UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

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

Commission file number 001-34385

 

INVESCO MORTGAGE CAPITAL INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland (State or Other Jurisdiction of Incorporation or Organization)		26-2749336 (I.R.S. Employer Identification No.)
1555 Peachtree Street, N.E., Suite 1800 Atlanta, Georgia (Address of Principal Executive Offices)		30309 (Zip Code)

(404) 892-0896
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of August 9, 2011, there were 94,782,520 outstanding shares of common stock of Invesco Mortgage Capital Inc.

 

 

INVESCO MORTGAGE CAPITAL INC.
TABLE OF CONTENTS

		Page
PART I FINANCIAL INFORMATION			1
Item 1. Consolidated Financial Statements			1
Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010			1
Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010			2
Unaudited Consolidated Statement of Equity for the six months ended June 30, 2011			3
Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010			4
Notes to Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative and Qualitative Disclosures About Market Risk			42
Item 4. Controls and Procedures			44
PART II OTHER INFORMATION			46
Item 1. Legal Proceedings			46
Item 1A. Risk Factors			46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3. Defaults Upon Senior Securities			46
Item 4. Reserved			46
Item 5. Other Information			47
Item 6. Exhibits			49
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I

ITEM 1.		FINANCIAL STATEMENTS

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		As of
		June 30,				December 31,
		2011				2010
$ in thousands, except per share amounts		(Unaudited)
ASSETS
Mortgage-backed securities, at fair value			12,155,861				5,578,333
Cash			66				63,552
Restricted cash			134,037				101,144
Investment related receivable			121,120				7,601
Investments in unconsolidated limited partnerships, at fair value			48,177				54,725
Accrued interest receivable			46,295				22,503
Derivative assets, at fair value			19,131				33,255
Other assets			2,063				1,287
Total assets			12,526,750				5,862,400
LIABILITIES AND EQUITY
Liabilities:
Repurchase agreements			9,560,766				4,344,659
Derivative liability, at fair value			139,129				37,850
Dividends and distributions payable			72,575				49,741
Investment related payable			910,552				372,285
Accrued interest payable			9,853				2,579
Accounts payable and accrued expenses			1,645				1,065
Due to affiliate			6,863				3,407
Total liabilities			10,701,383				4,811,586
Equity:
Preferred Stock: par value $0.01 per share; 50,000,000 shares authorized, 0 shares issued and outstanding			—				—
Common Stock: par value $0.01 per share; 450,000,000 shares authorized, 92,945,506 and 49,854,196 shares issued and outstanding, at June 30, 2011 and December 31, 2010, respectively			929				499
Additional paid in capital			1,889,173				1,002,809
Accumulated other comprehensive income (loss)			(89,838	)			24,015
Distributions in excess of earnings			(4,423	)			(8,173	)
Total shareholders’ equity			1,795,841				1,019,150
Non-controlling interest			29,526				31,664
Total equity			1,825,367				1,050,814
Total liabilities and equity			12,526,750				5,862,400

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

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
$ in thousands, except per share data		2011				2010				2011				2010
Revenues
Interest income			108,981				29,207				177,517				47,217
Interest expense			34,207				6,379				49,785				10,031
Net interest income			74,774				22,828				127,732				37,186
Other income
Gain on sale of investments			3,605				642				4,805				1,375
Equity in earnings and fair value change in unconsolidated limited partnerships			1,873				1,649				3,731				2,095
Loss on other-than-temporarily impaired securities			—				(262	)			—				(386	)
Unrealized loss on interest rate swaps			(197	)			(10	)			(202	)			(35	)
Realized and unrealized credit default swap income			1,259				—				3,791				—
Total other income			6,540				2,019				12,125				3,049
Expenses
Management fee — related party			5,753				1,771				9,728				3,055
General and administrative			1,157				1,017				2,026				1,954
Total expenses			6,910				2,788				11,754				5,009
Net income			74,404				22,059				128,103				35,226
Net income attributable to non-controlling interest			1,406				1,309				2,857				2,427
Net income attributable to common shareholders			72,998				20,750				125,246				32,799
Earnings per share:
Net income attributable to common shareholders (basic/diluted)			0.99				0.91				2.00				1.70
Dividends declared per common share			0.97				0.74				1.97				1.52
Weighted average number of shares of common stock:
Basic			73,486				22,808				62,731				19,266
Diluted			74,929				24,239				64,167				20,695

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

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY
For the six months ended June 30, 2011
(Unaudited)

		Attributable to Common Shareholders
														Accumulated
										Additional				Other				Distributions in				Total				Non-
$ in thousands, except per		Common Stock								Paid in				Comprehensive				excess of				Shareholders’				Controlling				Total				Comprehensive
share amounts		Shares				Amount				Capital				Income (loss)				earnings				Equity				Interest				Equity				Income
Balance at January 1, 2011			49,854,196				499				1,002,809				24,015				(8,173	)			1,019,150				31,664				1,050,814				—
Net income			—				—				—				—				125,246				125,246				2,857				128,103				128,103
Comprehensive income
Change in net unrealized gains and losses on available for sale securities			—				—				—				567				—				567				276				843				843
Change in net unrealized gains and losses on derivatives			—				—				—				(114,420	)			—				(114,420	)			(2,465	)			(116,885	)			(116,885	)
Total comprehensive income																																			12,061
Net proceeds from issuance of common stock, net of offering costs			43,087,519				430				886,272				—				—				886,702				—				886,702
Stock awards			3,791				—				—				—				—				—				—				—
Common stock dividends			—				—				—				—				(121,496	)			(121,496	)			—				(121,496	)
Common unit dividends			—				—				—				—				—				—				(2,807	)			(2,807	)
Amortization of equity-based compensation			—				—				92				—				—				92				1				93
Balance at June 30, 2011			92,945,506				929				1,889,173				(89,838	)			(4,423	)			1,795,841				29,526				1,825,367

The accompanying notes are an integral part of this consolidated financial statement.

