INVESCO MORTGAGE CAPITAL INC

and recorded. Now I would like to turn the call over to Greg Seals in Investor Relations. Mr. Seals, you may begin the call.

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 or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome. Thank you for joining us today. I'll now turn the call over to IVR's CEO, John Angelo.

Good morning, and welcome to Invesco Mortgage Capital's fourth 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 for Q&A Our President, Kevin Collins, our COO, Dave Weil, and our CFO, Mark Gregson. Long-term treasury yields ended the quarter sharply higher as the disinflationary trend stalled and market participants dealt with fresh uncertainty regarding the impacts of future monetary, fiscal, and trade policies. Expectations for future inflation reflected in TIPS breakevens rose over the course of the quarter with the two-year breakeven ending the year at 250 2.54%, up from 1.77% in September. This trend has continued into this year, as the two-year breakeven is now comfortably above 3%. These uncertainties, combined with a robust labor market, led to a recalibration of the market's expectations for future monetary policy. Following 100 basis points of reductions in the federal funds target rate over the course of the third and fourth quarters, Fed funds futures markets expectations as of year end 2024 reflected only one to two additional cuts in the target rate through the end of 25. This compares to an expectation of 10 cuts through the end of 25 priced in as recently as mid-September. Against this macroeconomic backdrop, agency RMES underperformed treasuries during the fourth quarter. Underperformers during the quarter primarily took place in lower coupons. as a sharp move higher interest rates, limited demand for discount securities. Although industry volatility moved higher during the quarter, supply and demand technicals for higher coupon agency mortgages were supported as supply was limited while bank and overseas demand improved. Couponing speeds largely remained at low levels given limited housing activity and elevated mortgage rates. Trading was on higher coupon specified pool collateral declined modestly given the increase in interest rates. remained relatively well supported as implied financing via the dollar world market for PBA investments remained largely unattractive throughout the quarter. Agency CMBS risk premiums contracted notably during the fourth quarter given increased optimism regarding renewed bank demand for stable cash flow profiles amidst elevated interest rate volatility and relatively modest new issuance. Against this backdrop, The value for common share decreased 4.8% to $8.92 per share, and when combined with our 40 cent per share common stock dividend, resulted in an economic return of a negative half a percent for the quarter. As of 2025, agency mortgage performance has been modestly positive, with interest rate volatility stabilizing as the market's outlook for future monetary policy has coalesced around one or two additional cuts from the FOMC this year. As of February 14, 2025, we estimate our book value for common share to be between $8.90 and $9.26 per share. We notably improved our capital structure and reduced our cost of capital by funding the redemption of our Series B preferred stock in December, primarily with lower cost repurchase agreements. As a result, our debt-to-equity ratio increased to 6.7 times at the end of the fourth quarter, up from 6.1 times at the end of the third quarter. At the end of the year, approximately 85% of our $5.4 billion investment portfolio was invested in agency mortgages, and 15% was invested in agency CMVFs. And we maintained a sizable balance of unrestricted cash and unencumbered investments totaling $389 million. Our earnings available for distribution declined from 68 cents in the third quarter to 53 cents in the fourth quarter, as we recognized a one-time charge associated with the redemption of our Series B preferred stock. In addition, we diversified the composition of our interest rate hedges, reducing our exposure to changes in swap spreads by increasing our allocation to U.S. Treasury futures. While this negatively impacted our effective net interest income for the quarter, we stand to benefit from future normalization of the yield curve. In the near term, we remain cautious on agency mortgages as shifting expectations for monetary and fiscal policy may result in elevated interest rate volatility, reducing investor demand. Our long-term outlook for agency mortgages is favorable, however, as we expect demand to improve in higher coupons given attractive valuations and eventual decline in interest rate volatility and a steeper yield curve. Lastly, we expect a gradual increase in agency CMDS new issuance to be met with robust investor demand as the sector continues to offer value relative to other fixed-income investments due to its prepayment protection and attractive risk-adjusted return profiles. Now, I'll turn the call over to Brian to go through the portfolio in more detail.

