Tony Semak - IR Richard J. King - President and CEO John M. Anzalone - CIO.

Dan Altscher - FBR Capital Markets Doug Harter - Credit Suisse Trevor Cranston - JMP Securities Joel Houck - Wells Fargo Mike Widner - KBW Brock Vandervliet - Nomura.

Good morning, ladies and gentlemen. Welcome to Invesco Mortgage Capital, Incorporated Third Quarter 2015 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, in Investor Relations. Mr. Semak, you may begin the call..

Thank you, Nicole, and good morning, everyone. Again we want to welcome you to the Invesco Mortgage Capital’s third quarter 2015 earnings call. I'm Tony Semak with Investor Relations and our management team and I are really delighted you joined us.

We are looking forward to sharing with you our prepared remarks as always, during the next several minutes before we conclude with a question-and-answer session. Joining me today are Rich King, Chief Executive Officer; Lee Phegley, Chief Financial Officer; John Anzalone, Chief Investment Officer and Rob Kuster, Chief Operating Officer.

Before we begin, I'll provide the customary forward-looking statements disclosure, and then we'll 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.

Security Laws, as defined in the Private Securities Litigation Reform Act of 1995. 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 core earnings, economic return, comprehensive income and changes in our book value, our ability to continue performance trends, the stability of portfolio yields, interest rates, credits spreads, prepayment trends, financing sources, cost of funds, our leverage and equity allocation, the impact of the restatement of our financial statements for certain periods and the adequacy of our disclosure controls and procedures and internal controls over financial reporting.

In addition, words such as believe, 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. 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 condition and results of operations in our Annual Report on Form 10-KA and quarterly reports on Form 10-Q which are available on the Securities 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 begin the slide presentation today you may access our website at invescomortgagecapital.com and click on the Q3 2015 earning presentation link, you can find on the Investor Relations tab at the top of our homepage. There you may select either the presentation or the webcast option for both the presentation slides and the audio.

Again, we want to welcome you and thank you so much for joining us today. We'll now hear from our Chief Executive Officer, Rich King.

Rich?.

Good morning. Thanks, Tony and thanks everybody for listening today. I will start in the presentation on Slide 3 and in the third quarter we earned core income of $0.40 and declared a $0.40 dividend. Our repo borrowing rates were a headwind for earnings in the third quarter.

Borrowing rates peaked before the September Fed meeting and then subsided since. In effect the Fed tightened financial conditions without actually announcing an increase, markets price and expectations and post the meeting given no rate increase repo rates declined further since quarter end.

Book value was down 5.2% in the third quarter due to spread movements that drive the mark-to-market pricing on our assets and hedges and I will detail that on the next slide. The fundamentals of our business are healthy actually, while the valuations on our stock are -- they are quite low.

As for the fundamentals, our asset quality is strong and improving and the credit premiums are now at levels that are attractive for new investment given the spread increases that occurred in the second and third quarter.

Interest rate risk for us is quite manageable given that the assets we hold have pretty high cash flow certainty Question we often get from shareholders and we have seen in analyst's reports and so forth is, we understand this strategy like your portfolio but why does the stock trade at such a large discount to book? Now broadly equity investors expect rates to rise and think that mortgage REITs should be avoided when around a tightening cycle and I think cycle is the keyword.

As I don’t think any one would think that 20% to 30% discount to book is appropriate, if the Fed raises rates only once or twice. So let's break this down a bit.

Why would investors think we are heading into a tightening cycle? I think it's because people are accustomed to the said tightening interest rate policy by hundreds of basis points pretty quickly one to three years after the Fed cuts rates for the last time.

It's been seven years since the last rate cut and since the economy has been growing albeit at a modest pace it seems to many that we are overdue.

Investor results, those that mandate high credit spread premiums over treasuries for the same reason, because after the Fed gives into a tightening cycle credit spreads widen before and during the next recession that typically people think would ensue from a Fed tightening cycle.

Third, an expectation that the Fed is going to tighten multiple times over the next couple of years is priced in the credit spreads and rates. There's probably never been a financial event talked about for longer in advance of execution than this first Fed miss.

That must be the consensus view or at least the consensus fear that is priced in our stock. In our opinion the likely path is that the Fed will raise rates a little, not a lot and the raised rates that little bit, not because of the evidence of inflation or overeating growth like they would in a typical business cycle.

