Invesco Mortgage Capital Inc. Q2 FY2026 earnings call

Core Strategic Focus and Platform Advantages

• Management remains focused on disciplined investment management, prudent risk-taking, and delivering attractive risk-adjusted returns to shareholders.
• The firm’s differentiated advantages include deep expertise in agency mortgage markets, strong risk frameworks, access to Invesco’s global resources and market insights, and longstanding counterparty relationships that support sourcing, financing, and hedging activities.
• The portfolio stays concentrated in agency RMBS, with a meaningful allocation to agency CMBS, which offer attractive carry, strong liquidity, and credit protection via government agency guarantees.

Q2 2026 Financial and Operational Performance

• Generated a 3.8% economic return for the quarter, consisting of $0.12 monthly dividends per share and a 0.6% modest decline in book value per share.
• Earnings available for distribution declined to $0.50 per share in Q2 from $0.55 in Q1.
• Economic debt-to-equity leverage remained unchanged at 9x, which management views as appropriate for the current uncertain market environment.
• 97% of borrowing costs were hedged via interest rate swaps and U.S. Treasury futures at quarter end, with 79% of hedge notional allocated to interest rate swaps, which management believes offer an attractive hedge profile relative to Treasury futures.
• The firm raised $118 million in capital via ATM issuance in Q2, and over $250 million year-to-date, driving a 12.4% quarter-over-quarter increase in total portfolio size.
• Unrestricted cash and unencumbered investments totaled $548.3 million at quarter end, equal to 55% of total equity, providing ample liquidity and operational flexibility.
• Net supply of agency RMBS remained muted, with year-to-date issuance of only $81 billion through June, while broad-based demand from global investors supported market valuations. Both agency RMBS and CMBS spreads tightened over the quarter.
• The firm reduced its duration gap from 0.5 years to 0.25 years, reflecting a more cautious stance on near-term interest rate direction amid monetary policy uncertainty.
• Nearly 85% of the total portfolio is allocated to securities with prepayment protection (via specified pools and agency CMBS), after management added exposure to specified pools at attractive valuations as pay-ups declined during the quarter.

Invesco Mortgage Capital held an $8.2 billion total investment portfolio at Q2 2026 end. The segments break down as follows: 1) Agency RMBS: $6.0 billion, accounting for 73.2% of total portfolio value. Higher coupon specified pool agency RMBS delivered mid-to-high teen levered gross returns when hedged with swaps, and returns improved to high teens as of early July. Agency TBA RMBS (a sub-segment of agency RMBS) delivered high teen levered gross returns, and its portfolio allocation declined from 16.9% to 14.7% quarter-over-quarter. 2) Agency TVA: $1.2 billion, accounting for 14.6% of total portfolio value. Dollar roll market conditions for higher coupon agency TVAs were favorable, with implied financing rates remaining below one-month SOFR for most of the quarter, enhancing levered return potential. 3) Agency CABS/CMBS: $0.9 billion, accounting for 11.0% of total portfolio value. Allocation declined modestly from 11.9% to 11.1% quarter-over-quarter. Agency CMBS delivered low double-digit levered gross returns, consistent with lower coupon agency RMBS performance, and provided portfolio stability and inherent prepayment protection.

• Management maintains a constructive but measured outlook for agency RMBS and agency CMBS, balancing attractive valuations and supportive market fundamentals against ongoing macro and geopolitical uncertainty.
• The firm expects favorable supply and demand dynamics for target agency assets to persist, as constrained net supply continues to be absorbed by broad-based investor demand.
• Management noted that a sustained de-escalation of Middle East geopolitical tensions would likely reduce volatility and improve risk sentiment, benefiting target asset valuations.
• The firm plans to continue its steady pace of ATM equity issuance near book value to support portfolio growth, deploying new capital primarily to higher-coupon (4.5% to 6%) specified pool agency RMBS, where valuations have become more attractive.
• Management will maintain its current monthly dividend policy and monthly financial reporting to improve transparency and deliver consistent cash flows for income-focused investors; the dividend is evaluated quarterly based on current and expected earnings, portfolio composition, and market opportunities.

• Ongoing uncertainty surrounding the path of U.S. monetary policy, elevated inflation, and geopolitical tensions in the Middle East continue to create potential for near-term volatility in mortgage valuations.
• Less forward guidance from new Federal Reserve Chair Kevin Warsh is expected to increase interest rate volatility, particularly in the front end of the yield curve, which acts as a headwind for agency mortgage valuations.
• Higher mortgage rates have limited U.S. housing activity due to affordability challenges, and have weighed on specified pool pay-ups as refinancing activity remains subdued and demand for prepayment protection softens.
• A continued shift in market expectations toward near-term Federal Reserve rate hikes could drive further bear flattening of the yield curve, which has historically been a headwind to portfolio performance for the firm’s duration position.
• GSE demand for agency MBS has underperformed initial expectations, though the GSEs retain over $100 billion of remaining portfolio capacity to support valuations if market conditions soften materially.

Q: What factors drove the modest Q2 book value decline, and what is the remaining ATM capacity for Q3? / A: The slight book value decline came from three main factors: a modest positive duration gap that detracted from performance as interest rates rose, a minor negative impact from the quarter’s yield curve flattening, and a very modest impact from ATM issuance priced close to par. Management will continue to issue at a steady run rate near book value to support portfolio growth, consistent with prior activity.

Q: What are your expectations for the yield curve and monetary policy under Fed Chair Warsh, and how does reduced forward guidance affect your volatility positioning? / A: Management’s base case is the Fed will hold rates steady for the foreseeable future, though a second half 2026 hike remains possible due to renewed geopolitical risks. Reduced forward guidance has increased front-end rate volatility, which has already driven a 7 basis point widening in current coupon spreads since quarter end. Spreads could widen to the ~160 basis point peak seen in Q1 if tensions escalate, but supportive supply-demand technicals limit sustained spread widening over time. Management maintains a smaller duration gap and elevated hedge ratio to account for increased uncertainty.

Q: If the yield curve steepens under a steady Fed policy, do specified premium pools still offer attractive value, and which subsectors are you focused on? / A: Management agrees a Fed on hold would likely lead to yield curve steepening, and still views specified pools as attractive even if pay-ups soften further. Generic agency RMBS collateral valuations are expected to deteriorate over time due to rising average loan balances and faster refinancing technology, so carefully selected specified pools with built-in prepayment protection are increasingly valuable. The firm focuses on lower loan balance pools, and diversifies across geography, LTV, FICO, and first-time homebuyer collateral stories, with high LTV first-time homebuyer pools currently particularly attractive.

Q: How do you approach swap versus Treasury hedging in the current rate environment? / A: Management remains comfortable maintaining 75% to 80% of hedge notional in interest rate swaps. Swap spreads were modestly wider (a performance tailwind) in Q2 and remain historically tight at current levels, making swaps an attractive hedge option relative to Treasury futures, so no major change to hedge composition is planned.