Thanks, John, and good morning to everyone listening to the call. I'll begin on slide four, which provides an overview of the interest rates in agency mortgage markets. As shown on the chart in the upper left, during the fourth quarter, U.S. Treasury yields rose across the yield curve, with two-year and longer maturities increasing between 60 and 85 basis points. Most of the increase occurred in the first half of the quarter, driven by market expectations of a Republican sweep in the November elections. The chart on the bottom left provides Fed funds futures market pricing since the beginning of 2024. The number of cuts to the Fed Fund's target rate in 2024 was much less than projected at the beginning of the year, as economic growth, employment, and inflation data proved to be more resilient than anticipated. The market is now pricing in only one or two cuts in 2025, along with a much higher terminal rate over the next few years. The chart in the upper right reflects changes in the short-term funding rates over the past year. During the fourth quarter, funding rates declined in line with monetary policy easing, but repo rates exhibited some volatility at year-end. Positively, the repo market has normalized since year-end, with one-month agency MBS repo spreads declining modestly from SOFR plus 20 to SOFR plus 15 basis points. Lastly, the bottom right chart details agency MBS holdings by the Federal Reserve and U.S. banks. Runoff of the Fed's balance sheet continues, with agency RMBS declining by approximately 15 to 20 billion per month. Quantitative tightening is expected to persist at the current pace in the near term, potentially ending in the second half of 2025. U.S. banks added nearly $50 billion to their portfolios in the second half of 2024, and we expect bank demand for agency RMBS to continue at a notable pace as deregulation and steeper yield curve provides an attractive environment for deployment of deposits. Slide 5 provides more detail on the agency mortgage market. In the upper left chart, We showed 30-year current coupon performance versus U.S. Treasury since year end, highlighting the fourth quarter in gray. Current coupons underperformed during the quarter due to a sharp rise in interest rates. This increase in interest rate volatility reduced investor demand for agency mortgages. In addition, nominal spreads on current coupons were quite volatile in the first half of the fourth quarter, but have stabilized over the last couple of months due to decreased interest rate volatility and favorable supply and demand dynamics. In the chart on the upper right, we show specified pool pay-ups over the past year, which declined since the end of the third quarter as prepayment protection became less valuable as mortgage rates remained elevated. Lastly, as shown in the lower right chart, funding via the dollar rule market for TVA securities has improved with implied funding rates lower than so far across several coupons. While we continue to prefer specified pools over TVA given their more predictable prepayment behavior, The improvement in the dollar rule market for TBS securities has reduced the difference in returns compared to specified pools funded via RETA. Slide 6 details our agency RMBS investments and summarizes investment portfolio changes during the quarter. Our agency RMBS portfolio decreased 11% quarter over quarter as we sold a portion of our lower coupon specified pools to manage leverage early in the fourth quarter and to fund purchases in agency CMBS. Overall, we remain focused in higher coupon agency RMBS, which should see greater benefit from a decline in interest rate volatility and are largely insulated from direct exposure to assets held by commercial banks and on the Federal Reserve's balance sheet. We focus our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environments, with our largest concentration in lower loan balance collateral, giving more predictable prepayments. We increased our allocation to specified pools with low credit score borrowers during the quarter, particularly as we added to higher coupons, given the attractive relative value in lower payout stories and higher coupons. Although we anticipate interest rate volatility to remain moderately elevated in the near term, we believe current valuations on production coupon agency RMBS largely reflect this risk and continue to represent attractive investment opportunities with current gross ROEs in the mid to high teens. Slide seven provides detail on our agency's CMDS portfolio. We purchased 181 million at the beginning of the fourth quarter, bringing our exposure to the asset class to approximately 15% of our total investment portfolio. We believe agency CMDS offers many benefits, mainly through its prepayment protection and fixed maturities, which reduce our sensitivity to interest rate volatility. Gross ROEs on our new purchases were in the low double digits, and we have been disappointed on adding exposure only when the relative value between agency CMBS and agency RMBS accurately reflects their different risks. Financing capacity has been robust, as we have been able to finance our purchases with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation as they become available, recognizing the overall benefits to the portfolio as the sector diversifies risks associated with an agency RMBS portfolio. Our agency CMO allocation is detailed alongside our remaining credit investments on slide eight. Our allocation to both agency interest only and credit securities remain largely unchanged with 71 million allocated to agency IO and 17 million allocated to credit at quarter end. Although we anticipate limited near-term price appreciation in these investments, we believe they provide attractive yields for unlevered holdings with returns in the high single digits. Slide 9 details our funding and hedge book at quarter end. Repurchase agreements collateralized by our agency RMBS and agency CMBS investments declined from $5.2 billion to $4.9 billion, consistent with a modest decrease in our total assets, while the total notional of our hedges increased from $4.3 billion to $4.7 billion. The decrease in our repo balance and increase in our hedge notional resulted in a higher hedge ratio for the quarter. from 83% to 95%, reflecting our expectation of fewer cuts in the Fed Funds target rate in 2025. The table on the right provides further detail on our hedges at year end. We continue to increase our hedge exposures in Treasury futures during the fourth quarter as we sought to decrease our exposure to swap spreads. At year end, our notional balance of Treasury futures was 30% of the total hedge notional balance. up from 11% at the end of the third quarter. Slide 10 provides more detail on our capital structure and highlights the improvements made in the fourth quarter subsequent to the redemption of our Series B preferred stock. Redemption was funded largely via an increase in repurchase agreements, which have a lower cost of capital than our Series B preferred stock. Further improvement in the capital structure remains a focus of ours as we seek to reduce our cost of capital and improve shareholder returns. To conclude our prepared remarks, financial markets were quite volatile in the fourth quarter as investors began to price in greater monetary and fiscal policy uncertainty. But our focus in higher coupon agency RMBS and increased allocation to agency CNBS mitigated much of this impact and resulted in an economic return of negative 0.5%. Positively, this volatility has dissipated thus far in 2025, providing a supportive backdrop for our investments. resulting in an increase in our book value of approximately 2%, excluding the dividend accrual as of last Friday. We believe IVR is well positioned to navigate current mortgage market volatility, given our moderate leverage and robust liquidity. We continue to selectively capitalize on historically attractive agency RMBS spreads and believe the sector is poised to perform well as interest rate volatility continues to moderate. Our liquidity position provides substantial cushion for further potential market stress, while also providing capital to deploy into our target assets as the investment environment improves. In addition, we believe further easing of monetary policy will lead to a steeper yield curve and decline in interest rate volatility, both of which provide a supportive backdrop for agency mortgages as they improve demand from commercial banks, overseas investors, money managers, and REITs. Thank you for your continued support for Invesco Mortgage Capital. Now we will open the line for Q&A.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1. You will be prompted to record your name. To withdraw your question, you may press star 2. Again, please press star 1 to ask a question. Our first question comes from Doug Harder with UBS. Your line is open.

