Q1 2020 Invesco Mortgage Capital Inc Earnings Call
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Welcome to the Invesco mortgage capital I <unk> first quarter 2020 investors conference call all participants will be in in listen only mode, which of the question and answers that Oh.
Oh, Hi, Josh Good question. Please press star followed by the one what are your phone as a reminder, this call is being recorded.
Now I'd like to turn the call over to branded Burke with Investor Relations Mr. Burton you may begin the call.
Thank you and welcome to Invesco mortgage capital was first quarter 2020 earnings call management team and I are delighted you've joined US and we look forward to sharing with you our prepared remarks that conducting a question and answer session.
Turning the call over to our CEO, John Anzalone I wanted to provide a reminder that statements made in this conference call and the related presentation may include forward looking statements, which reflect management's expectations about future events in our overall plans in performance. These forward looking statements are made as of today and are not guarantees they involve risks uncertainties assumptions in there and there can be knows for sure.
Actual results will not differ materially from our expectations for a discussion at these risks and uncertainties. Please see the rest of scrapping our most recent annual report on form 10-K, and subsequent filings with the FCC Baskin makes no obligation to update any forward looking statement. We may also discuss non-GAAP financial measures during today's call reconciliations of these.
Measures may be found at the end of our earnings presentation to view the slide presentation. Today, you may access our website at Invesco mortgage capital Dot Com and click on the Q1 2020 earnings presentation link under Investor Relations again, welcome and thank you for joining US today I'll now turn the call over to John Anzalone John.
Hi, Good morning, welcome Invesco mortgage capital's first quarter earnings call I will get some brief comments before turning the call over to our president and other commercial credit Kevin College, who will provide greater detail on our current portfolio.
Investment Officer, Brian Norris will expand on our go forward strategy.
Well getting started I'd like to acknowledge the entire team in Invesco will put in countless hours managing through this crisis doing it with you added difficulty of working remotely and there's no way that we would either position we are in today without their efforts. So thank you did the entire team.
That's why keep knowledge that support of both our board of directors and the senior management Invesco <unk>, who have provided all the resources necessary to get through this crisis.
Hi towards the end of the first quarter the onset of the cold that 19 pandemic in the economic shutdown left in its way caused unprecedented volatility in dislocation throughout the financial markets.
Even once rates rallying significantly prepay protected specified pool agency mortgage backed securities significantly underperformed as agency paper was being sold for cash settled at levels below GBA crisis. The structured securities credit markets, where you can be hard as look you could it be was severely impact <unk>.
Valuations became distressed.
Despite I'd be ours relatively strong liquidity position coming into the crisis. We sold assets is margin calls accelerated across all of our asset classes.
In late March we decided to discontinue selling our holdings easily deeply distressed market to meet margin calls. So it's just spending margin and entered into forbearance negotiations with our lender.
Alternately, we're able to capitalize on improving market conditions didn't pay off a repo counterparties rather than entering into an onerous comprehensive forbearance agreement.
Well, we are providing information as of 331 on slides three and four for informational purposes that snapshot was taken in the middle of argue levering it does not reflect the portfolio today.
Slide six gives the picture in the portfolio as of May 31st.
As you can see the Pie chart, our $1.6 billion Securities portfolio consists of predominantly non agency CMBS in residential credit positions.
540 million of that total is unencumbered.
The only borrowings we have left are secured federal home loan bank advances that 837 million, what's your collateralized by high quality AAA and doubly rated CMBS.
As a 531, we estimate that our book value was between 265 in Threeq 15 for share reflecting the continued you everything that's in place close quarter and currently we are holding a credit portfolio with modest leverage do we believe this potential.
Upside is credit markets continue to recover.
Going forward our strategy is treating best proceeds from these future credit sales into what will become an increasingly agency focused portfolio.
Currently the outlook for agency mortgages is quite attractive.
With strong support from the fed into attractive funding environment. This is in contrast to the non agency credit market and the kids revealed new risks to the strategy and the cost instability of short term mark to market funding or not attractive.
We lived that we'll be able to generate attractive or use in coming quarters is we need to redeploy into the agency strategy.
I'll stop here in the cabin get some details on the credit portfolio.
Thanks, John and everyone have a life for your interest.
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As John noted our portfolio was no.
Mortgage back.
So that's about 92% comprised of commercial mortgage credit at about 7% that's comprised.
Right.
So look the Coca Nike.
The decline in economic activity.
Made it pretty difficult for many borrowers to meet their financial obligations. So not surprisingly lodging retail property markets have been impacted the most student travel restrictions as well as a slowdown.
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So looking ahead, we do as many tenants they continue to forego rent payments for <unk>.
But despite our expectations for fundamental weakness, we do believe that bonds at the top or or near the top of the capital structure offer attractive.
They've been impacted by lack of liquidity just as much as <unk> <unk> <unk> <unk>.
