INVESCO MORTGAGE CAPITAL INC

Welcome to the Invesco Mortgage Capital Second Quarter 2026 Earnings 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 telethon. As a reminder, this call is being recorded. 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 Second Quarter 2026 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 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 and thank you for joining us today. I'll now turn the call over to IVR CEO Kevin Collins for his comments.

Good morning and welcome to Invesco Mortgage Capital's second quarter earnings call. I'll provide a few 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 is our president, David Lyle, and our CFO, Mark Gregson. Before I speak to market developments and our performance for the quarter, I would like to emphasize that our management team remains focused on disciplined investment management, prudent risk-taking, and delivering attractive risk-adjusted returns for our shareholders. We believe our platform is differentiated by deep expertise in agency mortgage markets, strong risk management, and access to extensive resources, market insights, and the global perspectives of Invesco. These advantages, combined with the longstanding counterparty relationships, can enhance our ability to source the finance and to hedge investments, position us well to navigate challenging markets, market environments, and capitalize on attractive opportunities. Importantly, our portfolio remains concentrated in agency RMVFs along with the meaningful allocation of agency CMVFs. These sectors continue to offer compelling risk-adjusted values supported by attractive carry, strong liquidity, and the credit protection provided by agency guarantees. Now turning to market developments, the second quarter was characterized by improving financial conditions despite some periodic balance of volatility driven by geopolitical developments in the Middle East and by shifting expectations for monetary policy. Brazilian economic growth, strong labor markets, and an elevated inflation contributed to a bear flattening of the U.S. Treasury yield curve as short-term interest rates rose more than longer-dated yields amid growing expectations that the FOMC's next policy move would be a hike rather than a cut. Although the second quarter was characterized by higher interest rates and more restrictive monetary policy expectations, It's important to note that interest rate volatility declined notably from March levels, while inflation expectations moderated despite ongoing uncertainty surrounding energy prices. Two-year break-evens fell sharply to 2% a quarter end from 3.25% at the end of the first quarter, and these developments supported risk assets broadly, and they contributed to higher coupon agency RBSL performance relative to U.S. Treasuries. Our agency RMVFs and TVA investments perform well, driven by attractive carry and contracting risk premiums, and our agency CMVFs continue to provide notable stability, supported by attractive relative valuations and predictable cash flows. Against this backdrop, we generated an economic return of 3.8%, consisting of monthly dividends of 12 cents per share and a modest decline in book value per share of six-tenths of a percent. We're estimating book value quarter to date is down roughly 2.5%, which backs out our accrued dividend given recent mortgage underperformance. So at quarter end, our economic debt-to-equity ratio remained unchanged, and our $8.2 billion investment portfolio consisted of $6 billion of agency RBS, $1.2 billion of agency TVA, and $0.9 billion of agency CABS. We also maintained a sizable balance of unrestricted cash and unencumbered investments, totaling $548.3 million. Our earnings available for distribution declined from $0.55 in the first quarter to $0.50 in the second quarter, and as of quarter end, we hedged 97% of our borrowing costs with interest rate swaps and U.S. Treasury futures. Regarding capital activities, we raised approximately $118 million during the quarter and more than $250 million year-to-date, enabling us to meaningfully expand our investment portfolio and capitalize on attractive opportunities across the agency mortgage market. We're encouraged by the growth of the company, which has enhanced our scale, its improved operating efficiency, and its reduced expenses on a per share basis. In addition, we believe our larger equity base and our increased market capitalization will improve the liquidity profile of our common stock, which should ultimately broaden our appeal to investors and support long-term shareholder value. As we continue to grow, We believe these benefits, combined with our disciplined investment approach, position us to generate attractive returns and create value for shareholders over time. So entering the third quarter, we remain constructive, yet measured, in our outlook for agency RMVS and agency CVS as attractive valuations and supportive market fundamentals are balanced against ongoing uncertainty surrounding monetary policy, as well as inflation and geopolitical developments. Despite these uncertainties, as interest rate volatility and inflation expectations have moderated from their first quarter piece. Supply and demand dynamics remain favorable as constrained net supply continues to be absorbed by broad-based investor. Additionally, we believe a sustained de-escalation of geopolitical tensions in the Middle East will likely benefit our target assets through reduced volatility, but also through an improved risk sentiment. Agency CBS is also well positioned supported by its attractive risk adjusted yields, its relatively low sensitivity to interest rate fluctuations, and its diversification benefits. Taking together these macroeconomic and market technical factors create a supportive backdrop for our investment strategy as we enter the second half of 2026. Further, we believe our capital structure and our financing profile provide us with flexibility needed to pursue opportunities while navigating continued uncertainty surrounding monetary policy, economic growth, and geopolitical developments. Away from market developments and our outlook, we remain committed to providing our investors with monthly financial summaries and paying monthly dividends to enhance transparency, deliver more consistent cash flows to income-oriented investors, and to strengthen investor engagement. So to summarize, we believe our team, our capital structure, our investment portfolio, we're all well positioned for the future. So looking ahead, we're excited to Thanks, Kevin, and good morning to everyone listening to the call.

