Q4 2024 Invesco Mortgage Capital Inc Earnings Call
Welcome to the Invesco mortgage capital fourth quarter 2024 earnings call all participants will be in a listen only mode until the question and answer session at that time to ask a question. Please press star followed by the one on your telephone as a reminder, this call is being recorded now I would like to turn the call.
Speaker Change: Over to Gregg Shields, and Investor Relations. Mr. Fields, you may begin the call.
Speaker Change: Thanks, operator, and so all of you joining us on Invesco mortgage capitals quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics. We plan to address today. The press release and presentation are available on our website at Invesco mortgage capital Dot Com. This information can be found by going to the investor.
Speaker Change: Relations section of the website a presentation today will include forward looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two of the presentation regarding these statements in measures as well as the appendix.
Speaker Change: Appropriate reconciliations to GAAP finally, invesco mortgage capital is not responsible for and stuff.
John Anzalone: Or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website again welcome. Thank you for joining US today I'll now turn the call over to our CEO John Anzalone.
Speaker Change: Good morning, and welcome to Invesco mortgage Capital's fourth quarter earnings call I will provide some brief comments before turning the call over to our Chief investment Officer, Brian Norris to discuss our portfolio in more detail also joining us on the call. This morning for Q&A our president.
Collins: Collins our CEO.
Speaker Change: Oh days, while and our CFO Mark <unk>.
Speaker Change: Long term treasury yields ended the quarter sharply higher as physician inflationary trends stalled and market participants dealt with fresh uncertainty regarding the impacts of future monetary fiscal and trade policies.
Expectations for feature inflation reflected in tips breakeven.
Speaker Change: Over the course of the quarter with the two year breakeven ending the year at $2 50 to five 4% from 177% in September.
Speaker Change: This trend has continued into this year and into your breakeven is now comfortably above 3%.
Speaker Change: These uncertainties combined with a robust labor market led to a recalibration of the market's expectations for future monetary policy.
Speaker Change: Following 100 basis points of reductions in the federal funds target rate over the course of the third and fourth quarters.
Speaker Change: As far as futures markets expectations as of year end 2024, reflecting only wanted to additional cuts in the targa right through the end of 'twenty five.
Speaker Change: This compares to an expectation of 10 cuts through the end of 'twenty five priced and as recently as mid September.
Speaker Change: Again, just back macroeconomic backdrop agency MBS underperformed treasuries during the fourth quarter.
Speaker Change: Under performance during the quarter, primarily took place in lower coupons and the sharp move higher in interest rates limited demand for discount securities.
Speaker Change: Although interest rate volatility was higher during the quarter supply and demand technicals for higher coupon agency mortgages were supported as supply was eliminated while banking overseas demand improved.
Speaker Change: And then Steve largely remained at low levels, given limited housing activity and elevated mortgage rates.
Speaker Change: Premium is on higher coupons specified pool collateral declined modestly given the increase in interest rates.
Speaker Change: Relatively well supported as implied financing via the dollar roll market TBA investments remained largely unattractive throughout the quarter.
Speaker Change: Agency MBS risk premiums contracted notably here in the fourth quarter, given increased optimism regarding renewed bank demand for stable cash flow profiles in mist elevated interest rate volatility and relatively modest new issuance.
Against this backdrop book value per common share decreased four 8% at $8 92 per share and when combined with our <unk> 40 per share common stock dividend resulted in an economic return of a negative half a percent for the quarter.
Speaker Change: As mentioned 2025 agency mortgage performance is and modestly positive with interest rate volatility stabilizing as the market's outlet for future monetary policy has coalesced around one or two additional cuts.
Speaker Change: See this year.
Speaker Change: As of February 14, 2025, we estimate our book value per common share to be between $8 90 and $9.26 per share.
Speaker Change: We notably improved our capital structure and reduced our cost of capital by funding the redemption of our series B preferred stock in December primarily with lower cost repurchase agreements as a.
Speaker Change: Our debt to equity ratio increased to six seven times at the end of the fourth quarter up from six one times in third quarter.
Speaker Change: At the end of the year, approximately 85% of our $5 $4 billion investment portfolio was invested in agency mortgages and 15% was invested in agency MBS.
Speaker Change: And we maintained a sizable balance of unrestricted cash and unencumbered investments totaling $389 million.
Speaker Change: Our earnings available for distribution declined from 68 in the third quarter to 53 in the fourth quarter as we recognized a onetime charge associated with the redemption of our series B preferred stock.
