Tony Semak - Investor Relations John Anzalone - Chief Executive Officer Rob Kuster - President and Chief Operating Officer Lee Phegley - Chief Financial Officer Jason Marshall - Chief Investment Officer Kevin Collins - Executive Vice President, Commercial Mortgage Credit.

Doug Harter - Credit Suisse Eric Hagen - KBW Trevor Cranston - JMP Securities.

Good morning, ladies and gentlemen. Welcome to Invesco Mortgage Capital Incorporated First Quarter 2017 Investor Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded.

Now, I would like to turn the call over to Tony Semak, Investor Relations. Mr. Semak, you may begin the call..

Thank you, Lorie and good morning everyone. Again, we want to welcome you to the Invesco Mortgage Capital first quarter 2017 earnings call and just thank you so much for dialing in this.

I am Tony Semak with Investor Relations and our management team and I are very delighted that you have joined us as we look forward to sharing with you our prepared remarks during the next several minutes before we conclude with a question-and-answer session.

Joining me today are John Anzalone, Chief Executive Officer; Rob Kuster, President and Chief Operating Officer; Lee Phegley, Chief Financial Officer; and Jason Marshall, Chief Investment Officer. Before we begin, I will provide the customary forward-looking statements disclosure and then we will proceed to management’s remarks.

Comments made in the associated conference call may include statements and information that constitute forward-looking statements within the meaning of the U.S. securities laws as defined in the Private Securities Litigation Reform Act of 1995 and such statements are intended to be covered by the Safe Harbor provided by the same.

Forward-looking statements include our views on the risk positioning of our portfolio, domestic and global market conditions, including the residential and commercial real estate market.

The market for our target assets, mortgage reform programs, our financial performance, including our core earnings, economic return and comprehensive income and changes in our book value, our ability to continue performance trends, the stability of portfolio yields, interest rates, credit spreads, prepayment trends, financing sources, cost of funds, our leverage and equity allocation.

In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as will, may, could, should and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements.

Forward-looking statements are not guarantees and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations.

We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions Risk Factors, Forward-Looking Statements and Management’s Discussion and Analysis of Financial Conditions and Results of Operations in our Annual Report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission’s website at www.sec.gov.

All written or oral forward-looking statements that we make or that are attributable to us are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure, if any forward-looking statement later turns out to be inaccurate.

To view the slide presentation today, you can access our website at invescomortgagecapital.com and click on the first quarter 2017 earnings presentation link. You can find under the Investor Relations tab at the top of our home page. There you may select either the presentation or the webcast option for both the presentation slides and the audio.

Again, we welcome and we thank you so much for joining us today. We’ll now hear from our Chief Executive Officer, John Anzalone.

John?.

Thanks, Tony. Good morning, everyone and welcome to Invesco Mortgage Capital’s first quarter 2017 earnings call. I will give a few brief remarks before turning the call over to Jason, who will discuss the portfolio in more detail.

I am pleased to report that Invesco Mortgage Capital had a strong start to 2017, with core earnings of $0.40 per share, which is back in line with our dividend and a 2.7% increase in our book value per share. Active sector allocation, a highly diversified portfolio and superior security selection led to a 5% economic return for the quarter.

The trajectory of core earnings is supported by a number of tailwinds at this time. Slowing payments fees of favorable funding environment and our ability to reinvest cash flows and opportunities that are producing ROEs that are clearly accretive to earnings.

In fact, we are seeing hedged ROEs in the mid-teens on 30-year ABC collateral with the level we haven’t seen in a number of years. Our active approach to managing IVR’s asset mix has also contributed to our recent performance. We believe that this environment will continue to provide opportunities to add value.

Over the course of the last several quarters, we reduced our asset balances and further reduced risk by investing cash flows into shorter duration 15-year and hybrid ARM agencies. The sector performed very well and we are now moving back towards 30-year fixed paper, which offer extremely attractive ROEs.

We also have taken advantage of these attractive assets to get our asset balances back up. Within credit, we benefited from both our sector calls, particularly in seasoned CRT bonds and seasoned subordinate CMBS bonds as well as through great security selection.

This is reflected in the strong spread tightening we have seen in those sectors and also by the numerous rating agency upgrades that we have seen within the portfolio.

