Invesco Mortgage Capital (IVR) 7 Nov 232023 Q3 Earnings call transcript

Welcome to Invesco Mortgage Capital Inc.'s Third Quarter 2023 Investor Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

Now I'd like to turn the call over to Greg Seals, Investor Relations. Mr. Seals, you may begin the call.

all earnings joining call. to Mortgage on and quarterly Capital's operator, of us you Invesco Thanks,

plan The In of Relations have available be that we found provided to on the a address addition today's This to presentation website. covers press our website, by the information presentation going release section and press release, invescomortgagecapital.com. we to are today. can topics Investor the

Slide review X forward-looking statements the and non-GAAP the Our disclosures statements today Please on for the the well will include regarding GAAP. appropriate presentation as reconciliations as of appendix financial presentation certain measures to measures. and the

only Finally, Invesco on our webcast Again, edit our not accuracy are welcome, Mortgage does website. of for you and Capital The is earnings today. teleconference for by joining authorized and guarantee provided us the responsible located or transcripts thank not parties. third

now call I'll the turn to John John? Anzalone. over

Mortgage XX% give difficult the pool book to yields for before Quarter welcome Lee a contributed particularly third stack current and during Good Third to was their coupon fiscal the environment CFO; expectations Earnings These detail. rate Capital's portfolio since pay-ups decline multiyear agency and and Investment in share Chief our President, value our treasury the This and in Dave lives market I'll per for Call. to declined. COO, conditions turning elevated us fringe quarter, our reached backdrop while increased the shifting volatility Collins, Brian highest more given monetary mortgages Kevin Officer, specified our to policy. discuss to morning, call remained on quarter. across joining Phegley; Interest XXXX. Norris, our as extremely level the for comments brief the call was Invesco Also Lyle. The some are over challenging

the valuations fueled capitalize investors continued ended. quarter, Sentiment by cycle of accelerating more positive to seeking first agency cheap of mortgage recently agency in FOMC's week, volatility interest few losses. last have turned the fourth that confidence portion Elevated the has weeks sector underperformance. to tightening mortgage quarter rising early a Positively, allowed rates this investors' and on historically growing recover the fourth

that on of X, to benefit during in the to share. declined Despite investments. $X.XX as value strong extreme coming low-cost We share hedges available ROEs remained continue attractive our as book of new to $X.XX a estimate for well November at our as we as $X.XX has the per volatility, earnings range distribution quarter, from per very

ended $X.X million. unencumbered unrestricted substantially at ratio quarter of invested maintained of a we balance cash with the X.Xx all portfolio sizable our investments totaling in and debt-to-equity mortgages, Our billion agency investment and $XXX

responded by the we on of reduction our end at and with portfolio, reducing commensurate earnings of the October. to are bringing ratio debt-to-equity interest further our elevated mortgage actively end, reduction quarter in pressure rate will impact our First valuations -- and to risk assets. agency our volatility down size X.Xx This approximately

uncertain risks. path near-term the disciplined policy on sector the geopolitical of heightened for cautious near in remain the the We monetary given -- and outlook

rates are the in However, loan supply interest as interest originations of case rate quarters supportive the target assets. of our be coming the associated low with reduction seasonal elevated demand and policy Agency monetary potential the should eventual factors. and normalization of dynamics remain in to in volatility mortgage improve expected

lower loans and clarity should capital into away the also soon risk-weighted requirements, deployment Commercial could as regulatory banks receive agency further mortgages. such from assets, on encourage which of greater

Finally, capacity valuations attractive, and funding coupon production agency remain and historically robust. mortgages is

agency favorable time, the interest a with environment, opportunities volatility, create funding believe term supportive over for due near valuations rate investors. volatility attractive elevated we and compelling technical the in cautious long-term investment remain we in mortgage combined conditions in decline should While to

I'll here, will go and stop portfolio. the through Brian

which an the everyone X, morning on begin John. mortgage Slide call. to listening of Thanks, the interest overview to markets rates year-to-date. I'll provides Good and agency

mentioned the the in third longer rose maturity left, on in the upper As a John U.S. flattening treasuries as chart yields on quarter and bear shown sharply and move.

