IVR - Earnings call transcript Q3 2024 | Invesco Mortgage Capital Inc.

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Operator

Welcome to the Invesco Mortgage Capital's Third Quarter 2024 Earnings Call. [Operator Instructions] Also as a reminder, this call is being recorded.

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

Greg Seals

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

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

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

John M. Anzalone

discuss Thanks, Earnings to All turning over right. and Investment Capital's to comments to our I'll our Officer, Dave portfolio the Kevin some Q&A call for Call. Third this before call our in is CFO, on Also recently more morning us our joining COO, appointed Chief our welcome brief Lyle; Mortgage the Invesco Norris, provide Gregson. and Brian Collins; Greg. interim President, Good detail. Mark morning Quarter

Mark. welcome, So

future the slower sharply to market's rates for market. dropped monetary of to curve and led factors labor as inflation the a also of interest a across quarter, the During policy. the activity potential These signaled weakening expectations reacted cooling repricing economic by investors

the Fund's the market in worth of point additional XXXX, another points would reduction reduced target to reflected to by points September, XX XXX with an initial the its into in FOMC's during XXXX. basis that basis basis benchmark XX cuts the XX XXX be of balance an rate priced expectation rate futures Federal Following

performing volatility industry coupons decline quarter. mortgages a yield better higher premium of at treasuries in par. a and agency for than the during mortgages for coupons Moderating this mitigated the curve outperformed backdrop, as spur lower demand trading the coupons Against agency third rates demand steepening to interest with sharp

levels, rates, a prepayment speeds activity very housing in increased surge the low refinancings notably remained but at elevated coupons originations. in as mortgage limited on and in given summer decline the rates mortgage Overall, to led higher speeds more recent September over in

Given Combined mortgages financing market the being $X.XX. the for volatility modestly, return common prepayments, decline of collateral increasing CMBS throughout X.X% via mortgage value higher quarter. in implied share remained modestly Agency for value to the increased to premiums implied in positive coupon-specified $X.XX relatively -- a resulted dollar on while mortgages. The an or the common stock roll increase pressure the versus our contributed risk dividend, roll unattractive dollar this wider, the and pool rates environment investments per agency premiums relative market book upward for in X.X% with on via quarter. TBA economic

path future quarter, valuations. mortgage has pressure As treasury the increase both monetary heavy of U.S. caused has rate which in interest the enter on and elections the fourth sharp around and a volatility, we put uncertainty policy yields

since X/XX. of approximately our value night, down As book last is estimated X.X%

from Our quarter-over-quarter. debt-to-equity our while ratio at debt-to-equity June ended as economic X.Xx the XX, X.Xx from of to second X.Xx, increased up quarter X.X ratio

to we investment of investments balance of $X.X quarter, end primarily billion Agency CMBS, totaling of billion unrestricted maintain $X.X and portfolio of $XXX and our the continue of $X.X mortgages cash sizable a billion of the unencumbered and As agency consisted million.

of in second to our quarter. in reduction primarily our effective interest changes related share was the common hedging per $X.XX size compared distribution portfolio. in income for net composition and reflects to available earnings quarter, increase the This For $X.XX a the

obligations we our structure and to help will our Series shares December optimize dividend which B preferred forward. announced reduce our XX, capital redeem Yesterday, going intention our on

policy the the continue combined to for declines. lower in coming ahead, monetary can recent the for cycle investments. months the curve Looking U.S. yield should with disinflationary volatility, trend creating policy in need of economic Federal restrictive the monetary suggested rate as mortgage environment steeper This favorable election the ease interest to agency data easing a end lead Reserve and a

policy shift, reverses the growth near-term market labor risk. expectations for the trend disinflationary economic posing However, improve, and a monetary

pressures could funding impact demand short-term the into year-end sector. for Additionally,

of and to we Despite stands policy on of risks, near-term valuations from given and agency normalization monetary attractive performance technicals. supply mortgage benefit support these are constructive as the sector demand

constructive remain new offers adequate CMBS sector its investor we with demand issuance on being gradual also value expect fixed investments, in and the met to as relative a other attractive income Agency as protection We return given profiles. prepayment increase

over Brian the Now call portfolio. to go to I'll turn through the

Brian Norris

Slide X, rate which interest the Thanks, everyone mortgage overview I'll an call. John, morning the and in good provides on listening to markets. begin of to agency