While spreads have taken dramatically, we still feel very good about the fundamentals in both residential and commercial credit, with paper holding in these positions with high book time and it is very difficult to replace strong season credits.

The results of our efforts could be seen on Slide 5, where we show our economic return relative to peers over each of the past three calendar years as well as over the trailing 3 and 5-year time periods. In each instance, we compare favorably to our hybrid and agency peers.

It is not coincidental that the volatility of our book value has also fallen dramatically over the past 5 years as our disciplined approach to risk management has proven effective. We thought it was important to highlight this performance for a couple of reasons.

First, we feel that our story has been underappreciated over the past few years as our price of book discount is not consistent with the type of returns that we have produced.

Second, it is an affirmation of our ability to invest well across the most diversified opportunity set in space and deliver investors an attractive dividend while reducing book value volatility. I will stop here and let Jason discuss the portfolio..

Thank you, John. After maintaining a relatively conservative posture in the fourth quarter of last year, we had capacity to take advantage of attractive investment opportunities during the first quarter given our opinion that interest rates are likely to range bound over the intermediate term.

We are opportunistic we had a net of $960 million and 30-year specified pools in the 3.5 coupon. Hedged ROEs on these purchases were in the 13% to 15% area.

Despite increased talk of tapering of February investment of pay-downs, agency MBS have remained well supported with 15-year and agency hybrids actually tightening during the quarter and the 30-year sector only modestly wider.

Our agency book remains well diversified in both sector and coupon, but we will clearly be closely monitoring developments around the timeline for the Fed to potentially pause or takeaway investment. On the commercial credit side, we added $170 million of primarily subordinate CMBS and duration hedged ROEs in the mid-teens.

We continue to see good opportunities in this sector as risk retention have resulted in improved credit profile and conduit deals that have come to market thus far this year.

While spreads tightened during the quarter, we continue to see attractive returns in this sector and continue to export potential opportunities to add exposure where we are comfortable with the credit profile.

Moving on to our residential credit book, we added an additional $70 million of credit risk transfer bonds during the quarter at ROEs in the low double-digits. While we continue to view the sector as fundamentally attractive, spreads have tightened sharply since we started adding to our position in December of last year.

Given current spread levels, we are unlikely had significantly to our position, but would likely take advantage of any material widening should occur. Lastly, on the financing side, we added $1.15 billion of swaps to hedge the fixed rate asset purchases.

Overall, our net position rates remained long during the quarter as we firmly believe that we are in the trading range. Another important development to note is that we have seen MBS repo rates tightened relative to LIBOR as the Fed has increased interest rates.

This will provide a modest tailwind to our interest income as we received generally 3-month LIBOR on all of our recent swaps. To summarize, while spreads have tightened in the sectors of which we participate, we continue to find attractive opportunities to deploy capital.

After a conservative approach in the latter part of last year, we have increased our asset base and earnings power while keeping our duration profile relatively stable. Given current conditions, this will be supportive of a run-rate consistent with our dividend over the next several quarters. This concludes my prepared remarks.

Operator, could you please open the line to Q&A?.

Thank you, sir. [Operator Instructions] Our first question is from Doug Harter of Credit Suisse. Your line is now open..

Thanks.

I was hoping you can just go into a little bit more about the risk – interest rate risk leverage that you are taking – all that you are seeing to get to those mid-teen returns on the agency MBS?.

I am sorry, I had a little trouble hearing the question, what was the second part of that?.

The question is, if you could just talk about what kind of the leverage and the duration assumptions behind those mid-teens ROEs that you are talking about for agency?.

Yes, sure. The agency book, we are assuming right around 10 terms of leverage in that portion of our book. And that’s fully hedging the duration. So we are adding some convexity risk, but hedging out the duration. We are using roughly 5 years to 5.5 years depending on where the market is for our hedge ratio on the agency book..

Got it.

And then on CRT, you said that current spreads are unlikely to add what – any thoughts of kind of selling at these levels and looking to add back on a weakness or do you continue to like the fundamentals?.

Yes. We continue to view the fundamentals as positive. So we are unlikely to sell at current level. Certainly, if we continue to see spreads tighten at levels where you get likely think about potentially rising up and looking for a better opportunity entering at entry point, but right now, we are just not quite there yet.

One thing I would point out is our book and this is across most of our credit assets is pretty highly seasoned. And we spend a lot of time with security side trying to pick up best bonds. So our ability to replace that type of credit is I mean it would be pretty difficult to replace those types of bonds unlike something like agency relatively easy.