I'll begin on slide five, which provides detail on interest rates over the past year. As Kevin noted in his opening remarks, the Treasury yield curve bear flattened in the second quarter as expectations for near-term monetary policy shifted from easing to tightening. Approximately one-third of the flattening occurred in the last two weeks of the quarter in response to new Federal Reserve Chairman Kevin Warsh's first FOMC meeting, as the ensuing statement and press conference were more hawkish than initially anticipated. The Chairman sought to cement a tough stance on inflation, emphasizing the price stability portion of the Fed's mandate over that of employment. Financial markets responded accordingly, pricing in tighter near-term monetary policy and lower future inflation expectations. as inflation break-evens declined quarter over quarter. Conversely, Treasury yields ended the quarter near their highest levels since early 2025, resulting in 30-year mortgage rates near 6.5% at quarter end and further limiting housing activity as affordability remains challenged. Positively, interest rate volatility recovered from the sharp Iran conflict-driven increase in March, supporting agency mortgage valuations. Lastly, Funding markets remain stable throughout the quarter, as lending capacity for our target assets remains ample and financing spreads over SOFR largely unchanged in the low teens. Slide 6 provides more detail on the agency MBS markets over the past year, with the second quarter highlighted in gray. Despite the bear flattening move in treasury yields, both agency RMBS and CMBS spreads tightened over the quarter, consistent with the improved tone in financial conditions and risk Although the entire 30-year coupon stack outperformed Treasury hedges during the quarter, the outperformance was more pronounced in higher coupons, which were primarily supported by the decline in volatility and constructive supply and demand dynamics. Net supply and agency RMBS remained muted, with year-to-date issuance of just $81 billion through June. On the demand front, investor interests remained broad-based, with overseas investors, banks, money managers, and mortgage rates, all increasing their allocations during the quarter. Demand from Fannie Mae and Freddie Mac continued to underwhelm initial expectations, however, as their combined retained portfolios were little changed during the second quarter. The two entities still have over 100 billion of additional capacity under their portfolio caps, providing some comfort for investors with the expectation that the GSEs could provide support Evaluations were to soften materially. The dollar roll market for higher coupon agency TVAs benefited from favorable technical conditions, with implied financing rates for production coupons remaining below one month SOFR for much of the quarter, enhancing levered return potential. These constructive supply and demand dynamics also supported the agency's CNBS sector, where issuance volumes moderated during the second quarter, while robust demand from banks, money managers, and mortgage rates contributed to modestly tighter spreads. Higher mortgage rates, however, weighed on specified pool pay-ups and higher coupons as refinancing activity remained subdued and demand for prepayment protection softened accordingly. Despite this near-term pressure, we continue to view prepayment protection obtained through carefully selected specified pools, particularly in premium price holdings, as an attractive investment for mortgage investors and an effective tool for mitigating the convexity risk inherent in agency mortgage portfolios. Slide seven summarizes the changes in our portfolio over the course of the second quarter. Our portfolio increased 12.4% quarter over quarter as we invested proceeds from ATM issuance. Most of our net purchases occurred in specified pools focused across collateral stories in 30 or 4.5 through 6% coupons. In our view, the decline in specified pool pay-ups during the second quarter created a compelling opportunity to add exposure at more attractive valuations as we continue to prioritize income protection in the portfolio, with nearly 85% of the portfolio allocated to securities with some form of prepayment protection via specified pools and agency CMBS. Levered gross returns on higher coupon specified pools hedged with swaps were in the mid to high teens, with the current coupon spread to the 5 and 10 year SOPR blend ending the quarter at 143 basis points. Modest whitening in July has improved those returns into the high teens as of today. Given the growth in specified pools within the portfolio, our allocation to agency TBA and agency CMBS declined modestly from 16.9% to 14.7% in agency TBA and 