Invesco Mortgage Capital Inc. Q3 FY2024 earnings call

• Interest rates dropped sharply in Q3, with Agency Mortgages outperforming treasuries. Agency CMBS risk premiums widened, improving relative value vs Agency Mortgages.
• Book value per common share rose 1.1% to $9.37, with an economic return of 5.4% for the quarter. Debt-to-equity ratio ended at 6.1 times, up from 5.6 times in Q2.
• Intention to redeem Series B preferred shares on Dec 27 to optimize capital structure. Agency RMBS portfolio increased 12% QoQ, rotating lower coupons into Agency CMBS.
• Focus on higher coupon Agency RMBS, prefer specified pools over TBA. Agency CMBS portfolio increased to ~12% of total portfolio, with gross ROEs in low double digits. Liquidity position: $520 million in unrestricted cash and unencumbered investments.

The investment portfolio was $5.9 billion at quarter end, primarily consisting of $5.2 billion (≈88.1%) of Agency Mortgages and $0.7 billion (≈11.9%) of Agency CMBS. Book value per common share increased 1.1% to $9.37. Earnings available for distribution for common share was $0.68 in the third quarter, down from $0.86 in the second quarter.

• Expect further monetary policy easing to lead to a steeper yield curve and lower interest rate volatility, supportive for Agency Mortgages.
• Intention to redeem Series B preferred shares to improve capital structure.
• Focus on higher coupon Agency RMBS and Agency CMBS as relative value improves.

• Uncertainty around U.S. elections and future monetary policy path caused sharp increase in treasury yields and interest rate volatility.
• Short-term funding pressures into yearend could impact sector demand.
• Swap spreads tightening persistently, affecting hedging strategies.

Q: How does the addition of Agency CMBS change leverage targets?

A: Brian Norris said the ability to increase leverage could improve as volatility declines. John Anzalone noted Agency CMBS has same borrowing costs/haircuts as Agency Mortgages.

Q: Thoughts on swaps vs treasuries as hedge instruments?

A: Brian Norris mentioned started using treasury hedges more, swap spreads tightened due to treasury supply, and swap spreads may remain persistent, so prefer treasury futures.

Q: Macro take on treasury yields and dividend?

A: John Anzalone commented on election impact and implied volatility, dividend determined by available ROEs on target assets.

Q: Leverage, duration gap, and spread sensitivity?

A: John Anzalone discussed keeping duration close to zero, mortgages' performance with rate moves, and sensitivity to spreads in rallies/sell-offs.

Q: Thoughts on dividend in light of 4Q challenges?

A: John Anzalone said dividend determined by available ROEs on target assets, with a month and a half to decide, balancing competitiveness and investor expectations.