Fed XXXX on as were to yields third declined XX-year yields points the in and labor X since rate during XX and respectively. declined in XX due the compared weakening upper The futures basis more cuts of second pricing and quarter left bottom Funds the XXXX yield Fund's quarter. quarter the the XX X-year disinflation the left, ongoing the basis Investors point XXX the end shown U.S. market a yields market. As curve end the XX-year chart on third and of the for Fed by treasury basis chart while points, in across lower year-end priced provides to

investor By to a may the monetary agency the of remain the rise report policy policy uncertainty and moderated caused employment has sharply, to rate monetary in strength that expectations tighter interest for raising mortgage leading stronger-than-expected September concerns of Elevated longer. October. economy volatility due to underperformance October, end

upper in right funding short-term since chart changes in The the reflects rates year-end.

supply Positively, policy but risk the increased the repo monetary concerns for demand exhibited although rates repo volatility election heavy end of easing, normalized pressures in third rates market at expectations renewed policy future October, U.S. During quarter, funding for funding the in remained and quarter with regarding and supply, line modestly declined uncertainty spreads substantial treasury into and treasury wider year-end. near-term have repo. given monetary given

right Reserve U.S. the mortgage Lastly, chart Federal U.S. per added sheet banks. of details with bottom and declining Fed's approximately modestly $XX Runoff to balance the billion the $XX banks balance by mortgages to by agency sheets. holdings month, while agency continues, their billion

or Agency with as MBS expect greater We regulatory Basel XXXX provides and finalization demand eases guidelines XXXX for of III rise monetary policy late the to likely early banks by clarity. and the bank

detail flattening quarter, underperformance remain end limiting a sector. interest increased during market. the chart, left we versus performance year-to-date quarter coupons volatility declined wide returned current attractive XX-year ongoing bear on mortgage as the gray. In more provides to improving rate investor sharp X the rate as U.S. agency treasuries highlighting demand. interest the quarter curve in historically upper interest Current year-end, show the Slide and the yield outperformed to volatility demand. third and on the however, Since and curve is yield coupons led of in rate Nominal the spreads coupon steepened, since current volatility

reversed to the Specified improved in rates increase third quarter protection. led partially interest as to for less prepayment in decline the but has it pool has pay the abrupt due demand rates, mortgage in

again market TBA for shown implied the higher dollar coupons. securities chart, unattractive most funding in roll for than lower the as with relatively Lastly, became right rates SOFR

We prefer continue yield prepayment predictable pools over given funding TBA to and more levels. specified favorable their behaviors

portfolio during Slide summarizes and the quarter. X investment details our changes Agency RMBS investments

quarter-over-quarter XX% we portfolio as ATM increased RMBS coupons. Our higher Agency proceeds invested issuance into from

lower coupons the RMBS. We as continue relative tighter our to discount spreads into of and Agency portion improved rotate given value a CMBS agency

specified balance predictable a interest our to from benefit volatility Reserve's exposure banks are are rate focused remain see higher in loan discount balance largely direct lower given characteristics we which in both environments should collateral more assets well largest decline Agency to Overall, on our and prepayments. by prepayment that on RMBS, perform concentration sheet. expected insulated Federal coupon the pool in and allocation held and commercial We greater premium in with from focused

we market the TBA $XXX best into coupon as levels during implied million funding position our addition, deteriorate. In fund in pools roll dollar rotated quarter, notional higher the

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

believe Slide fixed Financing maturities, value relative Agency reduce we rate XX% Gross And on accurately Agency as third benefits, the Agency X different when reflects to We our our the to offers CMBS double CMBS ROEs total protection disciplined our has new its million which able provides detail on our between counterparties portfolio. sensitivity purchased robust levels. prepayment finance and in the volatility. only to ROEs. were in adding interest multiple been capacity low many attractive Agency exposure on their through purchases been We risks. with at and mainly quarter, portfolio. of have investment RMBS our purchases exposure our $XXX approximately been CMBS we have digits bringing

risks to monitor as of sector for RMBS recognizing the the our associated benefits sector opportunities We as portfolio overall increase diversifies allocation our the will continue the they portfolio. available, to become within Agency

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

at and both securities quarter with Agency to $XX allocated million Our remain $XX allocated credit unchanged, interest-only IO allocation to and credit to end. agency million

investments, these believe unlevered anticipate digits. they we we Although in returns provide holdings, appreciation attractive the with for near-term limited in high single yields price

$X.X and and swaps quarter end. our MBS increased assets, to billion $X.X collateralized details increase equity interest to by billion, notional book from our well pay-fixed as Slide base billion. our funding in increased billion $X.X reflecting the X Agency $X.X at agreements hedge rate from Repurchase and

our our borrowings treasury from hedge we futures. notional, in XX% to hedge as to XX% position ratio increase in the smaller the increased Given of notional decreased longer quarter-over-quarter our duration

similar this hedges. in further interest the average to as led assets decreased, rates of decrease sensitivity our decline rate of addition, book the our a In weighted to the sharp swap the maturity warranting interest at in Reflecting the of in average of in X.XX%. X.XX% the second an from X.X to declined weighted average end increase our years, swaps change, swaps on resulting maturity from the the our coupon of years weighted pay-fixed quarter X.X repositioning