Thanks. I'm hoping you could talk about how you're viewing you know, kind of the risk-reward tradeoff of agency RMBS and agency CMBS, you know, especially in light of the current dividend level.

Yeah. Hey, Doug. It's Brian. Yeah. We are, you know, if you go back to slide seven, you can see, you know, when spreads are on agency CMBS are in the kind of high 50-60 area, that tends to be relatively attractive versus where mortgages were. So we did add most of our agency CMBS exposure kind of at the beginning of the fourth quarter. But as spreads tightened from there, it became a bit less attractive, particularly as agency mortgages were underperforming during that time. You know, that difference has certainly compressed here in the first quarter. Agency CMBS spreads are just a touch wider. while agency mortgages have performed pretty well. So, you know, I think the benefits that agency CMBS provides to our portfolio are still, you know, still supportive. But given that volatility has declined pretty notably here so far in the first quarter, you know, the lean is certainly towards agency RMBS at the current time.

Great. And, you know, I guess with that blend and kind of where, you know, all spreads are, you know, can you just talk about your comfort in the current dividend level?

Yeah, Doug, it's John. Hi. Yeah, I mean, obviously, you know, our board, you know, recommends it, or we recommend our dividend. Our board approves it. That'll happen over the next month. But, you know, I mean, we look at a number of factors. You know, first, First and foremost is where our current and near-term to medium-term projected ROEs are on investments. So that's the first thing. We also look at where average ROEs have been more historically over a longer timeframe, and then also look at the competitive environment where dividend yields are for that. So, I mean, those are all things we're going to be taking a look at as we move over the course of the next month. But to Brian's point, I think, you know, we are pretty selective about where we add agency CMBS. So, we're not, you know, adding it much, much lower than where we're seeing. The ROEs are a little bit lower because they don't have the convexity risk, so they should be a little bit lower, but that's kind of how we're looking at it.

Great. I appreciate the answers. Thank you.

Thank you. Our next question comes from Trevor Cranston with Citizens JMP. Your line is open.

Hey, thanks. On the changes you made to the hedge book this quarter, in the early part of this year so far, there's been a bit of a reversal in swap spreads. Can you generally talk about how you guys are thinking about swap spreads going forward, and if you would foresee making any incremental changes to the mix of the hedge position going forward?

