Invesco Mortgage Capital Inc. Q4 FY2024 earnings call

• Macroeconomic backdrop: Long-term treasury yields rose sharply, TIPS breakevens increased, Fed funds target rate expectations recalibrated. Agency RMBS underperformed treasuries in Q4, with lower coupons hit harder; agency CMBS risk premiums contracted. • Portfolio changes: Agency RMBS portfolio decreased 11% QoQ as lower coupon specified pools were sold; $181M added to agency CMBS portfolio. • Capital structure: Redemption of Series E preferred stock funded with lower-cost repurchase agreements, increasing debt-to-equity ratio to 6.7 times. • Hedging: Diversified interest rate hedges, increasing allocation to US treasury futures. • Outlooks: Cautious on agency mortgages near term due to policy uncertainty, but favorable long term; expected gradual increase in agency CMBS new issuance with robust demand.

Approximately 85% of Invesco Mortgage Capital Inc.'s $5.4 billion investment portfolio was invested in agency mortgages, and 15% in agency CMBS. Book value per common share decreased 4.8% to $8.92 per share. Earnings available for distribution declined from $0.68 in the third quarter to $0.53 in the fourth quarter due to a one-time charge associated with the redemption of Series B preferred stock.

• As of Feb 14, 2025, book value per common share estimated to be between $8.90 and $9.26 per share. • Near term: Cautious on agency mortgages due to potential interest rate volatility. • Long term: Favorable outlook for agency mortgages with expected demand improvement in higher coupons; expected gradual increase in agency CMBS new issuance met with robust investor demand.

• Interest rate volatility due to monetary/fiscal policy uncertainty. • Remote risk of GSE reform impacting agency mortgage spreads. • Volatility in swap spreads affecting hedging strategies.

Q: How are you viewing the risk-reward trade-off of agency RMBS and agency CMBS, especially in light of the current dividend level?

A: Brian Norris mentioned agency CMBS spreads were attractive at certain points, but current volatility decline leans towards agency RMBS; dividend considered based on projected ROEs on investments, historical ROEs, and competitive environment.

Q: Do you foresee making any incremental changes to the mix of the hedge position going forward?

A: Brian Norris stated they target 20 to 30% treasury futures in the current environment, currently at 30%, monitoring swap spreads but comfortable with current mix.

Q: Cautious outlook on agency mortgage – rate-driven or GSE reform baked in? View on GSE reform risk priced in? And view on preferred stock in capital structure?

A: Cautiousness due to monetary/fiscal policy uncertainty, not GSE reform as market hasn't priced it in; John Anzalone mentioned still targeting 20% ish preferred stock in capital structure, aiming to reduce preferred percentage to peer levels.