Speaker Change: In addition, we diversify the competent composition of our interest rate hedges, reducing our exposure to changes in swap spreads by increasing our allocation to U S Treasury futures.
Speaker Change: This negatively impacted our effective net interest income for the quarter, we stand to benefit from future normalization of the yield curve.
Speaker Change: In the near term we remain cautious on agency mortgages are shifting expectations for monetary and fiscal policy May result in elevated industry volatility reducing investor demand.
Speaker Change: Long term outlook for agency mortgages as favorable however, as we expect demand to improve in higher coupons, given attractive valuations and eventual decline in interest rate volatility and a steeper yield curve.
Speaker Change: Lastly, we expect a gradual increase in agency MBS, new issuance to be met with robust robust investor demand as the sector continues to offer value relative to other fixed income investments students prepayment protection and attractive risk adjusted return profiles.
Speaker Change: Now I'll turn the call over to Brian to go through the portfolio in more detail.
Brian Norris: Thanks, John and good morning to everyone listening to the call I'll begin on slide four which provides an overview of the interest rate and agency mortgage markets as shown on the chart in the upper left during the fourth quarter U S. Treasury yields rose across the yield curve with two year and longer maturities, increasing between 60% and 85 basis points most of the.
Brian Norris: The increase occurred in the first half of the quarter driven by market expectations of a Republican sweep in the November elections.
Brian Norris: On the bottom left provides fed funds futures market pricing since the beginning of 2020 for a number of cuts to the fed funds target rate in 2024 was much less than projected at the beginning of the year.
Brian Norris: Economic growth employment and inflation data proved to be more resilient than anticipated.
Brian Norris: The market is now pricing in only one or two cuts in 2025, along with a much higher terminal rate over the next few years.
Brian Norris: The chart in the upper right reflects changes in the short term funding rates over the past year during the fourth quarter funding rates declined in line with monetary policy easing our repo rates exhibited some volatility at year end.
Brian Norris: To avoid the repo market is normalized since year end with one month agency MBS repo spreads declining modestly and sofa, plus 20 to silver plus 15 basis points.
Brian Norris: Lastly, the bottom right chart details agency MBS holdings by the Federal Reserve and U S. Banks run off of the Fed's balance sheet continues with agency RMB is declining by approximately $15 billion to $20 billion per month.
Brian Norris: Wanted to get a tightening is expected to persist at the current pace in the near term potentially ending in the second half of 2025.
Brian Norris: U S banks added nearly $50 billion to their portfolios in the second half of 2024, and we expect bank demand for agency MBS to continue at a notable pace as deregulation and steeper yield curve provides an attractive environment for deployment of deposits.
Brian Norris: Slide five provides more detail on the agency mortgage market and the Upper left chart. We show 30 year current coupon performance versus U S. Treasuries since year end, highlighting the fourth quarter and Greg.
Current coupons underperformed during the quarter due to a sharp rise in interest rates. This increase in interest rate volatility reduced investor demand for agency mortgages. In addition, nominal spreads on current coupons were quite volatile in the first half of the fourth quarter, but has stabilized over the last couple of months due to decreased interest rate volatility in <unk>.
Brian Norris: <unk> supply and demand dynamics in.
Brian Norris: In the chart on the upper right, we show a specified pool pay ups over the past year, which declined since the end of the third quarter as prepayment protection became less valuable as mortgage rates remained elevated.
Brian Norris: Lastly, as shown in the lower right chart funding via the dollar roll market for TBA Securities has improved with implied funding rates lower than software across several several coupons, while we continue to prefer specified pools over TBA, given they're more predictable prepayment behavior the improvement in the dollar roll market for TBA Securities has.
Brian Norris: The difference in returns compared to specified pools on the DRA tubs.
Brian Norris: Slide six details our CRM, yes investments and summarizes the investment portfolio changes during the quarter.
Brian Norris: Our HDR MBS portfolio decreased 11% quarter over quarter as we sold a portion of our lower coupon specified pools to manage leverage early in the fourth quarter and to fund purchases and agency MBS.
Brian Norris: Overall, we remain focused and higher and higher coupon agency, MBS, which should see greater benefit from a decline in interest rate volatility and are largely insulated from direct exposure to assets held by commercial banks and on the federal reserve's balance sheet.