X.Xx structure. equity debt the our positive in to at The common the to total X.Xx quarter at of up the our equity our from June, in at nearly quarter while increase ended leverage leverage decline of capital X.Xx total common end. impact leverage from and improving equity, end X.Xx debt to declined highlights equity Economic

Subsequent will to improve B December, call late enter as quarter further to which we in XXXX. our end, our preferred intention we equity announced our structure capital Series

policy Agency on impact allocation the strong easing. outcome while reversed and To volatility, financial path well third interest Agency is investors recent volatility and interest as weeks in volatile remarks, and leverage near-term impacting quite debate become in continuing of liquidity, given monetary believe policy quarter, mortgage We October, our The been increased notably robust about fiscal valuations. our despite conclude the RMBS magnitude well to the results election have prepared its the sharp as concerned in IVR rates market in moderate and to markets decline positioned current our of increasingly navigate increasing as CMBS. rate negatively to also

historically We to passes. on election capitalize the as the and perform attractive Agency believe continue to poised RMBS currently sector spreads volatile well is selectively cycle

substantial providing the investment while our provides assets environment potential improves. also to market as liquidity deploy cushion target position stress for Our into further capital

a for decline as of agency and to we lead addition, and interest from both further they curve investors, a commercial volatility, of yield REITs. money supportive demand provide monetary believe improve banks, In mortgages overseas backdrop steeper managers will in which easing rate policy

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

Operator

Jason Instructions] JonesTrading. question comes [Operator like our Looks first from Weaver with

Jason Weaver

But comments I book you about change you I fact want dampen your that, that support the of leverage set forward? higher bridge Agency approach i.e., volatility. going addition that the there, does to your targets appreciate might CMBS. to could how the leverage value

Brian Norris

increase to extent Yes, exposure that for the that to allow rate that, Jason, question. our fall the it's think I to leverage. Thanks would declines us Brian.

of us has challenging, in where pretty a October think good attractive are the clearly, been I puts spreads and. but position that month pretty

the As future. volatility in it add us more declines, gives room be that to able to

John M. Anzalone

I'll agency haircuts this -- John. point CMBS and mortgages. has out the same cost is Agency it borrowing as also basically

from leverage either. perspective impact doesn't that So that

Jason Stewart

on sort it. Got any in helpful. raised about in quarter-to-date, of the curious you've was bit And positioning that a change prospective That's quarter? noting I ATM then quite your third

Brian Norris

too Yes. changes-wise. significant, Quarter-to-date, nothing

into I October think, and pretty I volatile, like strong we a liquidity said, was moderate and leverage. it came position with

significant make volatility that have so withstand of us to And ability to not since quarter kind changes our allowed to end.

Operator

[Operator with next Cranston comes question Instructions] from JMP. Trevor Our Citizens

Trevor Cranston

for about of thoughts have have either swap purposes, over hedges if and instruments have as relative change those swaps last just kind so I general spreads of the curious using using You months. hedging going treasury any was your of in why underperformed there's several swaps any And negative? to sort become if kind guys used guys a historically you forward. terms versus thinking hedge -- have of treasuries, in mostly

Brian Norris

Yes. Trevor, futures the in certainly it's treasury more third we to No, prominently. started Brian. quarter using

is and is robust. to You're about right, been treasury treasury from mostly has supply And it's now. more mean kind it's the quite that to at of swap and just the continue spreads, I spreads -- think And well tighter be LIBOR it robust of SOFR supply expectation swap for been while to will likely point. moving credit have move removed this -- component I the a

a that we're be won't bit spreads swap reverting. concerned mean So

tightening this so relatively we be persistent. that could And see

to our that help And so treasury exposure, mitigate our will book our idea swap is increase spreads. in exposure hedge to futures our

Operator

with next Our comes Stewart Janney. from question Jason

Jason Stewart

Just a clarification. quick

On accrual? dividend XX/X X.X% that through down ], the including the is [

John M. Anzalone

of I'm includes sorry. the excludes that -- Yes, dividend. it the Correct. Well, impact

Jason Stewart

the Excludes dividend.

