Invesco Mortgage Capital Inc. Q3 FY2026 earnings call

• Market Environment: Operated in a challenging environment with resilient economic growth but tightened financial conditions due to Fed rate hike expectations. Treasury yields rose sharply (2-year +70 bps, 10-year +80 bps), marking one of the most significant increases since 2022.
• Volatility and Rates: Interest rate volatility increased significantly, with the MOVE index rising from 83 to 110. The FOMC implemented a 25 basis point rate hike in September, anchoring long-term inflation expectations despite elevated energy prices.
• Portfolio Repositioning: Tactically reduced Agency CMBS allocation from 11% to 8.5%, redeploying proceeds into Agency RMBS and Freddie Mac-backed securities. Increased allocation to Specified Pools from 73% to 83% of the portfolio to improve convexity profile and capture attractive entry points.
• Leverage and Hedging: Economic debt-to-equity ratio increased to 8.3x from 7.5x. Maintained a hedge ratio of 99% using interest rate swaps (76% of notional) and Treasury futures. Extended hedge maturities to account for higher rates and longer portfolio duration.
• Capital Activities: Raised approximately $51 million through the ATM program to increase scale, reduce expenses per share, and improve liquidity. Maintained unrestricted cash and unencumbered investments exceeding $400 million (44% of equity).
• Outlook: Constructive outlook for Agency RMBS and CMBS due to widened spreads enhancing relative value. Believes agency MBS appeal is growing due to liquidity and government guarantees. Focus remains on prudent leverage, ample liquidity, and diversification.

The transcript does not provide a breakdown of financial performance by specific product segment (e.g., RMBS, CMBS, TBA) in terms of absolute revenue contribution percentages or distinct profit/loss figures for each. The company reports an overall economic return of negative 11.6% for the quarter, driven by monthly dividends of $0.12 per share and a 16.1% decline in book value per share. The total investment portfolio was valued at approximately $8 billion at quarter-end, consisting of roughly $6.6 billion in Agency RMBS Specified Pools, $0.7 billion in Agency TBA, and $0.7 billion in Agency CMBS.

• Forward-Looking Outlook: Management maintains a constructive outlook for Agency RMBS and Agency CMBS entering Q4 2026, citing enhanced projected returns from recent spread widening.
• No Specific Financial Guidance: No explicit numerical guidance for revenue, earnings, or book value growth was provided for future quarters.
• Strategic Positioning: Indicated comfort with current leverage levels given attractive valuations and supportive supply/demand technicals. Did not indicate plans to aggressively increase leverage despite capacity, suggesting current positioning is adequate.
• Dividend Policy: Dividend decisions will be reviewed by the board considering market conditions, available investment opportunities, current earnings, and portfolio composition. Current payout represents ~20% of book value.

• Interest Rate Volatility: Significant increases in treasury yields and volatility (MOVE index up to 110) weighed on investor demand and contributed to negative economic returns.
• Monetary Policy Uncertainty: Persistent uncertainty regarding the path of monetary policy and potential further Fed hikes creates headwinds for mortgage valuations.
• Geopolitical Risks: Instability in the Middle East contributes to broader market uncertainty and influences interest rate trajectories.
• Prepayment Risk: Higher mortgage rates have subdued refinancing activity, impacting specified pool payouts. However, management views convexity risk as more one-sided (extension risk) at current levels.
• Liquidity and Funding: While funding markets remained stable, reliance on repurchase agreements and swap financing requires continuous monitoring of counterparty risk and funding costs.

Q: Analyst asked about the appropriateness of the current dividend level (~20% of book value) and factors influencing future decisions. / A: CEO stated they will discuss the dividend with the board, emphasizing market conditions, available investment opportunities relative to the payout, current earnings, and portfolio composition. The goal is to ensure the dividend is supported by portfolio earnings power and provides stability while competing in the market.

Q: Analyst asked how the firm weighs attractive TBA financing against the convexity benefits of specified pools when comparing returns. / A: CIO noted that while TBA ROEs are attractive due to favorable implied financing rates, specified pools offer more durable convexity benefits. With extension risk largely played out, the firm is comfortable maintaining a majority allocation to specified pools (~8%) for their one-sided convexity protection and attractive entry points, though TBA remains a core holding.

Q: Analyst asked about the firm's risk positioning regarding leverage and cash encumbrance, specifically if they would increase leverage if volatility persists or book value recovers. / A: CIO expressed comfort with current leverage levels, noting it has decreased slightly post-quarter due to book value recovery. While they allowed leverage to drift higher during the quarter’s underperformance, they do not see an immediate need to add assets or aggressively increase leverage, viewing current risk positioning as appropriate given attractive valuations.

Q: Analyst asked about the likely drivers for normalization of MBS valuations and whether reduced interest rate volatility is key. / A: CIO identified normalized interest rate volatility as the primary driver for mortgage spread normalization, citing its strong historical correlation. He suggested that a clearer path for near-term monetary policy and de-escalation of tensions in the Middle East would help reduce volatility and support valuation improvements.

Q: Analyst asked about the floor on prepayments in specified pools given high mortgage rates and where the firm sees payoffs bottoming out. / A: CIO indicated that most of the mortgage universe is already in discount price areas, suggesting prepayments are likely near their floor. He noted that while stress can cause notable declines, payoffs typically bounce back quickly. Extension risk is largely priced in, making current levels representative of the low end of the range in this environment.