Welcome to Invesco Mortgage Capital Inc.'s Third Quarter 2019 Investor Conference Call. All participants will be on a listen-only mode until the question-and-answer session. As a reminder, this call is being recorded. And now, I would like to turn the call over to Brandon Burke, in Investor Relations. Mr. Burke, you may begin..

Well, thank you, and welcome to the Invesco Mortgage Capital third quarter 2019 earnings call. The management team and I are delighted you've joined us, and we look forward to sharing with you our prepared remarks and conducting a question-and-answer session.

Before turning the call over to our CEO, John Anzalone, I wanted to provide a reminder the statements made in this conference call and the related presentation may include forward-looking statements which reflect management's expectations about future events and our overall plans and performance..

Good morning, and welcome to IVR's third quarter earnings call. Joining me on the call this morning are Brian Norris, our CIO; Kevin Collins, our President and Head of Commercial Credit; Lee Phegley, our CFO; and Dave Lyle, our COO and Head of Residential Credit.

I am pleased to announce core earnings of $0.47 per share, which once again exceeded our $0.45 dividend. Our book value remains stable despite a relatively volatile backdrop, increasing six-tenths of a percent to $16.31 per share.

The combination of our dividend and our increase in book value produced an economic return of 3.4% for the quarter, bringing our year-to-date economic return to 15.7%.

Our team achieved this performance despite another fairly tumultuous quarter in which we saw the 10-year trade in a 66 basis point band, volatility increase across most asset classes, and funding markets disrupted to the point that the Fed had to intervene. Despite the turmoil, IVR was able to raise another $219 million of capital during the quarter.

That capital was put to work quickly at accretive levels as we were able to invest the proceeds in late August when the agency market had just experienced a significant widening event as interest rates bottomed.

Before turning the call over to Brian, I want to spend a few minutes explaining at a high level how we've constructed IVR's portfolio in a way that has resulted in book value stability while producing a repeatable core earnings stream.

Over the course of the past year or so we have been deliberate in allocating capital to strategies that minimize our exposure prepayment risk, as increased prepayments have a detrimental impact on core earnings.

Over that period, our overall exposure to Agency RMBS has been reduced, and what we do owe in an Agency RMBS is backed be collateral that in one way or another is less exposed to refinancing activity. At the same time, we have steadily increased our exposure to Agency CMBS.

These investments have several favorable attributes, the main ones being that the credit is guaranteed by a government agency, they are fixed rate and thus easy to hedge, and they benefit from notable prepayment protection..

Thanks, John, and good morning to everyone on the call. I'll start on slide six, where we detail our sector allocations on an equity and asset basis. As you can see in the pie charts on the left, we remain well diversified across asset classes.

Our actively managed hybrid strategy continues to provide a stable book value and consistent core earnings, despite a difficult third quarter in the financial markets as volatility increased.

The common equity raised in August provided an opportunity to capitalize on this volatility as we were able to add assets at attractive levels given spread widening in the first-half of the month. Proceeds were deployed primarily into Agency CMBS and Agency RMBS, increasing our overall allocation to agency assets to 76% as of September 30th.

As John mentioned, the most significant change in our portfolio is the increased allocation to Agency CMBS, which now represents 21% of total assets, an increase from 13% in the second quarter.

This increased allocation to Agency CMBS is largely attributable to the August equity raise, in addition to the reinvestment of pay downs and sales from the Agency RMBS allocation, given that we viewed Agency CMBS as a more attractive use of capital during the quarter, as Agency RMBS remained under pressure from the increase in interest rate volatility and faster prepayment states.

Moving on to slide seven, which details the composition of our Agency RMBS assets, prepayment speeds on our holdings increase during the quarter reflecting lower mortgage rates and higher seasonality, negatively impacting the effect of yield on our password securities by 4 basis points from 3.69% to 3.65%.

Positively our Agency RMBS allocation is largely comprised of 30-year specified pools, which contains some level of prepayment protection and experience CPRs 25% to 30% slower than the market on average.

The value of this protection continued to increase as interest rates fell, improving approximately quarter point on our 30-year specified tools during the quarter. We believe October's prepayment states represent the near-term peak for our holdings and thus we should see improvement on this front in the coming months and quarters.