X.XX% obviously, big moves ]. [ of morning then sort And this some with XX Okay. approaching

Just terms was your got fall? as think of wondering on what a in benchmark where your how with headed we overnight? of that mortgages for news maybe coincides macro And view are the you rate take XXs

Brian Norris

morning. Yes, so certainly, pretty fresh far foods this

of rates based the the treasury think expected I on in -- outcome the largely election. was move is

that's a not that surprise so perspective. from And

I I think down, here for a agency initially, come mortgages, vol the been at in positive implied has that's last XX actually looked least or so haven't so. minutes

been, day big have markets election, on some there the pretty the in historically. clearly, after So swings

But realized of a I it's volatility. versus implied do think volatility question that

implied event, that I I think this kind has of so now we're a I that's think said, down come past positive. like

tough where as far question. of end kind As yields treasury that's up, a

that the think kind range in is here in expectation the X.XX% of near term. I X.X% to

implied So for could lower pressure But see coupon be and we vol agency the continue to should mortgages. higher. particularly positive, both some higher steeper curve relatively

Jason Stewart

Yes.

way out? out portfolio far. the when the feel And house helpful has view or -- Okay. on your construct and and That's is that you end the Fed the remains some portfolio? be short the taken about I if word? to these look I forward of we'll Or the rate funds on is so steep of color. important guess, strategy [ might you of see at forward your rate view curve, that at ] mean, then trends a the Is underlying the Fed the one like the take of and you inflation offsides is cut moves, And more the sort X% their how X.XX% the forwards do net-net to curve come versus structure

Brian Norris

Yes.

means level has X% Yes, overall end your what house prefer as vol. the the it Clearly, our that a X% think volatility been steeper lower of for may important steepness range the and be the curve point, forward. to now XXXX. and of view we in curve and cut to opposed between to I less going

out to So night just number. in we'll of tariffs to I I that been cuts, based that near clearly, on probably see think and we so think a of plays specific I lower there's have end again, here about settle term lot that and the range. the on of moves tax But a how last kind talk before think of kind over

Operator

Hagen Eric from with comes question next BTIG. Our

Eric Hagen

for overall spread in your about way I that of because the the leverage here. stock change follow-ups of your And preferred does equity couple does might debt to retire you that range leverage? that explore levels? you the different mean, a think Maybe change

Brian Norris

Yes.

doesn't the capital I our But change the will total overall think debt-to-equity move view debt-to-the-common, normalizes. of it kind our on as that. structure higher

Eric Hagen

Is your you Okay. running that range target near there the leverage for term? a over envision with

Brian Norris

X that comfortable Debt-to-common, been area. pretty Yes. around we've

us lot kind over and level to all the that near that has I pick been term. But I to evolves if a come a of kind liquidity, think market up see it notch pretty higher of comfortable we'll generally of gives allows maybe X us monitor down. a it continue where think how conservative/moderate the we here

Eric Hagen

Yes.

Okay.

Another in see you on spreads do to follow-up are kind point mean, risk conversation. the extend or see at yield duration a I rate curve would extending sell-off? mean, your there that basically spread a appetite that of you the have I how steepens, this you gap? I constraints more widen do rally as mean much maybe duration gap? And your to any

Brian Norris

to keep curve far over X. well, rate been Mortgages to versus that really long close trading we inverted. -- rates As has intend the pretty the as goes, since have pretty been

tend don't that change as off. as think, I here. too And near what volatility But to so they said, underperformance kind implied dependent at dramatically. least expect I and rally is of is from in upon to fell And means the where it rates outperform rates moves like we that term,

I'm to question Sorry, what remember trying the was. first

Eric Hagen

got think gauging in you to I or sell No, a mean it spreads rally just the it. was sensitivity off. a I

Operator

[Operator Doug Instructions] question Our next comes UBS. with Harter from

Douglas Harter

light especially on the Wondering about you're could to touch just XQ? if how of dividend the challenging kind more you and start of kind in of thinking

John M. Anzalone

on John. or recommendations. as recommends our Yes, determines the always, Board a so it's dividend Doug, dividend based

set So we're mean target our available I dividend of at that policy. said, driver are. what biggest the we looking is assets generally that's on where ROEs where

that goes. yes, we'll So see of kind where

we we have have decision. to X.X until think months I that make

happen and then. lot between a now So can

we balance to competitive in investor we with space the then line with that stay within And want expectations.

we of So look the it's at. kind things

where we're at right of kind that's So yes, now.

though. early So a for little that,

Operator

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

Greg Seals

you look speaking for joining everybody, we to time. Thanks. and forward to next thanks, Well, Okay. us,

Operator

time, your this conclude may At thank you does disconnect We your for today's Thank you. participation. lines. you conference. That

Invesco Mortgage Capital (IVR) 6 Nov 242024 Q3 Earnings call transcript