INVESCO MORTGAGE CAPITAL INC

Welcome to Invesco Mortgage Capital Incorporated's first quarter 2024 investor conference call. All participants will be in a listen-only mode until the question and answer session. At that time, to ask a question, press the star followed by one on your telephone. As a reminder, this call is being recorded. Now I would like to turn the call over to Greg Seals in investor relations. Mr. Seals, you may begin.

Thanks, operator, and to all of you joining us on Invesco Mortgage Capital's quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website, Invescomortgagecapital.com. This information can be found by going to the investor relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome and thank you for joining us today. I'll now turn the call over to John Anzalone.

All right, well, good morning and welcome to Invesco Mortgage Capital's first quarter earnings call. I'll provide some brief comments before turning the call over to our chief investment officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning are our president, Kevin Collins, our CFO, Lee Begley, and our COO, Dave Lyle. The first quarter was characterized by sharply higher interest rates across the yield curve, as persistent inflation and strong economic data led to a repricing of the market's expectations of future monetary policy. These expectations, as reflected in the federal funds futures market, adjusted from projecting over six cuts in the Federal Reserve's benchmark rate during the balance of 2024 to less than two cuts today. Despite the sharp increase in interest rates, interest rate volatility fell as market expectations for monetary policy converged with official projections by the FOMC. In addition, organic mortgage supply remained at very low levels, while demand from money managers, commercial banks, and overseas investors broadly outpaced expectations. Against this backdrop, higher coupon agency mortgages outperformed treasuries, given the decline in interest rate volatility and improvement in supply and demand dynamics in the quarter. These factors led to a positive economic return of 4.8% for the quarter, consisting of an Eight-tenths of a percent increase in our book value, combined with a 40-cent common stock dividend. Our debt-to-equity ratio ended the quarter at 5.6 times, down modestly from 5.7 as of year-end. At the end of the quarter, 94% of our $5 billion investment portfolio was invested in agency mortgages, 5% invested in agency CMBS with the balance in credit assets. Our liquidity position remains strong as we maintain a sizable balance of unrestricted cash and unencumbered investments totaling $451 million at quarter end. We began to build an allocation to agency CNBS during the quarter. We believe this position will benefit the portfolio in a number of ways, most notably by providing stable cash flows with minimal prepayment risk, attractive returns, and favorable funding. During the quarter, agency CMBS spreads tightened as new issuance volumes remained relatively low, funding improved, and higher yields drove investor demand for fixed rate bonds. Earnings available for distribution was supported by attractive interest income on our target assets, favorable funding, and low-cost pay fix swaps. For the quarter, EAD per common share was 86 cents, down from 95 cents last quarter, primarily due to adjustments to our hedge portfolio. but still comfortably above our $0.40 dividend. The trends of higher inflation readings combined with positive economic growth have continued into the second quarter. Interest rates have continued to move higher as expectations of the timing and magnitude of rate cuts adjust. This has led to an increase in interest rate volatility and has put pressure on mortgage valuations. To that end, as of May 3rd, our book value was down approximately 2.5%. Given the increase in market volatility we have seen since quarter end, we remain cautious on the near-term outlook for the agency mortgage sector. Our recent allocation to fixed-rate agency CMBS reduces our exposure to near-term interest rate volatility while providing attractive returns with favorable funding. Over the longer term, however, the potential normalization of monetary policy and a steeper yield curve should be supportive of agency mortgages. We believe agency mortgage investors stand to benefit from attractive valuations, favorable funding, and robust liquidity as their macro environment evolves.