- Earnings call transcript Q3 2022

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Operator

Welcome to Invesco Mortgage Capital Inc's.

Third Quarter 2022 Investor Conference Call. [Operator Instructions].

As a reminder, this call is being recorded.

Now I would like to turn the call over to Matt Seitz in Investor Relations. Mr. begin now may you the call. Seitz, you. Thank

Matthew Seitz

operator, Invesco Mortgage to of all on us joining you Capital's Thanks, and Quarterly Call. Earnings

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

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

third Finally, over on for nor Invesco accuracy turn teleconference joining welcome, of website. responsible for Capital by authorized the now call not earnings Again, Anzalone. you guarantee The are webcasts John and parties. does our and only located the us is not thank our I'll John? edit provided to today. Mortgage transcripts

John Anzalone

welcome the its the basis Kevin XXX Brian Capital's turning the increased Invesco a point added and current of during Fed Lyle. Phegley, and total funds the spreads President, quarter market to us Fed. for before separate to markets volatility XX Chief Collins, our on by persist our highs. drivers on quarterly as X a at and tightening the decade. risk markets. Equity points in tightened the and third a FOMC recorded Also in widened CFO, Good Mortgage rate persisted the over have poorly detail. to hike our same. worst in comments Dave the a the sector Financial from now largely agency recession then volatility, third XXXX further conditions Earnings aggressive Officer, Lee policy, monetary performance in elevated discuss fears Persistent liquidity more rapidly over reduced The our have Investment levels the at Third already Call. COO, Mortgages priced tightening as the quarter financial tone challenging the occasions inflation basis of of give participate by yesterday off mortgages portfolio subsequently declined, and for that the brief to call Q&A morning, joining a to are general during Norris, performed I'll remained as levels some and in more quarters, pace elevated call response Quarter mounted in consecutive increased X inflation, multi-decade credit environment

backdrop, at remained attractive share third stock repurchased of We progress made favorable environment portfolio. quarter, be that a to structure funding distribution program. on portfolio. of at-the-market earnings by remain swap value created book for have further on leading reinvestment our the that front of have to Series XX% approximately continues third the we program value challenging book volatile, beginning during the mortgage and preferred ending stock stock, B of power of repurchasing On our repurchase performance supportive the the agency of inception remained positive C our the the in X.X%. preferred X.X to focused stock approximately Series issuing earnings $X.XX of our an of our during million Since capital and improving shares start preferred common note, assets our wider declined through quarter mortgages, the spreads into May higher-yielding outstanding program. has a the September 'XX, and our we prior representing decline agency in per given of a quarter and Further, this fourth Given $XX.XX. the the on Since quarter, our relatively legacy target common available for rotation at strong along with low-cost

and value invested book of preferred agency portfolio, to our in TBAs, stock, our billion Because remain maintained cautious $X.X the mortgages, X.Xx. was sizable substantially the end, we decrease investment unencumbered mentioned and and million. of all $XXX.X including leverage a in we relatively in the earlier, economic I on drivers mortgages balance cash At near repurchases of investments totaling of quarter term. unrestricted increased Given

are some been starting seen However, highly financial we to are potential to the tailwinds. and levels spreads Mortgage at has correlated great since volatility. not see now crisis,

limit subside also few Fed's positive for policy improving which should action would becomes quarters, interest be The which Fed's over the rate the and rates sharply reducing the path pace here, prepayments. the stop future mortgages. the Brian as will I'll technical for next also mortgages, of higher mortgages the for we through new issuance volatility of helps is portfolio, As see while clearer, in very reduce portfolio. go agency the of borrowing outlook runoff impact

