Invesco Mortgage Capital Inc. Q2 FY2025 earnings call

• Financial conditions were volatile in Q2, starting with tariff announcements causing interest rate volatility and risk asset repricing, but ended modestly accommodative. • Interest rate volatility declined, breakeven rates on TIPS moderated, labor market was resilient. • Yield curve steepened with short-term yields lower and long-term yields higher. • Agency mortgage performance was mixed, with underperformance in April but recovery by quarter end. • Agency RMBS portfolio decreased 15% QoQ as risk was managed, focusing on higher coupons. • Agency CMBS allocation increased slightly due to Agency RMBS underperformance, with benefits like prepayment protection. • Hedging with interest rate swaps was impacted by swap spread tightening, negatively affecting book value in April but markets stabilized by end of Q2.

The investment portfolio at quarter end was $5.2 billion. Agency mortgages accounted for $4.3 billion, representing approximately 82.69% of the portfolio. Agency CMBS made up $900 million, which is about 17.31% of the portfolio.

• Expect further monetary policy easing to lead to a steeper yield curve and decline in interest rate volatility, supportive of agency mortgages long term. • As Fed cuts become more certain, potential to take leverage higher as mortgage spreads tighten. • Swap spread direction is anticipated to widen, which is beneficial, and ROEs are attractive hedging with swaps currently.

• Volatile financial conditions initially driven by tariff announcements and interest rate volatility. • Potential impact of tariffs on inflation and economic growth. • Uncertainty regarding near-term monetary policy action. • Swap spread tightening negatively impacted book value in April. • Tariffs could have long-term effects on economic growth and inflation.

Q: I was hoping you could speak to your views on the trajectory of core earnings and what it means for the dividend?

A: ROEs are very attractive at this moment, mortgage spreads have been wide and supportive of earnings, leverage is where it needs to be to produce comfortable earnings, so don't anticipate significant change in near term.

Q: Conceptual question here in terms of leverage and total return. Is that you're leaning more towards carry rather than total return at this point?

A: Mortgage spreads and mortgages have performed well since April, interest rate volatility has trended lower, leaning more towards carry as mortgage spreads and conditions are supportive, balancing carry and total return.

Q: Question on the CMBS position: How do you guys feel like CMBS spreads could behave when the Fed cuts rates? Or do you think there's a lot of room for spreads to tighten in that market anymore? And do you feel like conditions in the repo market are stable enough to handle a spread widening event, the CMBS market?

A: Agency CMBS spreads follow lower coupon Agency RMBS spreads with lower beta, feel comfortable, financing market for Agency CMBS has been robust and not concerned about deterioration in a widening event; as Fed cuts, Agency CMBS likely follows Agency RMBS tightening.