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

$ in thousands		Six Months Ended June 30,
		2011				2010
Cash Flows from Operating Activities
Net income			128,103				35,226
Adjustments to reconcile net income to net cash provided by operating activities
Amortization of mortgage-backed securities premiums and discounts, net			11,149				(5,423	)
Unrealized loss on interest swap			202				35
Unrealized gain on credit default swap			(1,685	)			—
Gain on sale of mortgage-backed securities			(4,805	)			(1,375	)
Loss on other-than-temporarily impaired securities			—				386
Equity in earnings and fair value change in unconsolidated limited partnerships			(3,731	)			(2,095	)
Amortization of equity-based compensation			93				61
Changes in operating assets and liabilities
Increase in accrued interest			(23,792	)			(6,959	)
(Increase) decrease in other assets			(776	)			320
Increase in accrued interest payable			7,274				745
Increase in due to affiliate			3,278				1,033
Increase in accounts payable and accrued expenses			533				1,085
Net cash provided by operating activities			115,843				23,039
Cash Flows from Investing Activities
Purchase of mortgage-backed securities			(7,020,050	)			(1,826,855	)
(Contributions) distributions (to) from Investment in PPIP, net			11,710				(36,134	)
Principal payments from mortgage-backed securities			491,577				160,835
Proceeds from sale of mortgage-backed securities			344,767				169,016
Net cash used in investing activities			(6,171,996	)			(1,533,138	)
Cash Flows from Financing Activities
Proceeds from issuance of common stock			886,929				342,136
Restricted cash			(26,944	)			(16,445	)
Proceeds from repurchase agreements			33,213,268				6,720,307
Principal repayments of repurchase agreements			(27,997,161	)			(5,589,934	)
Investment related payable			18,044				—
Proceeds from TALF financing			—				71,525
Principal payments of TALF financing			—				(145	)
Payments of dividends and distributions			(101,469	)			(25,151	)
Net cash provided by financing activities			5,992,667				1,502,293
Net change in cash			(63,486	)			(7,806	)
Cash, beginning of period			63,552				24,041
Cash, end of period			66				16,235
Supplement disclosure of cash flow information
Interest paid			42,511				9,247
Non-cash investing and financing activities information
Net change in unrealized gain on available-for-sale securities and derivatives			(116,043	)			(6,298	)
Net change in investment in PPIP			(1,431	)			228
Net change in restricted cash			(5,949	)			—
Dividends and distributions declared not paid			72,575				20,329
Payable for mortgage-backed securities purchased			(399,323	)			(363,753	)

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

INVESCO MORTGAGE CAPITAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 — Organization and Business Operations

     Invesco Mortgage Capital Inc. (the “Company”) is a Maryland corporation focused on investing in, financing and managing residential and commercial mortgage-backed securities and mortgage loans. The Company invests in residential mortgage-backed securities (“RMBS”) for which a U.S. Government Agency such as the Government National Mortgage Association (“Ginnie Mae”), the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) guarantees payments of principal and interest on the securities (collectively “Agency RMBS”). The Company’s Agency RMBS investments include mortgage pass-through securities and collateralized mortgage obligations (“CMOs”). The Company also invests in RMBS that are not issued or guaranteed by a U.S. government Agency (“non-Agency RMBS”), commercial mortgage-backed securities (“CMBS”), and residential and commercial mortgage loans. The Company is externally managed and advised by Invesco Advisers, Inc. (the “Manager”), a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd. (“Invesco”), a global investment management company.

     The Company conducts its business through IAS Operating Partnership LP (the “Operating Partnership”) as its sole general partner. As of June 30, 2011, the Company owned 98.5% of the Operating Partnership and Invesco Investments (Bermuda) Ltd., a direct, wholly-owned subsidiary of Invesco, owned the remaining 1.5%.

     The Company finances its Agency RMBS, non-Agency RMBS and CMBS investments through short-term borrowings structured as repurchase agreements. The Manager has secured commitments for the Company with a number of repurchase agreement counterparties. In addition, the Company had financed its CMBS portfolio with financings under the U.S. government’s Term Asset-Backed Securities Loan Facility (“TALF”) which were repaid and replaced with repurchase agreements during 2010. The Company has also financed its investments in certain non-Agency RMBS, CMBS and residential and commercial mortgage loans by contributing capital to a partnership that invests in the public private investments funds (the “PPIF”) managed by the Company’s Manager. In addition, the Company may use other sources of financing including committed borrowing facilities and other private financing.

     The Company elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986, as amended (“Code”), commencing with the Company’s taxable year ended December 31, 2009. To maintain the Company’s REIT qualification, the Company is generally required to distribute at least 90% of its taxable income to its shareholders annually.