Brian Norris: <unk>, our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environments with our largest concentration in lower loan balance collateral, giving more predictable prepayments.
Brian Norris: We increased our allocation to specified pools with low credit score borrowers during the quarter, particularly as we added to higher coupons, given the attractive relative value in lower pay up stories and higher coupons.
Brian Norris: Although we anticipate interest rate volatility to remain moderately elevated in the near term. We believe current valuations on production coupon agency RMB is largely reflect this risk and continue to represent attractive investment opportunities with current gross ROE in the mid to high teens.
Brian Norris: Slide seven provides detail on our agency MBS portfolio, we purchased the $181 million at the beginning of the fourth quarter, bringing our exposure to the asset class to approximately 15% of our total investment portfolio.
Brian Norris: We believe the agency MBS offers many benefits mainly through its prepayment protection and fixed maturities, which reduce our sensitivity to interest rate volatility.
Gross rois on our new purchases were in the low double digits and we have been dose disappointed on adding exposure only when the relative value between agency MBS and agency RBS accurately reflects their different risks financing capacity has been robust as we have been able to finance our purchases with multiple counterparties that attract.
Brian Norris: At levels, we will continue to monitor this sector for opportunities to increase our allocation as they become available recognizing the overall benefits to the portfolio as this sector diversifies risks associated with an agency <unk> portfolio.
Brian Norris: Our agency CMO allocation as detailed alongside our remaining credit investments on slide eight our allocation to both agency interest only and credit securities remained largely unchanged with $71 million allocated to agency Io and $17 million allocated to credit at quarter end.
Brian Norris: Although we anticipate limited near term price appreciation in these investments we believe they provide attractive yields for Unlevered holdings with returns in the high single digits.
Brian Norris: Slide nine details our funding and hedge book at quarter and repurchase agreements collateralized by our agency MBS and agency MBS investments declined from $5 2 billion to $4 9 billion consistent with a modest decrease in our total assets, while the total notional of our hedges increased from <unk>.
Brian Norris: $4 3 billion to $4 7 billion the decrease in our repo balance an increase in our hedge notional resulted at a higher hedge ratio for the quarter from 83% to 95%, reflecting our expectation of fewer cuts in the fed funds target rate in 2025.
Brian Norris: The table on the right provides further detail on our hedges at year end.
Brian Norris: We continued to increase our hedging exposures and treasury futures during the fourth quarter as we start to decrease our exposure to swap spreads.
Brian Norris: At year end, our notional balance of Treasury futures.
Brian Norris: Was 30% of the total hedge notional balance up from 11% at the end of the third quarter.
Brian Norris: Slide 10 provides more detail on our capital structure and highlights the improvements made in the fourth quarter subsequent to the redemption of our series B preferred stock <unk>.
Brian Norris: The redemption was funded largely via an increase in repurchase agreements, which have a lower cost of capital in our series B preferred stock.
Brian Norris: Further improvement in the capital structure remains a focus of ours as we seek to reduce our cost of capital and improve shareholder returns.
Brian Norris: To conclude our prepared remarks financial markets were quite volatile in the fourth quarter as investors began to price in greater monetary and fiscal policy uncertainty, but our focus on higher coupon agency MBS and increased allocation to agency MBS mitigated much of this impacted resulted in an economic return of negative <unk>.
<unk>, 5%.
Brian Norris: Positively this volatility has dissipated thus far in 2025, providing a supportive backdrop for our investments and resulting in an increase in our book value of approximately 2%, excluding the dividend accrual as of last Friday.
Brian Norris: We believe <unk> is well positioned to navigate current mortgage market volatility given our moderate leverage and robust liquidity. We continue to selectively capitalize on historically attractive agency MBS spreads and believe the sector is poised to perform well as interest rate volatility continues to moderate.
Brian Norris: Our liquidity position, which provides substantial cushion for further potential market stress, while also providing capital to deploy into our target assets as the investment environment improves. In addition, we believe further easing of monetary policy will lead to a steeper yield curve and decline in interest rate volatility both of which provide a supportive.
Brian Norris: Drop for agency mortgages as they improved demand from commercial banks overseas investors money managers and rates.
Brian Norris: Thank you for your continued support for Invesco mortgage capital now we will open the line for Q&A.
Brian Norris: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one you'll be prompted to record your name to withdraw. Your question you May Press Star two again, please press star one to ask a question.
Speaker Change: Our first question comes from Doug Harter with UBS. Your line is open.
