Welcome to Invesco Mortgage Capital Inc's Fourth Quarter 2020 Investor Conference Call. All participants will be a in a listen-only mode until the question-and-answer session. As a reminder, this call is being recorded. Now I would like to turn the call over to Jack Bateman in Investor Relations. Mr. Bateman, you may begin..

Thank you and welcome to the Invesco Mortgage Capital fourth quarter 2020 earnings call. The management team and I are delighted you've joined us and we look forward to sharing 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 that 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.

These forward-looking statements are made as of today and are not guarantees. They involve risks, uncertainties and assumption, and there can be no assurance that actual results will not materially differ from our expectations.

For a discussion of these risks and uncertainties, please see the risks described in our most recent annual report on Form 10-K and subsequent filings with the SEC. Invesco makes no obligation to update any forward-looking statements..

Good morning and welcome to IVRs fourth quarter earnings call. I will give some brief comments before turning the call over to our Chief Investment Officer, Brian Norris to discuss the current portfolio in more detail. Also joining us on the call to participate in the Q&A are our President, Kevin Collins, our CFO, Lee Phegley and our COO, Dave Lyle.

I'm pleased to announce that core earnings came in at $0.10 per share for the quarter exceeding our recently increased dividend of $0.08 per share. Book value was 3.86 at quarter end, which represents an increase of 11.2% for the quarter.

The combination of the increased dividend and our book value appreciation produced an economic return of 13.5% for the quarter.

The improvement in book value has continued since quarter and as we estimate net book value is up approximately 5% through last Friday, with those gains concentrated in January and relatively flat performance so far during February.

During the fourth quarter, financial markets continued to recover as the impact of stimulus programs and optimism around the rollout of vaccinations began to take hold. Risk assets across fixed income continued to benefit from strong investor interest and agency mortgages in particular had a strong quarter.

Consistent demand for current coupon agency mortgages from the Federal Reserve and commercial banks outweighed elevated issuance, leading to a strong performance for the sector. At IVR we've largely completed our reallocation to agency MBS ending the year with 98% of our assets in agencies.

We continue to take advantage of the strong demand for credit assets by further reducing our credit book by 336 million, resulting in a credit portfolio of 161 million at quarter end. Our liquidity position remains strong as we ended December with a $745 million balance in cash and unencumbered assets.

Earlier this month, we successfully completed a common stock offering with net proceeds in approximately 103 million that was deployed into additional agency mortgages. This will allow us to build upon our success in restoring core earnings while adding scale and helping to balance our capital structure.

As we look out over the next several quarters, our outlook remains relatively constructive. We remain positive on agency mortgages as we expect demand from the Federal Reserve and commercial banks to remain strong while the steeper curve in recent underperformance keeps the ROE and new investments attractive..

Thanks John and good morning to everyone listening to the call.

We added a couple of slides to the presentation and are hopeful they provide a little more background and insight on recent financial markets in general, and more specifically the agency RMBS sector, given the particularly attractive environment and our increased focus on the sector during the second half of 2020.

I'll begin on Slide 4, which details the changes in the US Treasury yield curve over the past 12 months in the upper left-hand chart.

Positive developments in regards to the COVID-19 vaccine and an improving economic recovery led to a bear steepening move in interest rates, as the short end remained anchored while the 10 year and 30 year both increased approximately 20 basis points during the quarter.

The upper right-hand chart indicates the impact monetary policy has had on short-term funding rates, which remained subdued during the quarter and continue to be attractive for borrowers in the short end of the yield curve.

Financial market volatility in the bottom left was also impacted substantially by monetary policy and continued to diminish into year-end, despite a modest uptick as we approached the November elections in the US.

Lastly, in the bottom right chart, we detail the growth in both US Bank and Federal Reserve holdings of agency RMBS, which had a significant impact on agency RMBS valuations as we enter 2021.

Despite net issuance close to an all-time record at 210 billion in the quarter, the combination of the Federal Reserve with the prescribed 120 billion of net purchases and commercial banks with over 200 billion of net demand during the quarter, produced impressive hedged returns in the asset class, particularly in lower coupon 30 years as the primary beneficiary of the demand from both entities.

These totals resulted in net demand for the year of over 600 billion for the Fed, and 500 billion from banks, overwhelming the historically high 500 billion of net supply. Moving on to Slide 5, where we provide more detail on the agency RMBS market.