Note 2 — Summary of Significant Accounting Policies

Basis of Quarterly Presentation

     The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position and the results of operations of the Company for the interim periods presented have been included. Certain disclosures included in the Company’s annual report are not required to be included on an interim basis in the company’s quarterly reports on Forms 10-Q. The Company has condensed or omitted these disclosures. The interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010 which was filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2011. The results of operations for the period ended June 30, 2011 are not necessarily indicative of the results to be expected for the full year or any other future period.

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated.

Use of Estimates

     The accounting and reporting policies of the Company conform to U.S. GAAP. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Examples of estimates include, but are not limited to, estimates of the fair values of financial instruments, interest income on mortgage-backed securities (“MBS”) and other-than-temporary impairment charges. Actual results may differ from those estimates.

Cash and Cash Equivalents

     The Company considers all highly liquid investments that have original or remaining maturity dates of three months or less when purchased to be cash equivalents. At June 30, 2011, the Company had cash and cash equivalents, including amounts restricted, in excess of the Federal Deposit Insurance Corporation, or FDIC, deposit insurance limit of $250,000 per institution. The Company mitigates its risk of loss by placing cash and cash equivalents with numerous major financial institutions.

Deferred Offering Costs

     The Company records costs associated with stock offerings as a reduction in additional paid in capital. The Company includes deferred offering costs in other assets.

Underwriting Commissions and Costs

     Underwriting commissions and direct costs incurred in connection with the Company’s initial public offering (“IPO”) and subsequent follow-on common stock offerings are reflected as a reduction of additional paid-in-capital.

Repurchase Agreements

     The Company finances its Agency RMBS, non-Agency RMBS and its CMBS investment portfolio through the use of repurchase agreements. Repurchase agreements are treated as collateralized financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements.

     In instances where the Company acquires Agency RMBS, non-Agency RMBS or CMBS through repurchase agreements with the same counterparty from whom the Agency RMBS, non-Agency RMBS or CMBS were purchased, the Company accounts for the purchase commitment and repurchase agreement on a net basis and records a forward commitment to purchase Agency RMBS, non-Agency RMBS or CMBS as a derivative instrument if the transaction does not comply with the criteria for gross presentation. All of the following criteria must be met for gross presentation in the circumstance where the repurchase assets are financed with the same counterparty:

•

the initial transfer of and repurchase financing cannot be contractually contingent;

•

the repurchase financing entered into between the parties provides full recourse to the transferee and the repurchase price is fixed;

•

the financial asset has an active market and the transfer is executed at market rates; and

•

the repurchase agreement and financial asset do not mature simultaneously.

     If the transaction complies with the criteria for gross presentation, the Company records the assets and the related financing on a gross basis on its balance sheet, and the corresponding interest income and interest expense in its statements of operations. Such forward commitments are recorded at fair value with subsequent changes in fair value recognized in income. Additionally, the Company records the cash portion of its investment in Agency RMBS and non-Agency RMBS as a mortgage related receivable from the counterparty on its balance sheet.

     For assets representing available-for-sale investment securities any change in fair value is reported through consolidated other comprehensive income (loss) with the exception of impairment losses, which are recorded in the consolidated statement of operations.

Fair Value Measurements

     In January 2010, the FASB updated guidance entitled, “Improving Disclosures about Fair Value Measurements.” The guidance required a number of additional disclosures regarding fair value measurements. Specifically, entities should disclose: (1) the amount of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers; (2) the reasons for any transfers in or out of Level 3; and (3) information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. Except for the requirement to disclose information about purchases, sales, issuances, and settlements in the reconciliation of recurring Level 3 measurements on a gross basis, all the amendments are effective for interim and annual reporting periods beginning after December 15, 2009. The Company adopted these provisions in preparing its Consolidated Financial Statements for the period ended March 31, 2010. The adoption of these provisions only affected the disclosure requirements for fair value measurements and as a result had no impact on the Company’s consolidated statements of operations and consolidated balance sheets.

     The Company discloses the fair value of its financial instruments according to a fair value hierarchy (Levels 1, 2, and 3, as defined). In accordance with U.S. GAAP, the Company is required to provide enhanced disclosures regarding instruments in the Level 3 category (which require significant management judgment), including a separate reconciliation of the beginning and ending balances for each major category of assets and liabilities.

     Additionally, U.S. GAAP permits entities to choose to measure many financial instruments and certain other items at fair value (the “fair value option”). Unrealized gains and losses on items for which the fair value option has been elected are irrevocably recognized in earnings at each subsequent reporting date.

     During 2009, the Company elected the fair value option for its investments in unconsolidated limited partnerships. The Company has the one-time option to elect fair value for these financial assets on the election date. The changes in the fair value of these instruments are recorded in equity in earnings and fair value change in unconsolidated limited partnerships in the consolidated statements of operations.

Securities

     The Company designates securities as held-to-maturity, available-for-sale, or trading depending on its ability and intent to hold such securities to maturity. Trading and securities available-for-sale are reported at fair value, while securities held-to-maturity are reported at amortized cost. Although the Company generally intends to hold most of its RMBS and CMBS until maturity, the Company may, from time to time, sell any of its RMBS or CMBS as part of its overall management of its investment portfolio and as such will classify its RMBS and CMBS as available-for-sale securities.