Brian Norris: Yes.
Doug Harter: Thanks, I'm, hoping you could talk about how you're viewing kind of the risk reward trade off.
Doug Harter: Agency, MBS and agency MBS, especially in light of the current dividend level.
Brian Norris: Yeah, Hey, Doug it's Brian.
Doug Harter: We are.
Doug Harter: If you just go back to slide seven you can see.
Doug Harter: When spreads are on agency MBS are in.
Doug Harter: At a high 50 60 area.
Doug Harter: That tends to be relatively attractive.
Doug Harter: First is where mortgages were so we did add.
Doug Harter: Most of our agency MBS exposure kind of at the beginning of the fourth quarter, but as spreads tightened.
Doug Harter: From there it became a bit less attractive, particularly as agency mortgages were underperforming during that time.
Doug Harter: That difference has certainly.
Doug Harter: Compressed here in the first quarter agency <unk> spreads are just a touch wider while agency mortgages have performed.
Doug Harter: Pretty well so.
Doug Harter: I think the benefits that agency MBS provides.
Doug Harter: Through our portfolio are still.
Doug Harter: Yes.
Doug Harter: Still supportive.
But given that volatility has has declined pretty notably here so far in the first quarter. The lean as is certainly towards agency MBS.
Doug Harter: At the current time.
Doug Harter: Yeah.
Doug Harter: Great and I guess with that blend and kind of where you know all spreads are you know can you just talk about your your comfort in the in the current dividend level.
John Anzalone: Yes, Thanks John.
Speaker Change: Yeah, I mean, obviously.
Speaker Change: Board recommends it or we recommend our dividend.
Speaker Change: Proves that that'll happen over the next months.
Speaker Change: I mean, we look at a number of factors first and foremost.
Speaker Change: Sure.
Speaker Change: Our current and near term to medium term projected rovs are on investments. So I mean that said that's the first thing.
Speaker Change: Yes, we also look at where average yes.
Speaker Change: Sort of.
Speaker Change: ROE had been more historically over a longer timeframe and then also look at sort of <unk>.
Speaker Change: Competitive environment, where you are at and yields are for that so I mean, those are all things we're going to be taking a look at as we are.
Speaker Change: We move over the course of the next months.
Speaker Change: But to Brian's point I think we are pretty selective about where we add agency MBS. So we're not.
Speaker Change: Adding at much much lower than where we are seeing.
Speaker Change: Agency MBS are always are a little bit lower because they don't have a convexity risk so it should be a little bit lower.
Speaker Change: But that's kind of how we're looking at it.
Speaker Change: Yes.
Speaker Change: Great I appreciate the answers thank you.
Speaker Change: Thank you. Our next question comes from Trevor Cranston with citizens JMP. Your line is open.
Speaker Change: Okay. Thanks.
Speaker Change: On the changes you made to the hedge book this quarter.
Speaker Change: Yeah.
Speaker Change: In the early part of this year, so far theres been a bit of a reversal and swap spreads.
Speaker Change: Can you sort of generally talk about how you guys are thinking about swap spreads going forward and if you would foresee making any incremental changes to the hedge position going forward.
Brian Norris: Yes, Thanks, Robert it's Brian.
Speaker Change: Yes, certainly there are tradeoffs between the two.
Speaker Change: Given that that swap spreads are currently negative.
Speaker Change: The hedging what.
Speaker Change: Is it the cheaper so roes are better when you hedge with swaps, but certainly volatility that we've seen in swap spreads over the past year or two ads.
Speaker Change: It adds more volatility to it.
Speaker Change: To that hedging as well so.
Speaker Change: Like I said at the end of 2024, we were at 30% Treasury Futures I think.
Speaker Change: That's probably the high end given the current environment of where we'd like to be.
Speaker Change: Have seen swap spreads widen so far in 2025.
Speaker Change: It.
Speaker Change: Swap spreads did tighten a lot in 2024, just given the expectation that treasury issuance would.
Speaker Change: Would be substantial SP as we move forward here.
Speaker Change: But there's some uncertainty there I think.
Speaker Change: A lot of things that have happened. So far in 2025 is just that the new administration is maybe a little bit slower to roll out some of the things that were once feared so you've seen volatility come down swap spreads.
Widened a bit so.
Speaker Change: There are tradeoffs.
Speaker Change: Like I said, I think we would target probably 20% to 30% of Treasury futures in the current environment. So we're right in that.