11.9% to 11.1% in agency CMBS. Both remain core holdings in our portfolio despite the decline in allocations with agency PBA continuing to provide attractive levered gross returns in the high teens as implied financing rates persist near or below one month repo rates and production coupons. Agency CMBS spreads tightened modestly during the quarter, largely performing in line with lower coupon agency RMBS and continue to provide notable stability to the portfolio. Despite limited new purchases, we continue to believe agency CMBS offers many benefits, mainly through its inherent prepayment protection and fixed maturities, which reduce our sensitivity to interest rate volatility. Levered growth returns are in the low double digits and remain consistent with lower coupon agency RMBS, while financing capacity has been robust. as we continue to fund our positions with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation to the extent the relative value between agency CMBS and lower coupon agency RMBS is attractive, recognizing the overall benefits as the sector diversifies risks associated with agency RMBS. Slide eight details our funding book at quarter end. Repurchase agreements collateralized by our agency RMBS and agency CMBS investments increased from $5.3 to $6.2 billion as we funded most of our net purchases via repo, while the total notional of our hedges increased from $4.9 billion to $6 billion. Excluding the implied funding via our agency TBA allocation, we kept our hedge ratio elevated at 97% given the increased uncertainty regarding the path of monetary policy. In addition, we continue to maintain significant liquidity with approximately $550 million of cash and unencumbered investments at quarter end, equating to 55% of our total equity. Slide 9 provides a detail on our hedge book at quarter end. The composition of our hedges remain weighted towards interest rate swaps, with 79% of our hedges consisting of interest rate swaps on a notional basis and 65% on a dollar duration basis. Swap spreads widen two to four basis points during the quarter, serving as a modest tailwind for our performance. We remain comfortable focusing the majority of our hedges and interest rate swaps, as we believe swap spreads are historically tight and offer an attractive hedge profile relative to treasury futures. Slide 10 is a new addition to the presentation and provides our model-based estimates of book value sensitivity to instantaneous shocks in interest rates and mortgage spreads. Looking first at the table at the top of the slide, we reduced our duration gap from approximately one half year to one quarter year, reflecting a more cautious stance on the direction of interest rates. While this chart assumes a parallel shift in the yield curve, the more significant market development during the second quarter was a pronounced flattening of the yield curve, with two-year treasury rates rising nearly 40 basis points, while the 10-year rose 15 basis points, which was a headwind for our performance. On the bottom table, The impact of changes in mortgage OAS is largely unchanged quarter over quarter as our portfolio leverage remains consistent. We continue to view current leverage levels of nine times debt to common equity as appropriate in this environment of elevated uncertainty. To conclude our prepared remarks, the management team remains committed to delivering exceptional investment performance for our shareholders. We are pleased with the performance of our agency MBS portfolio through a challenging backdrop. as the combination of higher coupon agency RMBS and our agency CMBS position has performed well. We are also excited about the recent growth of the company, recognizing the significant benefits this growth has for our shareholders through the efficient deployment of proceeds into attractive investments, lower expenses per share, and better liquidity for our stock. Although elevated risks in the Middle East in the path of monetary policy may create near-term volatility in mortgage valuations, We continue to believe the medium to long-term outlook for our target assets remains constructive, supported by favorable supply and demand dynamics. Additionally, our liquidity position remains ample, providing substantial cushion to withstand additional market stress while maintaining the flexibility to capitalize on our opportunities and our target assets as the investment environment improves. Thank you for your continued support for Invesco Mortgage Capital, and 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, just press star 1 to ask a question. And one moment, please, for our first question. Looks like our first question comes from Marissa Lobo with UBS. You may ask your question.