     All securities classified as available-for-sale are reported at fair value, based on market prices from third-party sources, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity. When applicable, included with available-for-sale securities are forward purchase commitments on to be announced securities (“TBA”). The Company records TBA purchases on the trade date and the corresponding payable is recorded as an outstanding liability as a payable for investments purchased until the settlement date of the transaction. This is presented in the “Investment related payable” line item on the consolidated balance sheet.

     The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. The determination of whether a security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective factors. Consideration is given to (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of recovery, in fair value of the security, and (iii) the Company’s intent and ability to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

     For debt securities, the amount of the other-than-temporary impairment related to a credit loss or impairments on securities that the Company has the intent or for which it is more likely than not that the Company will need to sell before recovery are recognized in earnings and reflected as a reduction in the cost basis of the security. The amount of the other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of consolidated shareholders’ equity in other comprehensive income or loss with no change to the cost basis of the security.

Interest Income Recognition

     Interest income on available-for-sale MBS, which includes accretion of discounts and amortization of premiums on such MBS, is recognized over the life of the investment using the effective interest method. Management estimates, at the time of purchase, the future expected cash flows and determines the effective interest rate based on these estimated cash flows and the Company’s purchase price. As needed, these estimated cash flows are updated and a revised yield is computed based on the current amortized cost of the investment. In estimating these cash flows, there are a number of assumptions subject to uncertainties and contingencies, including the rate and timing of principal payments (prepayments, repurchases, defaults and liquidations), the pass through or coupon rate and interest rate fluctuations. In addition, management must use its judgment to estimate interest payment shortfalls due to delinquencies on the underlying mortgage loans. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact management’s estimates and its interest income. Security transactions are recorded on the trade date. Realized gains and losses from security transactions are determined based upon the specific identification method and recorded as gain (loss) on sale of available-for-sale securities in the consolidated statement of operations.

Investments in Unconsolidated Limited Partnerships

     The Company has investments in unconsolidated limited partnerships. In circumstances where the Company has a non-controlling interest but is deemed to be able to exert significant influence over the affairs of the enterprise the Company utilizes the equity method of accounting. 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.

     The Company elected the fair value option for its investments in unconsolidated limited partnerships. The election for investments in unconsolidated limited partnerships was made upon their initial recognition in the financial statements. The Company has elected the fair value option for the investments in unconsolidated limited partnerships for the purpose of enhancing the transparency of its financial condition.

     The Company measures the fair value of the investments in unconsolidated limited partnerships on the basis of the net asset value per share of the investments as permitted in guidance effective for the interim and annual periods ended after December 15, 2009.

Dividends and Distributions Payable

     Dividends and distributions payable represent dividends declared at the balance sheet date which are payable to common shareholders and distributions declared at the balance sheet date which are payable to non-controlling interest common unit holders of the Operating Partnership, respectively.

Earnings per Share

     The Company calculates basic earnings per share by dividing net income for the period by weighted-average shares of the Company’s common stock outstanding for that period. Diluted income per share takes into account the effect of dilutive instruments, such as units of limited partnership interest in the Operating Partnership (“OP Units”), and unvested restricted stock, but uses the average share price for the period in determining the number of incremental shares that are to be added to the weighted-average number of shares outstanding.

Comprehensive Income

     Comprehensive income is comprised of net income, as presented in the consolidated statements of operations, adjusted for changes in unrealized gains or losses on available for sale securities and changes in the fair value of derivatives accounted for as cash flow hedges.

Accounting for Derivative Financial Instruments

     U.S. GAAP provides disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. U.S. GAAP requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

     The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts, such as credit default swaps, that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting under U.S. GAAP.

Income Taxes

     The Company elected to be taxed as a REIT, commencing with the Company’s taxable year ended December 31, 2009. Accordingly, the Company will generally not be subject to U.S. federal and applicable state and local corporate income tax to the extent that the Company makes qualifying distributions to its shareholders, and provided the Company satisfies on a continuing basis, through actual investment and operating results, the REIT requirements including certain asset, income, distribution and stock ownership tests. If the Company fails to qualify as a REIT, and does not qualify for certain statutory relief provisions, it will be subject to U.S. federal, state and local income taxes and may be precluded from qualifying as a REIT for the subsequent four taxable years following the year in which the Company lost its REIT qualification. Accordingly, the Company’s failure to qualify as a REIT could have a material adverse impact on its results of operations and amounts available for distribution to its shareholders.

     A REIT’s dividend paid deduction for qualifying dividends to the Company’s shareholders is computed using its taxable income as opposed to net income reported on the consolidated financial statements. Taxable income, generally, will differ from net income reported on the consolidated financial statements because the determination of taxable income is based on tax regulations and not financial accounting principles.

     The Company may elect to treat certain of its future subsidiaries as taxable REIT subsidiaries (“TRS”). In general, a TRS may hold assets and engage in activities that the Company cannot hold or engage in directly and generally may engage in any real estate or non-real estate-related business. A TRS is subject to U.S. federal, state and local corporate income taxes.

     While a TRS will generate net income, a TRS can declare dividends to the Company which will be included in its taxable income and necessitate a distribution to its shareholders. Conversely, if the Company retains earnings at a TRS level, no distribution is required and the Company can increase book equity of the consolidated entity. The Company has no adjustments regarding its tax accounting treatment of any uncertainties. The Company expects to recognize interest and penalties related to uncertain tax positions, if any, as income tax expense, which will be included in general and administrative expense.