You can see the impact strong supply and demand technical's had a lower coupon valuations during the quarter driving Treasury spreads significantly tighter in the upper left-hand chart.

Specified pool pay-ups as shown in the upper right were modestly weaker and lower coupons as interest rates rose, diminishing the need for prepayment protection, while higher coupon pay-ups stayed well supported as prepayments remained elevated for borrowers that continued to have significant incentive to refinance at current low mortgage rates..

Thank you. At this time, we will now begin the question-and-answer session. And our first question is from Doug Harter with Credit Suisse. Your line is open..

Thanks and good morning.

Hoping you could talk a little bit about the capital deployment, kind of what types of returns and spreads did you see kind of when you were putting that money to work? And then also, you said that that leverage is now seven times I guess, if you could just put that in context of if given - if spreads were to widen a little bit more, do you see if you would have room to kind of take that up a little bit or how you're thinking about the range of records?.

Yeah. Hey, Doug, it's Brian. I can talk a little bit about the deployment of proceeds. We basically reinvested those proceeds into lower coupon agency mortgages. So similar to kind of how we built the portfolio over the last couple of quarters. ROEs on those, we're talking early February, ROEs on specified pools were right around 10%.

So call it maybe 9 to 11 range, whereas we also added some agency TBA as well. And at the time agency TBA was kind of mid to high teens ROE.

So since then we've - over the last couple of weeks, we've seen the agency mortgages, underperform, and we've seen ROEs improve a decent amount, maybe call it 200 basis points, so kind of bumped that up to 11% to 13% for specified pools. So with leverage, right around seven, that's kind of where we've intended it to be.

But it does give us room if this kind of continues and ROEs can become more attractive, we can we can add to that certainly..

Great and I guess if you could just talk - you mentioned that this capital raise was kind of used to rebuild - kind of help continue to rebuild kind of core earnings.

If spreads continue to kind of get more attractive, what would be your appetite be for raising additional capital?.

Yeah, Doug this is John. Yeah, I mean, I think we're going to raise capital if we see opportunities for it to be accretive. This one was accretive to ROE certainly. And also, I mean, I think, helping to rebalance the capital structure to better balance between our common and preferred is another goal.

So I think I mean, if the opportunity presents, we'll certainly look at that, especially given where ROEs are certainly - if we were to put money to work now or in the near future, we think it would be very accretive to core. So yeah, I mean, we definitely look at that..

Great, thank you, John..

Our next question is from Trevor Cranston with JMP Securities. Your line is open..

Alright, thanks. Good morning. You guys mentioned the recent underperformance of mortgages a couple of times in the prepared comments. And I think I heard you say John that book value in February was about flat.

I was wondering if you could just help us kind of square those two factors and comment on if there was any changes to the portfolio or the hedge book that helped book value stay flat despite the underperformance of MBS. Thanks..

Yeah. Trevor this is John..

Yeah..

Brian you want to go..

Yeah, I can take that a little bit..

Okay.

Yeah. So yeah, we had released an estimated book value range at the end of January, which was kind of where we were as of Friday. So we saw a decent amount of gains in the early part of February, but over the last call it 10 days or 12 days or so, mortgages have underperformed, so that kind of came back down to where we were flat through Friday..

Okay, I got you. That's helpful. I guess more generally, rates have obviously been trending a little bit higher. Can you guys talk about how you guys think about extension risk within the portfolio and how you guys are approaching managing that conceptually? Thanks..

Yeah, certainly as rates rise, and given the makeup of our portfolio there's going to be some extension in our bonds. And we've been hedging pretty long since we started this kind of rebuild in the third quarter, so longer dated swaps even out to 30 years to help protect us from that..

Okay, got it and just to clarify on the deployment of the proceeds from the offering, was any of that capital deployed into TBAs or was that primarily deployed into other pools?.

Yeah, some of it was in the TBA just to kind of keep our allocation. We'd like, given where, how attractive TBAs are we kind of like the allocation in that upper teens area. So with the new capital, we pretty much invested it to keep it there. Okay, got it. Appreciate the comments. Thank you, guys..

At this time I'm showing no further questions..

Sorry, did you say no more questions?.

Yes, I'm sure no further questions at this time..

Okay. Well, if there's no more questions, thanks, everybody for listening and we will see you next quarter. Thanks..

Thank you for participating in today's conference. All lines may disconnect at this time..