Thanks. Thanks, Trevor. It's fine. Yeah, certainly there are trade-offs between the two. You know, given that swap spreads are currently negative, you know, the hedging with them is a bit cheaper, so ROEs are better when you hedge with swaps. But certainly, you know, volatility that we've seen in swap spreads over the past year or two adds, you know, adds more volatility to that hedging as well. So, you know, Like I said, at the end of 2024, we were at 30% Treasury futures. I think that's probably the high end, given the current environment of where we'd like to be. We have seen swap spreads widen so far in 2025. Swap spreads did tighten a lot in 2024, just given the expectation that Treasury issuance would be substantial as we move forward here. You know, there's some uncertainty there. I think, you know, a lot of things that have happened so far in 2025 is just that, you know, the new administration is maybe a little bit slower to roll out some of the things that were once feared. So you've seen volatility come down, swap spreads have widened a bit. So, you know, there are trade-offs. Like I said, I think we would target probably 20% to 30% of Treasury futures in the current environment. So, you know, we're right in that area. that range currently. So, you know, as we move forward, I think, you know, we'll still be monitoring swath spreads, obviously, but again, where they are now, I think we're pretty comfortable with where we are.

Okay. Got it. Appreciate the comments. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1. Our next question comes from Jason Stewart with Jannie. Your line is open.

Hey, good morning. Thanks. I wanted to dig in a little bit more into your cautious outlook on agency mortgage, and maybe if you could talk a little bit more about whether that's a rate-driven outlook or if there's a component of GSC reform baked into that cautious outlook. And maybe on the latter, if you do have a view on what's priced into the basis in terms of GSC reform risk, that'd be helpful.

Hey, thanks, Jason. It's Brian. Yeah, I'll tackle GSD reform right off the bat here. You know, I think, you know, the market has not reacted at all to the headlines so far that we've seen on that topic. Mortgage spreads have tightened so that, you know, to the extent that there's any concern out there, it doesn't seem to be reflected. You know, I think that's notable because, you know, the market is essentially saying that, you know, the only thing that would really materially impact agency mortgage spreads would be a loss of the implicit or explicit guarantee on mortgages. And that remains an extremely remote scenario at this point. So I think spreads have responded accordingly by not pricing in any real concern about that at this current time. Our cautiousness is know i mean like i said volatility has come down quite a bit in 2025 mortgage spreads have tightened um so you know i think you know there's still a fair amount of monetary and fiscal policy uncertainty out there uh trade policy uncertainty um so you know i think we're just you know with with leverage um you know aren't to our common right around nine know i think uh we're comfortable in that situation where uh spreads are attractive still uh we can still earn uh attractive roes like i said in the mid to high teams um at that level so i think um you know we're kind of you know we're not we're not overly cautious uh we still think mortgages will perform well uh through the year uh but just given where where we are right now um you know i think you know, mortgages have had a pretty good start to the year. So, you know, it's just a matter of whether volatility will continue to trend lower or if it kind of pauses and goes the other way.

Got it. Okay. That's helpful. And then you referenced on the refunding of the Series B, you know, moving that to repo. I mean, I guess the question is a big picture question. Is the right way to look at, or how are you looking at, you know, preferred today as a part of the capital structure. Is it more permanent capital in your mind? Should we be looking at that as leverage to preferred plus common? Has that shifted the way that you look at the capital structure? Has it shifted over the last year?

Oh, hey, it's John. Yeah, no, I don't think it's shifted. I mean, we're still, I think, you know, if you look at us historically, you know, our portfolio mix was very different when we had when we put on the preferreds. I think we had, you know, there was time we had loans involved. We had securitizations, different asset classes. It made a little bit more sense having preferreds. And then, you know, post-COVID, you know, it just became too much percentage of our capital structure. So I think, you know, we're still targeting, you know, we'd like to get back to the, you know, 20%-ish range. You know, I think most of our peers are in, you know, around that range or about less even at this point. So we're still targeting that. You know, so that'll be a combination of, you know, either growth through ATM or equity issuance and or continuing to chip away at repurchasing the preferred Series Cs.

Okay. All right. Thanks, John. Thanks, Brian. Thanks.

Thank you. At this time, we have no further questions. Speakers, I'll hand the call back to you.

Great. Thank you very much, operator. And thank you, everybody, for joining the call today. Have a great fray.

Thank you. That concludes today's conference. Thank you for participating. You may disconnect at this time.