Share-Based Compensation

     On July 1, 2009, the Company adopted an equity incentive plan under which its independent directors, as part of their compensation for serving as directors, are eligible to receive quarterly restricted stock awards. In addition, the Company may compensate the officers and employees of the Manager under this plan pursuant to the management agreement.

     Share-based compensation arrangements include share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. Compensation costs relating to share-based payment transactions are recognized in the consolidated financial statements, based on the fair value of the equity or liability instruments issued on the date of grant, for awards to the Company’s independent directors. Compensation related to stock awards to officers and employees of the Manager are recorded at the estimated fair value of the award during the vesting period. The Company makes an upward or downward adjustment to compensation expense for the difference in the fair value at the date of grant and the date the award was earned.

Dividend Reinvestment Plan

     Effective as of August 27, 2010, the Company implemented a dividend reinvestment and stock purchase plan (the “Plan”). Under the terms of the Plan, shareholders who participate in the Plan may purchase shares of common stock directly from the Company. Plan participants may also automatically reinvest all or a portion of their dividends for additional shares of stock.

Reclassifications

     The presentation of certain prior period reported amounts has been reclassified to be consistent with the current presentation. Such reclassifications had no impact on net income or equity attributable to common shareholders.

Recent Accounting Pronouncements

     In January 2010, the FASB issued Accounting Standards Update 2010-06, “Improving Disclosures about Fair Value Measurements” (ASU 2010-06). ASU 2010-06 amends Topic 820 to require a number of additional disclosures regarding fair value measurements. Specifically, ASU 2010-06 requires entities to disclose: (1) the amount of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers; (2) the reasons for any transfers in or out of Level 3; and (3) information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. ASU 2010-06 also clarifies existing fair value disclosures about the appropriate level of disaggregation and about inputs and valuation techniques for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures were effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The additional disclosure requirements were incorporated into Note 7, “Financial Instruments”.

     In April 2011, the FASB issued Accounting Standards Update 2011-03, “Reconsideration of Effective Control for Repurchase Agreements” (ASU 2011-03). ASU 2011-03 simplifies the accounting for financial assets transferred under repurchase agreements (repos) and similar arrangements, by eliminating the transferor’s ability criterion from the assessment of effective control over those assets. This guidance is effective fir fiscal years and interim periods beginning after December 15, 2011. The Company does not believe that the adoption of the amended guidance will have a significant effect on our consolidated financial statements.

     In May 2011, the FASB issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (ASU 2011-04). ASU 2011-04 amends Topic 820 and does not modify the requirements for when fair value measurements apply; rather, it clarifies the Board’s intent about the application of existing fair value measurement requirements, and changes to a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For public entities, this guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Early application by public entities is not permitted. The Company does not anticipate any material impact from this guidance.

     In June 2011, the FASB issued Accounting Standards Update 2011-05, “Presentation of Comprehensive Income” (ASU 2011-05). ASU 2011-05 amends Topic 220 and eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity, which is the Company’s current presentation, and also requires presentation of reclassification adjustments from other comprehensive income to net income on the face of the financial statements. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011, and is not expected to have a material effect on the Company’s financial condition or results of operations, though it will change the Company’s financial statement presentation.

Note 3 — Mortgage-Backed Securities

     All of the Company’s MBS are classified as available-for-sale and, as such, are reported at fair value, which is determined by obtaining valuations from an independent source. If the fair value of a security is not available from a dealer or third-party pricing service, or such data appears unreliable, the Company may estimate the fair value of the security using a variety of methods including other pricing services, repurchase agreement pricing, discounted cash flow analysis, matrix pricing, option adjusted spread models and other fundamental analysis of observable market factors. At June 30, 2011, all of the Company’s MBS values were based on values obtained from third-party pricing services. The following tables present certain information about the Company’s investment portfolio at June 30, 2011 and December 31, 2010.

June 30, 2011																						Net
						Unamortized								Unrealized								Weighted
		Principal				Premium				Amortized				Gain/				Fair				Average				Average
$ in thousands		Balance				(Discount)				Cost				(Loss)				Value				Coupon (1)				Yield (2)
Agency RMBS:
15 year fixed-rate			1,996,178				106,361				2,102,539				15,732				2,118,271				4.43	%			3.24	%
30 year fixed-rate			4,672,172				320,753				4,992,925				45,550				5,038,475				5.26	%			3.99	%
ARM			118,688				2,981				121,669				1,094				122,763				3.60	%			3.22	%
Hybrid ARM			1,233,212				27,161				1,260,373				11,102				1,271,475				3.34	%			2.98	%
Total Agency			8,020,250				457,256				8,477,506				73,478				8,550,984				4.73	%			3.64	%
MBS-CMO			353,790				(278,533	)			75,257				3,530				78,787				3.17	%			6.23	%
Non-Agency MBS			2,757,121				(408,616	)			2,348,505				(28,085	)			2,320,420				4.46	%			5.90	%
CMBS			1,229,100				(6,617	)			1,222,483				(16,813	)			1,205,670				5.42	%			5.49	%
Total			12,360,261				(236,510	)			12,123,751				32,110				12,155,861				4.70	%			4.28	%