And yes, also those bonds, a lot of this using credit on top of that are some of the highest book yielding ROEs that we have. So again, it’s very difficult to replace that..

It makes sense. Thank you..

Thank you. Our next question is from Bose George of KBW. Your line is now open..

Hi. Thanks. Good morning guys. It’s Eric on for Bose.

Staying on the conversation of replacing run-off and capital allocation, how do you think about replacing the run-off in the non-agency RMBS portfolio given that book to be running above 10% pretty consistently?.

I think just given the ROE opportunities within that sector, we will probably divide those cash flows into 30-year agency or our CMBS opportunities. Certainly, the legacy ROEs that are available right now aren’t accretive to earnings. CRT does [indiscernible] would probably directed there.

But as of right now those would probably be divided into 30-year pools in CMBS or more than CMBS..

That makes sense.

The 8x leverage you are running in the agency portfolio, do you feel comfortable with that?.

We are comfortable with that. We continue to see good repo availability and our overall risk management framework when we look at our exposes, we still remain comfortable running at that level. Certainly, if we were – the majority of our equity in agencies will be part of – quite that high.

But just given that it’s just part of our equity allocation, but we are comfortable with that..

Right.

How about the commercial loan portfolio, it feels like there has been a couple of quarters that we have gone by that we haven’t heard much activity update on there on that portfolio?.

Yes. We actually – we have Kevin Collins, our Head of CRE on the call as well. I will turn over it him to talk about that portfolio..

Yes. In terms of activity there, most of the – what has been done has been draw-downs on existing ones. We will continue to search for opportunities and deploy capital when it becomes available.

But at this point, we have been really encouraged with opportunities we have done on the CBS side just given the implementation of risk retention and seeing underwriting standards really holding firm there..

I would say further that at 15% of our equity, we are comfortable with that. We seem to run-off on the existing portable. We probably look to replace it ones..

You said 15% of that, okay, great.

One more for me, just any color on where book value is trending since the quarter end?.

It’s modestly higher..

Great. Thanks guys..

Thank you. Our last question at this time is from Trevor Cranston of JMP Securities. Your line is now open..

Hi. Thanks.

A question on the CMBS, you guys are finding attractive currently, you mentioned the risk retention compliant deals being attractive a couple of times, so is it fair to interpret the comments as being that your current investment focus in the CMBS bases on new issuance subordinate bonds or are you still finding any opportunities in the legacy space? Thanks..

Still some opportunities within legacy, but certainly, fair to say that most of our focus recently has been on warranty issue.

Regardless of whether or not we participate in the class subject to risk retention requirements or simply plan to subordinate bond from say, a risk retention eligible transaction, it is good to see that as the cycle progresses here that we are not seeing lending standards become more aggressive if anything, it’s been the opposite..

Okay.

And then one more question on leverage in the agency portfolio, as you guys said or as the portfolio stood as of March 31 and given the returns you guys are seeing, do you feel like you have a room to marginally increase the leverage on that portfolio or at this point, would allocations primarily come from pay-downs from the rest of the portfolio? Thanks..

Yes. I think the right answer to that in terms of the agency book, I mean if you look at the composition of the agency portfolio, we are still – we still have quite a few bonds in hybrid ARMs and 50-year collateral.

So we have been more likely to what we saw and as we see attractive ROEs, more likely rather than increased leverage, more likely to move capital from hybrids and 15% lower ROEs and obviously less convexity risk and duration risk and that way without increasing leverage. That will be the most likely scenario today..

Yes. We actually did do some of that trade. We sold about $260 million of a season probably four weeks to six weeks ago, the spreads got really pretty full there. So we did sell about $260 million and redeploying 30 years back pools. So as John said, that’s definitely a possibility and depending on our assessment on the relative value..

Got it, okay, that makes sense. Thank you..

Thank you. At this time, I show no further questions. I would now like to turn the call back over to Mr. Semak..

Okay. Well, we want to thank everyone again for your interest in our company and for joining the call today. As always, you are very welcome to reach out to us with the questions to the extent that we are able to help. So we really do appreciate your interest in participating today. Everyone, have a great day..

Thank you, speakers. And that concludes today’s conference. Thank you for participating. You may now disconnect..