positives, many borrowers continue to experience difficulties meeting their obligations or seek to forbear or further forbear payment on their mortgage loans.

As a result, loans may continue to experience elevated delinquency levels and eventual defaults, which could impact the performance of our mortgage-backed securities.

The pace of commercial real estate fundamental improvement is moderating given accelerating monetary policy tightening by the Federal Reserve.

Occupancy and rental rates have stabilized and valuations face downward pressure as property borrowing costs remain elevated.

Meanwhile, residential real estate fundamentals have also deteriorated due to historically low affordability driven by the dramatic rise in mortgage rates throughout 2022.

CMBS loan delinquencies increased in the fourth quarter but remain materially lower than COVID-19 peak levels.

Many borrowers continue to experience difficulties meeting their obligations or seek to forbear or further forbear payment on their mortgage loans.

Given tightening lending conditions, loans may continue to experience increasing delinquency levels and eventual defaults, which could impact the performance of our mortgage-backed securities.

We also expect credit rating agencies to continue to reassess transactions negatively impacted by these adverse changes, which may result in our investments being downgraded.

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dollars upon consolidation.

We seek to hedge our foreign currency exposures by purchasing currency forward contracts.

We have historically sought to hedge our foreign currency exposures by purchasing currency forward contracts.

Investment Guidelines

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It also reviews its compliance with our investment policies and procedures, including our investment guidelines, and our Manager provides our board of directors an investment performance report at the end of each quarter in conjunction with its review of our quarterly results.

Table of Conten t s

Investment Process

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The information on our website is not intended to form a part of or be incorporated by reference into this Report.

Table of Conten t s

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business