Given more attractive valuations and improved financing ROEs on the sector have improved to 13% to 15%. Turning to slide eight, you can see in the lower left-hand table that our allocation to Agency CMBS has grown to nearly $5 billion, we purchased $1.9 billion of Agency CMBS during the quarter, predominantly in the Fannie Mae DUS program.

Spreads widened modestly during the quarter, allowing us to add exposure at attractive valuations both during the deployment of our capital raise as well as the reinvestment and monthly cash flows for our -- from our Agency RMBS holdings.

The prepayment protection embedded in holdings in addition to muted spread volatility, has played a large role in the reduction of our overall book value volatility, and increases the consistency and repeatability of our core earnings..

Thank you. Our first question today is from Eric Hagan from KBW..

Hey, guys. Thanks. Nice quarter. Just a couple of housekeeping items from me, I think the press release noted the effective yield on agency CMBS was 344 for the period and the presentation the period ending yield on the DUS bonds, which are your largest position, were 286.

Did the market really tightened that much during the quarter, or was there some timing-related impact from when you guys raised capital and deployed it? I am just trying to square that up. Thanks..

Yes, Eric. This is Kevin. Much of that is timing-related. In fact, I would say that agency CMBS spreads actually widened a touch over the quarter, and during the time of that capital raise we were able to take those proceeds and invest at more attractive levels..

Okay. All right, great. And then, it looks like there was a bit rebalancing in the period the swap portfolio, I think you guys touched on in your remarks, you guys locked in lower pay rates, which I think is really good to see. I am just curious around the timing of impact of that too.

I mean when did that take place? I mean how much of the quarter's earnings are reflective of that rebalancing?.

Yes, Eric. This is Brian. We did a lot of that rebalancing kind of throughout the quarter. I mean some of it certainly was during the August capital raise as we were adding swaps at lower levels at that time, but as we add agency CMBS, the duration of those are significantly longer than the bonds that we are replacing it with.

So, agency RMBS are much shorter. So, we have been adjusting our hedges to account for that..

Okay. Yes, to your point on the duration, can you just give us a sense for your duration gap at the end of the quarter? I mean I know that in the past you guys I have articulated that you don't really look at the portfolio and duration gap standpoint. But any clarity there would be helpful..

Yes. Hey, Eric. This is John. I mean we try to our empirical duration as close to zero as we can. So I mean that's kind of how we look at it. So you can back out that. If we do that, then our duration gap would effectively be closed to zero also. So, that's what we have experienced lately.

Our model duration is a little bit longer than that, but I think the empirical is the one that we look at more closely and is more relevant..

Okay. And can you give us a sense for book value since quarter end? Just give me a….

Yes. It's kind of little bit less than 1%..

Cool. All right, guys. Thank you very much..

Thank you. And our next question is from Trevor Cranston from JMP Securities..

Hey, thanks. Good morning.

Couple of questions on the agency CMBS book and you guys continuing to allocate capital there, I guess when I listen to you describe why you find that sector attractive, the lack of the convexity risk, relatively low spread volatility, it seems like a strategy that would support using higher levels of leverage versus agency RMBS for sort of like credit.

So I guess I was little surprised to see leverage not really change much this quarter as you have added to the agency CMBS. Can you talk about how you guys are looking at overall leverage as that position grows and specifically how much you are willing to lever the agency CMBS book? Thanks..

Hey, thanks, Trevor. Yes, this is Brian again. Yes, our leverage overall on the portfolio was marginally down quarter-over-quarter. And really the agency CMBS book has been largely replacing agency RMBS which we lever about the same. So, it's really no change in leverage between those two sectors..

Okay, got you. And then I think I heard in the prepared remarks, so I think you guys said returns in agency RMBS were low to mid teens currently. I missed it if you said where you see ROEs on the agency CMBS, so if you could comment on that that also will be helpful. Thanks..

Sure. This is Kevin. In terms of non-agency CMBS, we are in the low double digit ROE territory at this point. Excuse me, for agency CMBS to clarify..

Okay, got it. Perfect. And then, one follow-up question on the adjustments you made to swap portfolio.

Do you have the weighted average maturity of the swap book as of September 30th?.

I do not have that in front of me, but we can get that to you..

Okay. Thank you. Appreciate the comments..

And I am showing no further questions at this time. I will just turn the call back to John Anzalone..

Okay. Well, thanks everyone for joining us. And we will look forward to seeing you again next quarter. Thanks..

Thank you. And this does conclude today's conference. You may disconnect at this time..