INVESCO MORTGAGE CAPITAL INC

being

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 Invest Code 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, investcodemortgagecapital.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, Invest Code Mortgage Capital is not responsible for and does not edit or guarantee the accuracy of our earnings toilet conference 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 Ansela.

Good morning, and welcome to Invest Code 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 is our Chief Investment Officer, Kevin Collins, our CEO, Dave Blyle, 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 break evens rose over the course of the quarter with the two-year break even ending the year at .54% up from .77% in September. This trend has continued into this year as the two-year break even is now comfortably above 3%. These uncertainties combined with the 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 year and 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 treasury during the fourth quarter. Underperformance during the quarter primarily took place in the quarter 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. Predebted fees largely remained at low levels given limited housing activity and elevated mortgage rates. Premiums on higher coupon specified collateral declined modestly given the increase in interest rates. Remained relatively well supported as implied financing via the dollar role market for PBA investments remained largely unattractive throughout the quarter. Agency CMDS risk premiums contracted notably during the fourth quarter given increased optimism regarding renewed bank demand for stable cashflow profiles amidst elevated interest rate volatility and relatively modest new issuance. Against this backdrop, value for common share decreased .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 mentioned 2025, agency mortgage performance is in modestly positive with interest rate volatility stabilizing as the market's outlook for future monetary policy is 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 CMDS. And we maintained a sizable balance of unrestricted cash and unencumbered investments totaling $389 million. Our earnings available for distribution declined from $0.68 in the third quarter to $0.53 in the fourth quarter as we recognized the 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 U.O. 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 and higher coupons given attractive valuations and eventual decline in interest rate volatility and a steeper U.O. 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 through 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 and 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 funds 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 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 five provides more detail on the agency mortgage market. In the upper left chart, we show 30-year current coupon performance versus U.S. Treasuries 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 tool payups 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 TBA securities has improved, with implied funding rates lower than before across several coupons. While we continue to prefer specified tools over TBA given their more predictable prepayment behavior, the improvement in the dollar rule market for TBA securities has reduced the difference in returns compared to specified tools funded via RETA. Slide six details our agency RMDS investments and summarizes investment portfolio changes during the quarter. Our agency RMDS portfolio decreased 11 percent quarter over quarter as we sold a portion of our lower coupon specified tools to manage leverage early in the fourth quarter and to fund purchases in agency CMBS. Overall, we remain focused in higher coupon agency RMDS, 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 both premium and discount environments, with our largest concentration in lower loan balance collateral given more predictable prepayments. We increased our allocation to specified tools with low credit score borrowers during the quarter, particularly as we added to higher coupons given the attractive relative value in lower payout stories in higher coupons. Although we anticipate interest rate volatility to remain moderately elevated in the near term, we believe current valuations on production coupon agency RMDS largely reflect this risk and continue to represent attractive investment opportunities with current gross ROEs in the mid to high teams. 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 percent of our total investment portfolio. We believe agency CMBS 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 RMDS 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 of the portfolio as the sector diversifies risks associated with an agency RMDS 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 unloved holdings with returns in the high single digits. Slide nine details our funding and hedge book at quarter end. Repurchase agreements collateralized by our agency RMDS 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 the 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 our Coupons 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 and 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 would provide substantial cushion for further potential market stress, while also providing capital to deploy into 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 one. You will be prompted to record your name. To withdraw your question, you may press star two. Again, please press star one 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 trade-off of Agency RMBS and Agency CNBS, 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 CNBS are in the kind of high 50s, 60s area, that tends to be relatively attractive versus where mortgages were. So we did add most of our Agency CNBS 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 CNBS spreads are just a touch wider while Agency mortgages have performed pretty well. So, you know, I think the benefits that Agency CNBS 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 or approve it. That'll happen over the next month. But, you know, I mean, we look at a number of factors, you know, first and foremost is, you know, where our current and near term to medium term projected ROEs are on investments. So, I mean, that's the, the first thing. You know, we also look at where average, you know, sort of ROEs have been more historically over a longer timeframe. And then also look at, you know, sort of 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 CNBS. So, we're not, you know, adding it much, much lower than where we're seeing agency R&BS. I mean, it's obviously 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 CitizensJMP. Your line is open.

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

Thanks. Thanks, Trevor. It's fine. Yeah, certainly there are tradeoffs 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, volatility that we've seen in swap spreads over the past year or two 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. You know, we have seen swap spreads widen so far in 2025. You know, it's, you know, 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 tradeoffs. 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 range currently. So, you know, as we move forward, I think, you know, we'll still be monitoring swap 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 JANI. 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 GSE reform baked into that cautious outlook and maybe on the ladder if you do have a view on what's priced into the basis in terms of GSE reform risk, that'd be helpful.

Hey, thanks, Jason. It's Brian. Yeah, I'll tackle GSE 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, 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, you know, a loss of the implicit or explicit guarantee on mortgages and that remains an extremely remote scenario at this point. So, you know, I think spreads have responded accordingly by not pricing in any real concern about that at this current time. Our cautiousness is, you know, I mean, like I said, volatility has come down quite a bit in 2025. Mortgage spreads have tightened. So, you know, I think, you know, there's still a fair amount of monetary and fiscal policy uncertainty out there, trade policy uncertainty. So, you know, I think we're just, you know, with leverage, you know, to our common right around nine, you know, I think we're comfortable in that situation where spreads are attractive still. We can still earn attractive RLEs, like I said, in the mid to high teens at that level. So, I think, you know, we're kind of, you know, we're not overly cautious. We still think mortgages will perform well through the year, but just given where we are right now, 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 away.

Got it. Okay, that's helpful. And then you reference 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 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 common? You know, 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 preference. I think we had, you know, there was time we had loans involved. We had discretization, different asset classes. They made a little bit more sense having preferred 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 get back to the, you know, 20% ish range. I think most of our peers are in, you know, around that range or not 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 in the way of 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 Friday.

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