Good morning. Thanks for taking my question. book value move in the second quarter. Could you talk to us about the attribution of that decline? How much was spread moves on the coupons versus hedge performance versus the ATM issuance?

Sure, Melissa. Hey, it's Brian. Good morning. Yeah, thanks for the question. Yeah, you know, as we mentioned, our higher coupon agency mortgages perform pretty well. Agency CMBS also modestly tightened on the quarter. I think, you know, our slight book value decline can be attributed to a couple of different factors. You know, we have a modestly positive duration gap, which, you know, served, which, you know, as interest rates rose on the quarter was a slight detractor. And then also, you know, maybe a modest, you know, the modest flattening of the yield curve also had a minor impact on portfolio. and as far as ATM issuance, yeah, I mean, we are issuing, you know, relatively close to par. So, you know, it's a modest impact to book value as well.

Got it. And just thinking about the pace of ATM issuance, you know, what is the remaining capacity and, you know, what should we, look for in Q3, given your current portfolio growth targets and the spread environment?

Sure. Yeah, thanks for your question, Marisa. So, yeah, as you know, we raised roughly $118 million in Q2 all-year ATM at levels close to low value. That at a pretty steady run rate. We'll look to continue to do that to the extent that Thank you.

Thank you. Our next question comes from Trevor Cranston, Citizens JMP. Your line is open. You may ask your question.

Okay. Thanks. Follow-up question on the ATM. Can you give any update on capital that may have been raised in July so far? And, you know, if so, where you guys have been deploying that within the coupon stack? Thanks.

Yeah. We've, you know, we've, continue to look for opportunities to do that and deploy capital. It's been at, as I said prior, just levels close to book value where we've been able to do that and kind of held our portfolio composition steady to what we were doing in Q2.

Yeah, Trevor, hey, it's Brian. I would also just add, I mean, we do... include share count in our monthly updates. That will be forthcoming as well. And then also, you know, as far as deployment of proceeds, you know, it's been still kind of in that higher coupon range, you know, 30 or fives through sixes primarily. And again, you know, as I mentioned in my opening remarks, I think, you know, specified pool valuations have become more attractive relative to TBA, just given the softness and payoffs that we've seen. and so, you know, I think, you know, moving forward, if this environment were to persist, then that would be where we would deploy most assets.

Got it. Okay, that's helpful. And then one question, looking at slide six on dollar roll financing, you know, there's been quite an improvement in financing on sixes in particular. Can you guys just talk about what you think has been driving that improvement, particularly on the six coupon dollar roll financing? Thanks.

Yeah, Trevor, that was, as you can see, a pretty significant squeeze on the coupon there at the end of the quarter. That did, if we were to extend that chart another week or so, it kind of bounced back into a more reasonable range. um so but you know there is like i said there's there's pretty strong um supply and demand technicals going on in that coupon um you know that coupon tends to be one that that cmo desks um you know participate in the most uh to create floaters and and inverse io and those kind of things so um you know i think in particular maybe there was uh you know a large large money manager or something of that nature um putting a bit of a squeeze on that coupon uh but it has bounced back to a more reasonable level we still think it's you know like we like we said you know dollar roll financing is still fairly attractive in those in those higher coupons um so we like the allocation that we have there uh but yeah that's that's a bit of an unusual kind of thing that happened at the end of the quarter okay got it appreciate the comments thank you

Thank you. Our next question comes from Doug Harder with BTIG. You may ask your question.

Thanks and good morning. I'm hoping you could talk a little bit about your expectations for kind of the shape of the yield curve and, you know, direction of rates under Chair Warsh and, you know, kind of how you think you're positioned and, you know, kind of what you're watching for in case you might need to change, you know, any of that hedging strategy.

Yeah. Hey, Doug. Good morning. It's Brian. Yeah, certainly, you know, we've had two very different responses or reactions to the two Fed meetings under Chair Warsh. I mentioned what happened in June, but just a couple of days ago, we've had a pretty significant steepening move as I guess the press conference was certainly more dovish than expectations. So I think for the most part, our house view is that the Fed will be on hold in monetary policy for the foreseeable future. um but you know i think also you know the kind of the the renewed geopolitical risks that we've seen over the last few weeks could uh or does make that um outlook a bit more cloudy uh than it otherwise would have been so you know there's certainly a chance uh that there could be a hike um in in the you know in the later half of latter half of 2026 but our again our house view is that that they'll be keeping monetary policy on hold for the foreseeable future.

Great. And, you know, with less forward guidance from Warsh, you know, kind of how does that impact kind of how you think about volatility, how you think about risk positioning, you know, is there anything that that changes?

Sure. it does yes you know our expectations are that that volatility particularly in the front end uh will increase or it has increased um you know and that tends to be a bit of a headwind for agency mortgages and i really think that's why you've seen uh some modest widening uh over the last month or a month and a half um in mortgages and so you know i think you know current coupons spread to the five and ten years so for blend was 143 at quarter end and it's more like 150 now so we've seen you know call it seven basis points of widening since quarter end and I think that's you know largely a reflection of you know that potential increased volatility both due to you know reduced forward guidance or the elimination of forward guidance and also the renewed kind of Middle East you know risks that we've seen so um you know as far as you know putting a spread range on on that um you know i think we're you know towards the wider end um you know in in march of this year we kind of hit the 160s area um you know as the middle east conflict really uh started to escalate and so i think that's probably a pretty good uh estimate of where um you know we could get at the widest moments here if we were to kind of continue to see those risks escalate but you know right now we're at you know call it 150 and you know I think again there's more room for tightening I think just based on how much how supportive the supply and demand technicals are.