Brian Norris

the over markets call. macro fixed listening Thanks, the the environment the within an good X, to John, provides income and begin year. the to I'll overview of morning everyone on in which changes past Slide

rates consistent quarter, During of and past year. to tightening to elevated the Reserve theme monetary by persistently over pressure the third leading continued another policy higher, interest Federal flattening bear the the inflation acceleration move, a

with that quarter, on approximately that longer-term decline while amount, should from reflecting levels of increased longer-dated future yields year term, than of the half adjustments in as evolved heightened maturities chart. the tightening basis as XXXX, roughly for easing further current the and maturities the During by monetary followed increased less environment. inflation the well latter the left XXX X bottom policy points, the half indicated expectation in have expected in expectations near Market

supply Reserve, quarter. net banks lower The cap the of by with right-hand agency to lower previous in during Federal Reserve's cap Fed's the sheet month significantly in As of third the $XX approximately the on net in during September of the increase rates concurrent $XX a quarter, mortgage $XX to of third billion holdings market. resulting it of billion With billion agency in unlikely the portion the the resulting portfolio and asset significant per month modest increase shown be sector demand of their activity. on to end a reduced in purchases $XX.X Federal and commercial mortgages billion the agency balance quarter, $XX the for will billion, the the the runoff per housing U.S. paydowns drop restrictive leading in cap increased mortgage to is mortgage refinancing versus absent chart,

volatility for path quarter, of pressured RMBS Moving well chart, and hedge the spreads. attracted on in upper as sheet, wider policy sales on treasury past the gray. fund coupon to detail poorly RMBS the balance we sector versus and third XX-year over uncertain demand monetary In XXXX manager the market. the the performance current resulting lower, again valuations Slide we year, provide Agency in more performed agency the July The X, sharply where highlighting the Agency rate of a valuations significant elevated left-hand investor from hedges quarter expectations mortgage as Fed and interest show reduction communities. money in very performed cheaper from during

However, worst quarter quarters, with and sentiment the the the sector worsened September, September concluded sector negative worst shifted its year third years. in the and representing XX representing in resulting worst the on previous Combined the quarter in August X in quickly record ever. also month for

sharp before their pay-up chart, stabilized As increase as protection mortgage pool briefly demand shown descent the in specified in continuing upper given prepayment declined for right rates. the further

indicated the detail continue converge right X Slide our changes financing to While short-term in with in rates, TBA investments the funding market lower in Agency the chart. and on the quarter. portfolio implied RMBS during the as provides third

period improved our improvement weighted net at end coupons, in yield expanding spreads quarter, the X.XX% rotate coupon to on and into more available second a investments investments to interest of interest during significant quarter. the the from our end lower supporting end higher returns and attractive quarter continue our given We X.XX% company. power of capturing higher rates the RMBS the The of Agency the third at earnings wider the margin average

production and balances those Texas stories slower premium. coupon when that Reserve and Higher specified stack expected which in a states, Our pool With of investments FICO attractively reduction TBA for allocation RMBS eliminated expectations the are lead sheet that low discount valuations, the at trading speeds diversified Federal have on to turnover attractive. Reserves characteristics lower prepayment well typically the largely the we across prices, perform continue Agency roll banks coupons. and the from a direct balance faster both market potential from lower at as and priced discount Despite given a provide a premium dollar as demand are remains discount Florida, coupons, in deterioration and to environment. we all trading to reduction at on such the almost weighs sales and exposure commercial loan characteristics, in coupon Federal trading well in to when speeds

cycle we cheaper Although opportunities pools near-term the ROEs -high Reserve volatility on teens. valuations with to mid- investment persists, in the believe attractive anticipate continue Federal TBA to we and as specified current heightened represent very tightening

Our representing remaining on portfolio. Slide the X half with are CMBS credit approximately non-Agency detailed investments $XX million of

the credit given our paydowns declined quarter Our allocation modestly on during credit securities.

are Our XX% high or of million quality remaining with $XX credit higher. single-A securities rated

are anticipate we an in and assets approximately Although real repaid as October. loan, remaining our value unlevered held these was provide unlevered representing believe basis in $XX near-term limited are market favorable commercial million on Positively, price attractive estate yields. holdings appreciation, XXX% we full