December 31, 2010																						Net
						Unamortized								Unrealized								Weighted
		Principal				Premium				Amortized				Gain/				Fair				Average				Average
$ in thousands		Balance				(Discount)				Cost				(Loss)				Value				Coupon (1)				Yield (2)
Agency RMBS:
15 year fixed-rate			1,789,891				99,611				1,889,502				(8,688	)			1,880,814				4.49	%			2.89	%
30 year fixed-rate			2,059,475				163,332				2,222,807				6,771				2,229,578				5.54	%			3.57	%
ARM			21,926				1,080				23,006				(494	)			22,512				4.23	%			2.55	%
Hybrid ARM			70,253				1,612				71,865				448				72,313				3.68	%			2.71	%
Total Agency			3,941,545				265,635				4,207,180				(1,963	)			4,205,217				5.03	%			3.25	%
MBS-CMO			57,232				(30,248	)			26,984				1,821				28,805				4.92	%			3.59	%
Non-Agency RMBS:			1,168,797				(339,501	)			829,296				17,072				846,368				4.83	%			5.47	%
CMBS			488,246				(4,640	)			483,606				14,337				497,943				5.35	%			5.51	%
Total			5,655,820				(108,754	)			5,547,066				31,267				5,578,333				5.01	%			3.78	%

     The components of the carrying value of the Company’s investment portfolio at June 30, 2011 and December 31, 2010 are presented below.

$ in thousands		June 30, 2011				December 31, 2010
Principal balance			12,360,261				5,655,820
Unamortized premium			476,535				271,728
Unamortized discount			(713,045	)			(380,482	)
Gross unrealized gains			141,465				75,231
Gross unrealized losses			(109,355	)			(43,964	)
Fair value			12,155,861				5,578,333

     The following table summarizes certain characteristics of the Company’s investment portfolio, at fair value, according to estimated weighted average life classifications as of June 30, 2011 and December 31, 2010:

$ in thousands		June 30, 2011				December 31, 2010
Less than one year			9,806				26,214
Greater than one year and less than five years			6,112,694				3,304,668
Greater than or equal to five years			6,033,361				2,247,451
Total			12,155,861				5,578,333

     The following tables present the gross unrealized losses and estimated fair value of the Company’s MBS by length of time that such securities have been in a continuous unrealized loss position at June 30, 2011 and December 31, 2010, respectively:

June 30, 2011		Less than 12 Months								12 Months or More								Total
						Unrealized								Unrealized								Unrealized
$ in thousands		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Agency RMBS:
15 year fixed-rate			859,816				(6,027	)			—				—				859,816				(6,027	)
30 year fixed-rate			1,427,539				(10,235	)			—				—				1,427,539				(10,235	)
ARM			38,250				(184	)			7,325				(228	)			45,575				(412	)
Hybrid ARM			366,385				(1,475	)			—				—				366,385				(1,475	)
Total Agency			2,691,990				(17,921	)			7,325				(228	)			2,699,315				(18,149	)
MBS-CMO			8,701				(793	)			—				—				8,701				(793	)
Non-Agency RMBS			1,442,438				(46,344	)			26,292				(3,790	)			1,468,730				(50,134	)
CMBS			759,672				(40,279	)			—				—				759,672				(40,279	)
Total			4,902,801				(105,337	)			33,617				(4,018	)			4,936,418				(109,355	)

December 31, 2010		Less than 12 Months								12 Months or More								Total
						Unrealized								Unrealized								Unrealized
$ in thousands		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
Agency RMBS:
15 year fixed-rate			1,039,444				(17,284	)			—				—				1,039,444				(17,284	)
30 year fixed-rate			802,118				(10,885	)			—				—				802,118				(10,885	)
ARM			14,911				(251	)			7,601				(244	)			22,512				(495	)
Hybrid ARM			10,912				(17	)			—				—				10,912				(17	)
Total Agency			1,867,385				(28,437	)			7,601				(244	)			1,874,986				(28,681	)
MBS-CMO			—				—				—				—				—				—
Non-Agency RMBS			370,839				(13,242	)			—				—				370,839				(13,242	)
CMBS			138,037				(2,041	)			—				—				138,037				(2,041	)
Total			2,376,261				(43,720	)			7,601				(244	)			2,383,862				(43,964	)

     The following table presents the impact of the Company’s MBS on its accumulated other comprehensive income for the three and six months ended June 30, 2011 and 2010.

		Three Months				Three Months				Six Months				Six Months
		ended				ended				ended				ended
$ in thousands		June 30, 2011				June 30, 2010				June 30, 2011				June 30, 2010
Accumulated other comprehensive income from investment securities:
Unrealized gain on MBS at beginning of period			41,217				18,307				31,267				12,741
Unrealized gain on MBS, net			(9,107	)			15,613				843				21,179
Balance at the end of period			32,110				33,920				32,110				33,920

     During the three months ended June 30, 2011, the Company reclassified $774,000 of net unrealized gains from other comprehensive income into Gain on Sale of Investments as a result of the Company selling certain investments.

     During the six months ended June 30, 2011, the Company reclassified $2.9 million of net unrealized gains from other comprehensive income into Gain on Sale of Investments as a result of the Company selling certain investments.