Great appreciate those answers for us we're noting as well Doug that you know just giving a more uncertain path monetary policy we have to

That makes sense. Thank you.

Thank you. Our next question comes from Jason Weaver with Jones Trading. You may ask your question.

Hey, guys. Good morning and thanks for the question. Just one for me. It looks like net economic investment spread is vulnerable to additional swap roll off ahead over the next several quarters. How do you see the EAD run rate evolving from there, just from that factor? And also when the board sets dividend policy, approximately how far out are they looking?

Yeah, so makes your question. Yeah, you know, certainly something that we're mindful of as we think about our hedge portfolio. I think the important point here is to really note that we're evaluating the dividend each quarter, you know, in context to the EAE. we're evaluating that each quarter based on current earnings as well as expected earnings you know our portfolio composition and market opportunities um so just to get out you know in front of it I I do think at present we believe our dividend is competitive it's in line with long uh term levered agency MVS returns which we talked about you know being important for us uh it's also well covered at this point by the the EAD but I think um you know as as was noted as our as our hedge uh Thank you for that

Thank you. And this question comes from Jason Stewart with Compass Point. Your line is open. You may ask your question.

Hey, good morning. Thank you. Following up on Doug's question about curve shape, and I guess if you're in the camp where the Fed's on hold, you can make the argument that you'll see a steeper curve and more upside potential in 10s and mortgage rates. If we follow that logic, one, disagree if you do, and two, how do you think about are all premium at risk or spec pools in that environment? Do they still offer compelling values? And I think you touched a little bit on convexity profiles, but maybe dig a little bit more into which subsectors are a focal point, which ones you're avoiding, and how you think about overall premium at risk.

Yeah. Hey, Jason. Good morning. The first answer is yes, we would agree that if the Fed is on hold, we would expect to see some steepening in the yield curve. so that's you know that's the first part I guess the second part is more about you know specified pools you know our weighted average pay up at quarter end was about 28 ticks so that equates to about 50 million of market value you know so that you know if if they all went to zero that's that's about you know the impact would be but you know I think you know this kind of also goes into kind of What we've talked about in the past about the deliverability of generic collateral and the value of specified pool. In the current environment, we would agree that specified pool payouts could soften. But as we mentioned, we think that's a pretty compelling opportunity to add because we do think that going forward, the valuations of generic collateral will continue to deteriorate and for a number of reasons. you know I think you know obviously loan balance has continued to increase which makes them more susceptible to refinance activity and then also you know with the proliferation of more technology in the refinancing process we think that that makes specified pool selection significantly more important and you know that's kind of what our bread and butter is and so you know that's what we're going to stick to particularly as we said you know as as those payoffs kind of soften and provide attractive opportunities to add in the current environment you know I think that will serve us well you know as we move forward you know I think we've seen it even over the last couple of years just how much technology has improved the refinancing process and how much quicker the impact is felt we saw it you know last fall and again in February of this year and so you know I think to a certain extent you know loan balance continues to be a significant significantly important aspect so choosing you know lower low balances that are that are less impacted you know we like the first-time homebuyer story as well but you know I think you know away from loan balance we like being relatively well diversified across the collateral stories so whether that be you know geography or High LTV or Low FICO, and first-time homebuyer. Those are all things that we're kind of looking at on a relative value basis.

Okay. I guess first-time homebuyer would be in this bucket, but are there any new, without giving away sort of, I guess, your secret sauce on where you're focused on deploying capital, are there any new spec pool stories that are being developed that are interesting?

Yeah. As far as being added to the portfolio yet? No. But, you know, we're obviously certainly, you know, continuing to kind of look at things. So, you know, there's nothing that I would point to right off the bat, no, other than, you know, I mean, first-time homebuyer can be included in all of those buckets. You know, it's typically in kind of a high LTV bucket. So, you know, that's something that we've been finding quite attractive here lately.

Okay. That's all for me. Thank you.

Thank you. Our last question comes from Marissa Lobo with UBS. You may ask your question.

Thanks. I just had a quick follow-up on how you're thinking about using swaps versus treasuries for hedging in this rate environment.

Hey, Marissa. Yeah, so we're still very comfortable with most of our hedge books being in interest rate swaps. So again, that's kind of been in the 75% to 80% range on a notional basis. And so, yeah, I think you know going forward uh yeah we see we saw modest improvement uh in swap spreads during the second quarter but but here today they're still a little bit tighter so we still feel like that's a pretty attractive uh entry point to use uh for our hedge book okay great thank you thank you so much on the call back over to the speakers

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