Repurchase shown agreements in quarter the details by Agency September collateralized X to at billion RMBS Slide left. chart on $X.X Lastly, our as funding upper XX. as increased of the book end,

book X.XX%. with our pay those of tightening in repo higher rotation offset hold Given hedged starting the in our also hedge are Consistent to equity short-term prepared our received further end to value. to TBA in represented rate a environment debt a in result and net the a swaps, we of swaps rate Agency hedges unchanged another million from X.Xx the quarters, over valuations quarter generate XX% past additional the remarks, mid- our with equity to dates notional served for of was to holdings $X.X including To pay roughly the notional result and order year record. resulted as quarter in ever expected extremely quarters exposure rate as in specified performance when yields continue starting production increase our the repo pools RMBS of combined was in the Positively, with coupon leverage costs our rates of In during Economic attractive increased monetary very changes to end. performances and sector ROEs preferred borrowings interest to and worst RMBS of to current Leverage forward swaps. pool underperformance result associated net into costs. coupon by XXXX. resulted fixed billion XX-month amongst sharply quarter the high-teen increased Agency yield has floating TBAs. current weighted curve, of X-month the and challenging interest experienced third the Positively, cost specified increase historically of as interest worst on October the investors. conclude to on asset decline increase of also the $XXX policy, XXXX and our exposures with significant funding repurchases Hedged increased funding previous average modest the with leverage our in as for out

addition, benefit in on given and policy market conclusion Federal impact supply. improving monetary mortgage higher from and reduction In Agency the the as the RMBS technicals volatility should tightening rates of cycle Reserve of the the anticipated near both

entry RMBS continued continued open line valuations Invesco and now market do remain time Agency support for today's Capital, cautious those for you point we Q&A. with for Thank the for given While attractive your volatility, near-term represent longer Mortgage will an we horizons. we believe

Operator

Instructions]. [Operator

comes question from with Credit Harter Doug first Suisse. Our

Douglas Harter

weakness October of about kind might the the end happened of sits over kind today? quarter size where portfolio just into Given spilled that any September. of portfolio you in a have took tail a leverage of talk at actions third you the lot Can that and

Brian Norris

it's Brian. of Doug, the leverage since unchanged Yes, mostly end is September.

equity, to debt TBA. X.Xx around including So

book So X.X%. John like value performance X%, said, down roughly quarter-to-date is,

mortgages, may too a difference. have but much to to really agency modestly reduced big So we exposure not make

Douglas Harter

steps of has common to making preferred been book And the equity, reduce kind but value then Great. of you've obviously kind amount to of fall. continued

what get Just talk of looking other you're kind take? to a about as equity the where you're trying steps percentage preferred of to total and

John Anzalone

And target. for ATM repurchasing well through accretive getting And our we're just kind both can is accretively think to through if this look for in on structure context Yes, the Doug, capital thinking John. to it as as of to -- or still the mean, preferreds XX% raise trades. XX% is continuing we either in committed opportunities, block of obviously rebalance. we're I about range preferreds common I our the

So those it. future about near go any avenues we're the of to how in is going

Operator

with JMP Trevor question comes from next Securities. Our Cranston

Trevor Cranston

need You talk if leverage at strong emerging Can or income today. what where that prepared you get with potentially for with obviously increase guess eventually But spread to guys spread your book mentioned to about remarks. see meaningfully is agencies order earning leverage tailwinds the some I you'd in of pretty are from value the the in when to a is appreciation here some it's you tight?