     The Company assesses its investment securities for other-than-temporary impairment on at least a quarterly basis. When the fair value of an investment is less than its amortized cost at the balance sheet date of the reporting period for which impairment is assessed, the impairment is designated as either “temporary” or “other-than-temporary.” In deciding on whether or not a security is other than temporarily impaired, the Company considers several factors, including the nature of the investment, communications from the trustees of securitizations regarding the credit quality of the security, the severity and duration of the impairment, the cause of the impairment, and the Company’s intent that it is more likely than not that the Company can hold the security until recovery of its cost basis.

     The following table presents the other-than-temporary impairments for the three and six months ended June 30, 2011 and 2010.

		Three Months				Three Months				Six Months				Six Months
		ended				ended				ended				ended
$ in thousands		June 30, 2011				June 30, 2010				June 30, 2011				June 30, 2010
Credit related other-than-temporary impairments included in earnings			—				262				—				386
Non-credit related other-than-temporary impairments recognized in other comprehensive income			—				—				—				—
Total other-than-temporary impairment losses			—				262				—				386

     The following table presents a roll-forward of the credit loss component of other-than-temporary impairments for the three and six months ended June 30, 2011 and 2010.

		Three Months				Three Months				Six Months				Six Months
		ended				ended				ended				ended
$ in thousands		June 30, 2011				June 30, 2010				June 30, 2011				June 30, 2010
Cumulative credit loss amount at the beginning of the period			510				124				510				—
Additions for credit losses for which other-than-temporary impairment had not been previously recognized			—				262				—				386
Cumulative credit loss amount at end of period			510				386				510				386

     The following table presents components of interest income on the Company’s Agency and non-Agency portfolio for the three and six months ended June 30, 2011 and 2010.

For the three months ended June 30, 2011

						Net (Premium
		Coupon				Amortization)/Discount				Interest
$ in thousands		Interest				Accretion				Income
Agency			78,954				(15,907	)			63,047
Non-Agency			25,455				9,967				35,422
CMBS			10,569				(35	)			10,534
Other			(22	)			—				(22	)
Total			114,956				(5,975	)			108,981

For the six months ended June 30, 2011

						Net (Premium
		Coupon				Amortization)/Discount				Interest
$ in thousands		Interest				Accretion				Income
Agency			130,312				(30,129	)			100,183
Non-Agency			40,958				18,933				59,891
CMBS			17,377				47				17,424
Other			19				—				19
Total			188,666				(11,149	)			177,517

For the three months ended June 30, 2010

						Net (Premium
		Coupon				Amortization)/Discount				Interest
$ in thousands		Interest				Accretion				Income
Agency			14,385				(4,895	)			9,490
Non-Agency			8,756				8,334				17,090
CMBS			2,564				59				2,623
Other			4				—				4
Total			25,709				3,498				29,207

For the six months ended June 30, 2010

						Net (Premium
		Coupon				Amortization)/Discount				Interest
$ in thousands		Interest				Accretion				Income
Agency			23,999				(8,215	)			15,784
Non-Agency			13,182				13,468				26,650
CMBS			4,601				170				4,771
Other			12				—				12
Total			41,794				5,423				47,217

Note 4 — Investments in Unconsolidated Limited Partnerships

Invesco Mortgage Recovery Feeder Fund, L.P. and Invesco Mortgage Recovery Loans AIV, L.P.

     The Company invested in certain non-Agency RMBS, CMBS and residential and commercial mortgage loans by contributing equity capital to a legacy securities PPIF managed by the Manager, Invesco Mortgage Recovery Feeder Fund, L.P. (the “Invesco PPIP Fund”) that receives financing under the U.S. government’s Public Private Investment Program (“PPIP”). In addition the Manager identified a whole loan transaction for the Company, which resulted in the Company’s admission into an alternative investment vehicle, the Invesco Mortgage Recovery Loans AIV, L.P. (“AIV”). The Company’s initial commitment in the Invesco PPIP Fund and AIV was $25.0 million. The Invesco PPIP Fund and AIV limited partnership agreements provided for additional subscriptions of limited partners within six months of the initial closing. During 2009 and 2010, the Invesco PPIP Fund and AIV accepted additional subscriptions and the Company increased its overall commitment to $100.0 million which effectively increased the Company’s initial ownership interest in the Invesco PPIP Fund and AIV. As of March 31, 2010, the Invesco PPIP Fund stopped accepting investment subscriptions and was deemed closed. The Company made its first contributions to the Invesco PPIP Fund in October 2009. In connection with the increase of the Company’s interest in the Invesco PPIP Fund and AIV, the Company is committed to fund approximately $30.7 million of additional capital at June 30, 2011. The Company realized approximately $3.5 million and $5.6 million of equity in earnings for the three and six months ended June 30, 2011 and $1.6 million and $1.8 million for the three and six months ended June 30, 2010, respectively. The Company also realized $1.6 million and $1.9 million of unrealized loss from these investments for the three and six months ended June 30, 2011, respectively, and $44,000 and $260,000 of unrealized appreciation for the three and six months ended June 30, 2010, respectively.