and Short-term rates as years and and an modestly rates. impact maturing signaled slowdown monetary the the at would in investors and inflation of XX substantial rose data risk between yields issuance price is between as costs on resilient XX points, X impending tightening, while a basis path the longer-term XX pause treasury treasury economy increase

for Reserve, rates market end and second the stance These futures By expectations moved the of October interest Federal a post half by cuts the higher longer funds into interest Fed the volatility XXXX. for end. rate trends quarter reflected pushing higher third of as the in intensified quarter, pricing into

reliance to in investment with Agency banks in the of RMBS shown lower valuations. chart, U.S. during of quarter. reduced Concurrent runoff As further on and Federal manager holdings money support increased the right commercial RMBS overseas Reserve's balance resulting their an Agency sheet, the

overseas money that to from recent with community While dampened little add exposure. was in class has a management fund demand the overweight been already investment in outflows room mutual robust asset sector months, the

remaining net addition, increased the FDIC by as specified liquidated the tools the quarter. strengthened housing of the mortgages of seasonal organic the while In supply market agency were held during to quarter end the by

rate the Taken quarter, and environment during providing tenuous worsened interest as a together, increased. volatility technicals demand supply

as RMBS XX-year Slide higher third rate policy highlighting the quarter leading interest U.S. year-end, In RMBS expectations X fluctuated, RMBS sharply and on the versus to volatility. since gray. for left Agency more provides in fiscal performance detail poorly current chart, Agency Production coupon the during Treasury show upper quarter we monetary investor the coupon market. performed Agency

spreads across significantly widened the versus treasuries and to basis Current approximately stack. RMBS quarter Agency coupon lower valuations coupon ended points XX XX the

interest right. pool chart the top increase, specified decline the continue addition, In indicated rates as pay-ups as on to in

of loan right negatively demand securities less impacted balance As higher profile lack more shown roll with attractive consistent lower as a TBA bank the have issuance technicals. chart, in the prepayment unattractive for dollar market the and remained recent

subsided October, underperformed RMBS modestly. Agency stabilize as of in Although and selling the market part did latter in volatility dissipated the month investors the

investments detail provides and our RMBS the during quarter. Agency X changes on Slide portfolio

Our Agency by over and insulated the combination focused our of RMBS spreads to more remain direct rates exposure sheet. priced on Reserve's wider prices higher assets from balance quarter portfolio assets. marginally led We attractively and the of which on largely and Federal as interest higher held lower the are coupons, FDIC to the decreased

specified exposure for In TBA pools roll remain in deterioration exclusively addition, the we to in no the market dollar with invested securities.

attractive quarter. stories holdings our continue We the during pool specified by lower given allocation our valuations modestly the more to of to quality increasing loan improve balance

opportunities elevated near coupon current valuations in we priced rate Agency persist to interest represent anticipate to believe we volatility risk largely mid- Although the current high-teens. ROEs attractive investment RMBS term, this gross on with in production

Our remaining credit are Slide investments X. our detailed alongside CMO allocation Agency on

declined quarter pay due million downs. during the allocation $XX to to credit Our

quality high XX% remains or higher. allocation credit Our with AA rated

to end. on unchanged Our interest-only remained at the totaling Slide million detailed allocation agency of quarter securities $XX right side X

limited unlevered we Agency investments, and these anticipate near-term holdings assets are credit favorable in price our yields. attractive provide appreciation Although IO that believe we

with and short-term at were counterparty the average due Repo X.X% in remained agreements at our funding our relatively steady X remains details collateralized repo hedge billion, weighted Slide book funding consistent by $X tightening spreads and rates quarter to appetite changes RMBS quarter during Repurchase increased monetary Agency strong. end. cost and to policy.

rates those hedges increased borrowing and receive associated impact borrowings increasing of higher we floating notional the of hedge the earnings of billion company $X pay interest the borrowings to current swaps, quarter. Positively, to XX% power fixed mitigating on the notional with during net rate to our of the

investment quarter the position reflecting decline at our to million of value X% $XXX higher cash with quarter ended leverage portfolio. modestly of X.Xx at book the quarter. over unencumbered X.Xx debt the end the remained liquidity equity approximately representing and of versus economic Our investments June, at end Positively, mostly robust in our

interest X $XXX the swaps. rate provides on our notional quarter, we received notional million of portfolio. billion further At swaps of Slide fixed pay the third and swap held of low-cost $X.X fixed end detail

the challenges our book Given presented the of weighted the pay the the hedge our reduce swaps loss. of maturity fixed repositioned average majority fixed modestly significant we receive and to quarter, extend during

over able pay loss pay Agency as RMBS largely with X.XX% fixed our our Because extended loss our increasing the on was recent into the we average durations tenor fixed years, of rates, the low-cost from avoid new were adding X.X higher sell-off, at quarter-over-quarter. to fixed rate X.XX% pay most to

the on we led we changes valuations. an of Slide should aggressively of post in rate XX update a the end as elevated interest Since quarter which quarter, RMBS reduced portfolio of XX, offer our to our leverage the asset declines end. picture as volatility helpful sharp provides third made Agency and hedge October