Oh, we ultimately believes that non mark to market term financing.
And the term asset backed securities.
Which is a new York program noticed how I should really continue to assist in creating renewed investor interest in these bonds.
Roughly 9% of vulnerable CMBS bonds would be eligible for college financing. If they were purchased could that however, I do want to know that we expect to a much larger portion of our portfolio did benefit indirectly as many of the investments that just the needs these bonds and the capital structure, which makes.
Yeah, we'd be very well positioned to benefit from any future credit card.
Not to quantify I'd ask you to take a look at the chart like credit ratings.
So.
As a 531, you'll see that about 85% of our credit investments were rated single layer higher.
At about 90% of our commercial mortgage credit was written single layer.
Further over 75% of our CMBS portfolio.
It was written doubling or higher.
On slide seven and the chart so you're right.
We've also illustrated that significant subordination levels are available.
I did increase getting little Cuattro losses.
Totaling 90%.
Yes, that's for 15 or more points of subordination and positively roughly 93% <unk> subordination levels in excess of most of it seemed little collateral losses.
We think that's worth noting because now.
Not surprisingly loans originated seven.
Having have experienced notable losses, just given the big I didn't hear the global financial crisis, and they don't benefit for recently improved underwriting.
Now I'll turn the presentation over to Brian to discuss our strategic outlook for the portfolio.
Thanks, Kevin and good morning to everyone listening to their call.
As John mentioned, the latter half of the first quarter and extending well into the second quarter.
To be a tremendously challenging environment for the company our team worked extremely hard towards the goal of reducing the company's reliance on short term mark to markets financing for our credit assets as well overall company leverage.
At that and by early May we successfully reduced our reliance on credit repo to zero with current overall company leverage below 0.8 times debt to equity.
With over 1 billion of equity we believe we are well positioned to reconstruct a portfolio that can offer investors compelling returns and dividend income.
We have reengage the agency RMBS repo and interest rate swap counterparties to build the necessary capacity to prudently invest proceeds from a further reduction in credit exposure as our credit assets continue to recover from the liquidity and do sell off in the first quarter.
Given current and past said support and the enduring availability of agency RMBS read through multiple crises and the financial markets moving forward, we anticipate the asset class will be the primary use of capital to achieve the company's longstanding goals of providing attractive dividend income and book value stability.
We believe we can reliably achieved low double digit.
Mixture the agency RMBS specified tools. In addition to a modest allocations of GBA securities.
Fed intervention its fostered an attractive investment environment.
While we plan to transition from the current portfolio, which is almost exclusively credit investments. It's been agency focused strategy in the coming quarters. We will continue to evaluate opportunities to achieve target returns on credit investments without reliance on short term mark to markets funding.
Lastly, our external manager Invesco remained committed to devoting the necessary resources to the company Invesco enjoys a long history of managing the agency RMBS asset class and many of our team team members. That's supported the trading and management of the agency RMBS allocation and I've yard since the IPO.
In June 2009.
Combined our team members have over 80 years of experience managing the asset class.
Multiple market cycles, and crises with over 23 billion of agency RMBS assets under management as a 12 31 2019.
That ends our prepared remarks, and now we will open the line for today.
Oh, Hi, My guess is like wants to question at this time.
Our although probably.
My first question will come from Eric Hagen from KBW. Your line now thanks.
Hey, Thanks, Good morning, guys, a hub is doing well I'm on the asset sales to wind down to the FHLB line, which assets do you do you think you might sell a in order to to accomplish that when they come from.
More of the AAA double a category there.
Or something you know the positions that are lower rated than that and then on the CMBS portfolio and stuff that's remaining.
What's the level of unrealized losses that are sitting in that portfolio and what's the unlevered yield.
In the CMBS portfolio now.
Spell out the <unk> I'll start with he home loan so that the bonds on the line the older dances are doubling AAA predominantly.
So those are the ones it would be sold to pay down that line.
Hmm and again as we anticipate the topic capital structure.
You know improving as little bit starts to get.
Underway.
Back to that to be relatively.
Soon and I'll, let Kevin.
Answer the second part.
Yeah, Eric So you just to give you a sense or where we're getting things trade today and putting in context of what we currently own or <unk> I.
I guess I'd start at the top of the capital structure for US, which is I believe about 30% portfolio. That's currently in AAA CMBS.
Those sport.
He said differently or do you ever CMBS portfolio is triple A. those are largely junior AAA rated positions. So you know in terms, where they're trading again, it's very dependent.
On the transaction, but I'd call it around 160 basis points.
You know double a rated paper anywhere from 250 that says what is 400 basis points on single a paper around 440, excuse me 450 basis points.
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And triple B, it looks more like 810 wars or 1300 over in terms of a chart.
Great. That's helpful color and maybe I can press you on the unrealized losses that are sitting in the portfolio.