But rather because they want to get off the zero to 25 target in order to signal that they aren't desperate times and we don't extraordinary measures in the U.S. as maybe they do in Europe and Japan. So in our view it won't be a tightening cycle but a small adjustment. Growth in most industries is not just robust as here in the U.S.

and rather anemic in rest of the world. Earnings have been driven by margin improvement and buy backs and not growth.

Core inflation is not showing signs of increasing from the 1.25% to 1.5% and CPI has been at risk of deflation say around zero percent and it’s been at this level once before I think 2015 has been in the business since the early 80s and then once in 2009, when we kind of were in desperate times.

I don’t think we should be too worried about the inflation monster, deflation is just as real of a possibility. The government's mired in a gridlock and still awash in debt.

Tightening cycle, I just believe, that there are mindsets, we believe we may get a relatively minor adjustment and may see the funds rate go up to -- from zero to 25 to maybe 50 to 75 if the economy continues to go okay.

We are still in the gravitational pull of a deleveraging cycle which should keep the economic growth and inflation in check for a number of years. Low debt growth which we have has generally meant low interest rates which we also have.

But IVR in the mortgage REIT space is trading like all this tightening is happening and that we believe is a huge opportunity for investors willing to be contrarian on buying back IVR with strong asset quality, buying the stock for us, with limited rate risk due to hedging, 13% dividend yield, makes a lot of sense to us.

In addition it will meaningfully improve our book value and earnings. Now is actually becoming a great time for us to reinvest in assets. But in fact it still makes more sense to buy IVR stock at recent valuations and that's what we especially did in Q3 and that's we intend to do in Q4.

We intend to buy again at least 50 million in probably the next month or so and then assess whether to do more and I suspect we probably will. Let's turn to Slide 4, in the presentation and talk about book value.

Quarter three was somewhat of a hostile environment for book value for mortgage REITs as there was a pretty big drop in rates and a risk off environment driving spread and valuations. We saw the typical credit spread widening in a correlated fashion.

Real estate tax spreads like CMBS widened along with investment-grade corporates and of course high-yield and emerging market debt. At the same time there was a rallying rate of nearly 50 basis points in 10 year interest rate swaps such that our hedges decreased our book value.

You can see on the graph on the presentation the impact on our book value from -- in the table that the Agency MBS actually increased $0.40 per share and CMBS $0.06, that our derivatives that hedged those assets lost quite in the quarter nearly $1 or more than that.

GSE, CRT, non-Agency don’t have any meaningful rate risk that's hedged but selling prices did a credit spread widening. That and then there was an offsetting impact from the benefit of share repurchases.

That left us with a book value per share decline of $0.96, clearly not a result we like to see but it is book value we expect to recover because spreads are cyclical and mean reverting and we very much expect spreads can prove not only the cyclical but also seasonal and we do expect later this year and in Q1 that does probably improve.

On the right we show the volatility of our book value per share on a rolling eight quarter basis. You can see that the swings in our book value have decreased. We employed discipline to keep volatility in book value to a minimum while still earning attractive income.

The most important discipline in keeping interest rate risk low, we aren't the traditional mREIT kind of role that does not do well -- or does well when rates fall and poorly when rates rise.

A strong asset quality is a key for us and we would rather employ appropriate leverage on assets we feel very, very confident and, than hold risky assets with low leverage.

We accept the cyclical credit spread premium volatility so long as we strongly believe that the asset is going to mature and that we can hold it and continue earning the yield on it. Over time spreads mean revert and its effect on book value is transitory.

We maintain a diverse portfolio of Agency, residential and commercial real estate bank debt and finally we manage our capital to benefit book value as well and most recently buying shares at a large discount to book. And as stated we do intend to do more of that. We see our stock as extremely undervalued.

Our Agency portfolio's quite short in duration and John will get into that. Has limited extension risk because it's a lot of -- made up of hybrids and high coupons that actually benefit if rates go up and prepayments low.

Our RMBS assets are largely either backed by loans higher in the quality continuum, prime and Alt-A or super enhanced classes Re-REMICs predominantly fairly short average life and variable-rate. Our CMBS are predominantly investment-grade bonds collaterals -- collateralized by high quality season loans. Now we are confident in our assets.

We couldn't buy our seasoned portfolio today without paying up a lot versus where we bought it. So buying our stock at a big discount makes a lot of sense.