     The Company’s non-controlling, unconsolidated ownership interests in these entities are accounted for under the equity method. Capital contributions, distributions, profits and losses of the Invesco PPIP Fund and AIV are allocated in accordance with the terms of the entities’ limited partnership agreements. Such allocations may differ from the stated percentage interests, if any, as a result of preferred returns and allocation formulas as described in such agreements. The Company has made the fair value election for its investment in both unconsolidated limited partnerships. The fair value measurement for the investment in unconsolidated limited partnerships is based on the net asset value per share of the investment, or its equivalent.

Note 5 — Borrowings

Repurchase Agreements

     The Company has entered into repurchase agreements to finance the majority of its portfolio of investments. The repurchase agreements bear interest at a contractually agreed rate. The repurchase obligations mature and typically reinvest every thirty days to one year and have a weighted average aggregate interest rate of 0.52% and 0.57% at June 30, 2011 and December 31, 2010, respectively. During the second quarter of 2010, the Company entered into a repurchase agreement with a one year maturity. The facility was subsequently amended and expires in April 2012. These repurchase agreements are being accounted for as secured borrowings since the Company maintains effective control of the financed assets. The following table summarizes certain characteristics of the Company’s repurchase agreements at June 30, 2011 and December 31, 2010:

		June 30, 2011								December 31, 2010
						Weighted								Weighted
						Average								Average
		Amount				Interest				Amount				Interest
$ in thousands		Outstanding				Rate				Outstanding				Rate
Agency RMBS			7,174,858				0.23	%			3,483,440				0.33	%
Non-Agency RBS			1,510,666				1.44	%			459,979				1.76	%
CMBS			875,242				1.28	%			401,240				1.30	%
Total			9,560,766				0.52	%			4,344,659				0.57	%

     Under the repurchase agreements, the respective lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets would require the Company to provide additional collateral or fund margin calls. In addition, the repurchase agreements are subject to certain financial covenants. The Company is in compliance with these covenants at June 30, 2011.

     The following tables summarize certain characteristics of the Company’s repurchase agreements at June 30, 2011 and December 31, 2010:

June 30, 2011						Percent of Total
$ in thousands		Amount				Amount				Company MBS
Repurchase Agreement Counterparties		Outstanding				Outstanding				Held as Collateral
Credit Suisse Securities (USA) LLC			2,118,108				22.1	%			2,347,235
Nomura Securities International, Inc.			996,218				10.4	%			699,639
Wells Fargo Securities, LLC			809,187				8.5	%			880,658
Goldman, Sachs & Co.			664,506				7.0	%			699,452
RBS Securities Inc.			581,275				6.1	%			640,571
JP Morgan Securities Inc.			528,132				5.5	%			585,193
Deutsche Bank Securities Inc.			502,685				5.3	%			534,088
Morgan Stanley & Co. Incorporated			444,418				4.6	%			842,343
Mitsubishi UFJ Securities (USA), Inc.			427,066				4.5	%			448,179
BNP Paribas Securities Corp.			406,279				4.2	%			422,443
Barclays Capital Inc.			388,502				4.1	%			432,872
UBS Securities Inc.			316,790				3.3	%			333,696
CitiGroup Global Markets Inc.			277,111				2.9	%			302,876
Banc of America Securities LLC			262,788				2.7	%			292,023
Guggenheim Liquidity Services, LLC			246,880				2.6	%			258,754
Mizuho Securities USA Inc.			181,080				1.9	%			200,072
Jefferies & Company, Inc			145,752				1.5	%			153,171
Industrial and Commercial Bank of China Financial Services LLC			141,737				1.5	%			148,341
Cantor Fitzgerald & Co.			95,195				1.0	%			149,734
Royal Bank of Canada			27,057				0.3	%			35,709
Total			9,560,766				100.0	%			10,407,049

December 31, 2010						Percent of Total
$ in thousands		Amount				Amount				Company MBS
Repurchase Agreement Counterparties		Outstanding				Outstanding				Held as Collateral
Credit Suisse Securities (USA) LLC			974,369				22.4	%			1,072,719
Wells Fargo Securities, LLC			614,365				14.1	%			710,529
Morgan Stanley & Co. Incorporated			468,748				10.8	%			511,022
Deutsche Bank Securities Inc.			463,087				10.7	%			493,533
Barclays Capital Inc.			287,469				6.6	%			322,035
Goldman, Sachs & Co.			273,369				6.4	%			291,512
Mitsubishi UFJ Securities (USA), Inc.			261,594				6.0	%			273,131
BNP Paribas Securities Corp.			228,566				5.3	%			239,218
JP Morgan Securities Inc.			227,261				5.2	%			255,403
RBS Securities Inc.			210,332				4.8	%			241,331
Banc of America Securities LLC			200,081				4.6	%			220,018
Nomura Securities International, Inc.			135,418				3.1	%			144,586
Total			4,344,659				100.0	%			4,775,037

     Company MBS held by counterparties as security for repurchase agreements was $10.4 billion and $4.8 billion at June 30, 2011 and December 31, 2010, respectively. This represents a collateral ratio (Company MBS Held as Collateral/Amount Outstanding) of 109% and 110% respectively. The decline in the collateral ratio was due to the change in asset mix as the Company had a higher percentage of credit assets that generally have lower advance rates.

     Cash collateral held by the counterparties at June 30, 2011 and December 31, 2010 was $85.0 million and $81.3 million, respectively. In addition, cash collateral held by the Company at June 30, 2011 and December 31, 2010 was approximately $29.1 million and $11.1 million, respectively.