Today, we can see where it was at the end of the quarter, but.
Based on the sales it was taking place since then.
Yeah, just what the market is on the overall portfolio how much of that isn't isn't an unrealized loss position and then I'll just and then I'll just ask my second question just how much leverage do you think you you might run in the agency RMBS portfolio as you transition back that strategy.
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Yes, it don't have business sort of numbers in front of here, but what I can tell you is kind of go back to so what I walked you through if you think of that junior AAA rated positions.
You know what is largely junior triple as Jim mentioned about 9% Art art also people see that you'd be more senior positions.
But at 531, those are around 250 basis points laws that spread level it looks more like 160 today.
After the double H positions at 531 that was 400 basis points looks more like 250.
For single a rated 650 531 looks more like fortune 50 today.
And by 31 for Triple B 1300 looks more like 800, I'm sitting here that should should provide some context.
In terms of.
What we see it and the way it.
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Slow slowly slowly increasing demand.
In the CMBS sector since pals come online that certainly help and lives as the economy begins to slow the restart here.
So we do that your new entrance into the space or crossover investors I think that that's.
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Yeah, Eric I'll take the and the <unk> leverage question.
We anticipate you know it's the transition from our current portfolio to predominantly agency only a portfolio will likely take a one or two quarters. So you know, it's gonna take us a while to kind of build up to this number but.
It's likely to be in the seven to eight times debt to equity on agency investments.
Got it right. Thank you very much.
Next question will come from carbon credit Suzy Your line is now open.
Thanks, you can't just talk about how you're thinking of the capital structure you prefer ads are very big part of your or.
In total equity base, and then kind of what you know your thoughts around that.
Yeah. Thanks, Doug you know.
We are looking at opportunities are obviously to to raise capital that makes sense for shareholders.
And you know over time, we are looking to get the preferred to common ratio back back in line. So I think you know post a host this call post post the a filing of our Q you know we're going to start evaluating the the best path forward in terms of capital structure.
Oh, Yeah, I mean, we realize that the the preferred a preferred to common ratio is a.
Clearly not not where it was and we prefer to get back to.
More in line with historical averages.
Okay and is there anything on around kind of the rules and won't pool to that would kind of.
Cause you to the need to accelerate that the transition back to agency or do you have flexibility around that.
Yeah, we there's some flexibility around timing so we have a number of quarters to to get back into Oh pool compliance.
But given given the leverage on agencies it wouldn't take that long to to get back up to 55% hopefuls.
Well, we do anticipate getting there a relatively quickly.
Right.
Thank you.
[noise] and our next question will come from Trevor Cranston for J M. P Securities Your line Hamilton.
Alright, thank you.
A follow up question on the FHLB financing, which remains in place.
Can you say if.
When you choose to pay that off or are there any <unk> frictional costs associated with that in terms of make whole payments or her termination fees.
No no.
No. So we are read every pay those kind of as we sell assets. So there's no no penalties or anything like that.
Okay got <unk>.
And then another follow up on a question about unrealized losses, it sounds like or it sounded like you're suggesting that spreads have tightened pretty meaningfully in June.
I'm very chance you can sort of estimate what the means and true in terms of your portfolio Smit relative to where it was it may 31st.
Yeah, I mean, what books I you Centsfive 31 is up I would say up modestly.
I've seen some.
Some valuation increases see I mean, it's up it's up a bit.
Okay.
And then it's it sounds like there were some sort of extraordinary costs that might have been in the GE and they all right now.
The first quarter.
Relative to everything that happened in March, let's say kind of where you expect to Oh Gee available to run a going forward [noise].
Yeah, Dave do you have a hospital.
Yeah. Trevor you know, we don't expect it to change dramatically. We do you know there are some additional costs.
Incurred in association with Kinda navigating a you know the covered 19 crisis that you will see come through in Q1 in Q2.
But beyond that you know, we don't expect a really a dramatic change in DNA from historical levels, you know, we kind of reasonable band.
The exception to the management fee. This is this is Lee phegley the management he will be coming down since it's based on the map of the portfolio Dave's correct. There were some costs associated with.
The advisory work that you'll see this quarter and then the second quarter, but those were not material numbers, but you will see the management they come down.
Okay got it and that just to clarify when you mentioned the low double digit are always on the agency strategy was that a grocer or we estimate or the other expenses and everything.
That was gross.
Okay. Appreciate it thank you.
Our next question will come from Jason Stewart Jones trading your line <unk>.
Hey, good morning, all my questions have been answered thanks a lot.
Hi, I'm currently showing that with our last question for today I'd like to answer back.
Okay, well I again like to thank everybody for your interest in Invesco mortgage capital and we look forward to I talk into next quarter. Thank you.
This concludes today's conference all participants disconnect at this time.
Thank you for your participation on today's call.
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