Liquidity October. a to equity leverage $XXX As our increased investments our remained and as X.Xx in to unencumbered cash declined to X.Xx robust from million. debt result,

see our specified can top the of and in remain allocated pool now quality loan is left we of higher balance and RMBS our allocation to collateral. As XX% with coupon nearly holdings chart, Agency you higher

to pay In quarter hedges in hedge from power X.XX% fixed reduction years, the maturity our providing from now of X.XX% weighted is fixed assets size commensurate pay the addition, the declining with we billion at also $X.X of with billion at reduced book our swap our end $X.X for company. the marginally of declined our Positively, the hedges October. earnings rate and of average support the end our X.X average to

leaves Agency the Federal of XXXX a positive investors, priced was the us the for another in well remarks, near attractively higher the interest in RMBS increased challenging once decline rate given prepared seeks to specified further our for as more potential sharply believe volatility conclude again. term, quarter coupon conclude yet for To monetary volatility quarter third interest bias as rate tightening. our We Reserve pools very positioned

historical Agency as leverage an averages strategy. well position is remains liquidity our Further, below for RMBS focused robust

IVR market well selectively wide historically spreads. to navigate a RMBS volatility is capitalize result, Agency and positioned future mortgage on As

anticipate supportive monetary for valuations believe potential investment. long-term we volatility a tightening as current near-term backdrop provide While concludes, the policy we

Invesco for Thank the you Capital, line support will continued for open Q&A. now and Mortgage for your we

queue first JMP The [Operator Securities. Instructions] the Trevor is Cranston from with in question

of that Can conservative to, staying context? of the near the about is level And you given how term? leverage thinking negative the that talk a you in dividend when the after about maybe bit little October. think mentioned, guys the took can impact I of you're talk sales asset down earnings about level if you guess, end comfortable I pretty as you're you

Brian. is it's with warranted. to before approach longer-term of our that conservative the only a certainly I'll kind given the We volatility John dividend. is as below here the Trevor, of Leverage, that mortgage over average well market do level for turning think leverage in agency the it currently start an comment REIT. yes,

of end lower probably closer modestly the so would to rate in vol June. a And we look a interest environment, little to while be leverage were if where we were probably at

think Given we we approach is are where margin. right now, more a conservative

Yes. John. Yes. mentioned I dividend. And it's Trevor, the

So our on of covering I declined had I comment But mean, first keep fairly by interaction, all, that longer-term next power late will Board, dividend a and been mind determined dividend margin this directly in driven month. is has significant in but say be by recent earnings the EAD a leverage, can't can't the I quarters.

then there them several of one historical available consider factors the profile among when return we And dividend sector. that yields setting our the and then prospective obviously, along target are dividend assets with of EAD, in them,

will that goes board. into there's -- like determined our it. but mean, later I by that a bunch It's So be

Okay. That's it.

queue the with the in is Erdner Matthew And from question JonesTrading. next

balance amongst pretty of portfolio coupons the production going end So part the balanced. to you loan coupon. kind the I the lower of was distribution believe mentioned quarter, the at of

So and in production new coupons? to higher concentrated a higher should percentage be portfolio the expect going we those forward, of

-- as we'll Matt, look we move that in forward Brian. coupons. Yes. here, it's to we it's higher add Yes, likely would

been we a where You'll coupon which notice XX to stack. that of the slide October X% did had was in on along modest amount addition the relative coupon, add we

So pretty estimate of that's purchases forward. think occur I where would a good going new

questions showing this I'm at And further time. no

Okay. Well, guess, we Thanks. I'd in like I on forward to thank look and February. to us speaking, the call, everybody for joining

you. Thank

This Thank concludes participation. call. for your today's you

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