Brian Norris

need Yes. it's Trevor, in to volatility. We Brian. a definitely see reduction

I think point. the that. a of reduction press comments high. think And But We just thing that volatility to should longer potentially tightening. in to the volatility the see be or conference, be start a volatility market We a see looking near-term talking we'll we more again, that. as reduction a for that, about that's actually, this think policy result should we're primary continues in that relatively on that but monetary Powell's at shallow yesterday's for frame time

think that going longer happens, look play we're that, But increase into somewhat to remain we that So potentially to should until we that. leverage And then were the play cautious. if out. would out, term to over that

Trevor Cranston

speed Okay. the low. very on obviously, portfolio, still it's for the Got it. prepayment Then

about some speed You sort point? mentioned of potentially for at just trading discounts. be at spec would you prepared when remarks kind the they're of in this the talk paying lifetime faster what projected Can generally portfolio of pools the

Brian Norris

relatively keeping we're higher Yes. mostly low buying prepayment to We into issued of newly well, kind -- mortgages. because continue that's speeds as our think we shift coupons,

on We currently. that seeing little digits hold in single But increase into rotation bit. around we're CPR X maybe still we expect for And turnover anticipate high range. coupons would longer-term the kind of So range. of to would a we CPR high be a should CPR X% our higher what kind

Operator

[Operator Instructions].

with Stewart next Jason Our question comes JonesTrading. from

Jason Stewart

of guys political you the at point? this view do How Fed nature the

Brian Norris

Jason, one. it's Brian. Yes, tough yes, that's a

was. sentences there statement a added be some were conference seemed dovish little or the yesterday statements clearly, than think to I to bit more that press the

is of think So other clearly, some I likely the Chairman committee hawkish more members. the than

and dovish is think way views of hawkish I his he and the and goal potentially now dovish to it's lease be be than so inflation. easier that And control now later it to

John Anzalone

Yes.

helpful all, also presidential I slightly think get probably is trying the aggressive or getting near that. to of of that's being think cycle people and I this yes, more more I terms -- more John. but the first -- being agree in is all with just get more of And hawkish, in quickly, inflation -- that. avoiding then next into the all term

think the calculus probably. I part that's of So

has of pivot thing the went mortgages, the didn't come time. the little other talk that been selling for mortgage The talk an bit. market whole potential the is a sort away didn't for It's whole get that up which with of dovish a supposed long overhang -- of we

and go forward holdings would politicized. most really mortgages the less we that -- going could the and create losses as avoid wants as any of discounts, like are we as see think And is you things be could selling easily of becoming less that possibility potential and -- sort think like think Fed paper realize, Fed overt kind forward, of the you I battles. massive I political becoming I that, of to

I volatility more though, aggressive meeting more mortgages where that being mean for to to -- hikes endpoint decreasing. good past think and for think potentially it path going I that the is potentially in the to but a than of it's maybe the longer each be and less seems I good think I that's kind out where important So is. Brian's is point, laid

So that we positively. view

Jason Stewart

it. peers TBAs your a the little would in of change ? of bit terms cause more TBA What be to do. some And then Got than used guys view your aggressively you use way you on to you

Brian Norris

in production the as Yes. to I just continue higher. attractive. being comes see mortgage continued pretty it's mean TBAs we've newer online coupons certainly, of seen as kind deterioration to continue be march rates to newer that created coupons, We've

But production are just to which those see to the we start a we invest kind as to on back to TBA year, X.X if coupons, little out somewhat to we kept that to and remain higher we anticipate were more things see those would has XX we decline, we start limit But and stabilize see Xs coupons rates if relatively how much we're start in kind anticipate -- a to attractive. of of come start willing So see bit, come attractive. of market. of to market the banks into kind would

environment, to the that I sense make increase it there. So think in exposure would maybe

Jason Stewart

you. Got

on more side, got I ball the you. So

Operator

are questions queue in no time. other There at this

John Anzalone

everybody I'd to again us, Thank next All Well, thank forward you. quarter. look we to for you right. like meeting joining and

Operator

you today's call. disconnect participants this All at That concludes for may Thank time. joining.

Invesco Mortgage Capital (IVR) 3 Nov 222022 Q3 Earnings call transcript