Speaker Change: That range currently so.
Speaker Change: Moving forward I think we will still be monetary.
Speaker Change: <unk> spreads obviously, but.
Speaker Change: Again, where they are now I think we're pretty comfortable with where we are.
Speaker Change: Okay got it I appreciate the garlic ticket.
Speaker Change: Thank you as a reminder, if you would like to ask a question. Please press star one. Our next question comes from Jason Stewart with Janney. Your line is open.
Jason Stewart: Hey, good morning. Thanks.
Jason Stewart: I wanted to dig in a little bit more into your cautious outlook on agency mortgage and maybe if you could talk a little bit more about whether that's a rate driven in the outlook or if there's a component of GSE reform.
Jason Stewart: Into that cautious outlook and maybe on the ladder. If you do have a view on whats priced into the basis in terms of GSE reform risks that'd be helpful.
Jason Stewart: Hey, Thanks, Jason It's Brian.
Jason Stewart: Yes, I'll tackle GSE reform or off the bat here you know I think.
Jason Stewart: The market has not reacted at all.
Jason Stewart: The headlines so far that we.
Jason Stewart: We've seen on that topic.
Jason Stewart: Spreads have tightened.
Jason Stewart: To the extent that there is any concern out there doesn't seem to be reflected I think.
Jason Stewart: Yes, I think thats notable because.
Jason Stewart: The market is essentially saying that.
Jason Stewart: The only thing that would really.
Jason Stewart: Materially impact.
Jason Stewart: Agency mortgage spreads would be.
Jason Stewart: Our loss of the implicit or explicit guarantee.
Jason Stewart: Mortgages in that.
Jason Stewart: We remained an extremely remote scenario at this point so.
Jason Stewart: I think spreads have responded accordingly by not pricing in any any real concern about that at this current time.
Speaker Change: Our cautiousness is.
Speaker Change: Like I said volatility has come down quite a bit in 2025 mortgage spreads have tightened.
Speaker Change: So I think there's still a fair amount of monetary and fiscal policy uncertainty out there trade policy uncertainty.
So I think we're just.
Speaker Change: With leverage.
Speaker Change: Two our comment right around nine I think we're comfortable in that situation where spreads are attractive still we can still earn attractive ROE like I said in the mid to high teens at that level. So I think no.
Speaker Change: We're kind of we're not we're not overly cautious we still think mortgages will perform well through.
Speaker Change: Part of the year, but just given where we are right now.
Speaker Change: Yes, I think.
Speaker Change: Mortgages have had a pretty good start to the year. So.
Speaker Change: It's just a matter of weather volatility, we will continue to trend lower or is it kind of pauses and goes the other way.
Speaker Change: Got it okay. That's helpful.
Speaker Change: And then you use you reference on the refining of the series B moving that.
Speaker Change: So to repo I mean, I guess my question is a big picture question is the right way to look at there how are you looking at.
Speaker Change: Preferred today as part of the capital structure is it more permanent capital in your mind should we be looking at that as leverage to preferred plus common.
Speaker Change: Yeah.
Speaker Change: Shifted the way that you look at the capital structure as it shifted over the last year.
Speaker Change: Oh, Hey, it's John Yeah, No I don't think it's it's shifted I mean, we're still I think if you look at us historically.
Speaker Change: Our portfolio mix was very different and we when we had.
Speaker Change: When we put on the preferreds.
Speaker Change: At this time, we had loan loans involved we had securitization different different asset classes.
David: David made a little bit more sense having.
Speaker Change: Preferreds and then post.
David: Okay.
David: Became too much.
David: What percentage of our of our of our capital structure. So I think.
David: We're still targeting we'd like to get back to the.
David: Yes.
David: The percent ish range.
David: I think most of our peers are and it will be.
David: Around that Ranger Outlasts Steven.
David: At this point, so we're still targeting that.
So that'll be a combination of.
David: Either growth through through ATM or equity issuance or <unk> or <unk>.
David: Continuing to chip away at repurchasing.
David: The preferred series six.
David: Okay.
David: Alright, Thanks, John Thanks, Brian.
David: Sure. Thanks.
Speaker Change: Thank you at this time, we have no further questions speakers I'll hand, the call back to you.
Speaker Change: Great. Thank you very much operator, and thank you everybody for joining for joining the call today have a great Friday.
Speaker Change: Thank you that concludes today's conference. Thank you for participating you may disconnect at this time.