If we get -- I think of it like this, if we get a standard deviation, one standard deviation improvement in book value over the next year and the price to book just improves to 20% discount from where it is like over 30%, the stock performance with the dividend as well as is kind of astounding and personally I like your chances of achieving that.

So I think our stock is trading irrationally low. I am going to turn over to John Anzalone, our CIO, who will now tell you about our portfolio and strategy..

Thanks Rich and thanks to everyone dialing into the call this morning. I will start off on Slide 6. Our portfolio allocations remain stable over the quarter with 65% of our capital and 50% of our asset allocated to credit exposure.

Despite the spread widening that we experienced during the quarter the fundamentals underlying our residential and commercial assets remain strong.

We continue to prefer to invest in assets that will benefit from continued improvement in the real estate markets and are seeking to minimize our interest rate risk as uncertainty around the timing of the Fed lift off builds.

As Rich talked about we are successful at insulating the portfolio from the impact of changes in rates, as a correlation between our book value in changes in rates continues to hover around zero. However, the portfolio was negatively impacted as spreads in our assets widened along with all other fixed income markets.

Compounding this we saw swap spreads de-couple and go in the other direction due to a number of issues including a rebalancing by central banks as well as a surge in corporate issuance. The good news is that we believe that these impacts will be transitory as long as the high-quality credit assets that we own continue to perform as expected.

The ebbs and flows of credit spreads don’t impact our ability to generate good returns. This is very different than owning assets that contain a lot of convexity risk. In that case changes in interest rates create the need to readjust hedges and losses created there are very difficult to recoup.

It's for that reason that we have structured our portfolio to have exposure to high-quality credit and it worked to reduce our interest rate in convexity risk. I will give you a little more detail on this over the next few slides.

In our Agency book the goal has been to construct a portfolio that has a stable cash flow profile thus reducing our convexity risk. To accomplish this we have increased our exposure to hybrid arms 38% and also have a 16% allocation of 15 year collateral.

The 42% that we own in 30s is well seasoned and is predominantly made up of bonds backed by various forms of prepayment protective collateral. CPRs in the portfolio were up modestly during the quarter. We do expect to see speeds decline over the next few quarters as seasonal factors take hold.

Slide 8, gives a snapshot of our residential mortgage credit book and you can see it contains a mix of new production paper, credit risk transfer and new issue RMBS as well as legacy positions. Again you can see from the duration numbers in the table that these bonds do not have much if any correlation to interest rates.

While our CRT paper was impacted by the same concerns that drove spreads wider across the entire fixed income space, our legacy paper held it quite well. Going forward we expect that our residential credit assets will benefit from continued strength in the housing market where we have seen further gains in home prices sales and housing starts.

Slide 9, gives a snapshot of our CMBS book. This portfolio is more concentrated in post-2010 production as our legacy positions are shortening the duration and paying off. The majority of our positions are split between two groups; post-2010 BBB-A paper and post-2010 AA-AAA paper.

While the favorable trends in property fundamentals will continue to benefit both groups, I want to take a minute to explain why we own each. The BBB-A bonds that we favor originated predominantly in 2010 to 2013, when the post crisis underwriting was at its highest.

Combining those underwriting standards were depressed property valuations made investing in lower rated subordinate bonds very attractive. Once property prices started to recover and competition drove underwriting standards loser we ended up the capital structure to invest in AA and AAA tranches in large part financed by the home loan banks.

This was exactly the correct call and market pricing bears this out. While all CMBS experienced spread widening this quarter, our season BBB positions, A positions held in much better than newer on the run bonds. Rate for CMBS includes the one floating rate mezzanine loan totaling $34 million and the pipeline there remains steady.

Finally I will spend a minute on financing. We continue to have a diverse funding mix with 71% of our funding represented by repo. Funding costs were moderately higher during the quarter reflecting quarter and balance sheet pressures that the banks as well as uncertainty around the Fed decision.

While we have seen funding rates moderate somewhat this quarter we expect to see further volatility around funding rates as we approach year end and subsequent Fed meetings. With that I will open the floor to Q&A..

[Operator Instructions] Our first question is coming from Dan Altscher of FBR Capital Markets. You may now ask your question..

John and Rich good morning, Rich especially appreciate your comments earlier on. I think that the message was pretty loud and clear as to how you think about the stock price.

But I want to ask about the buybacks, since you said it seemed pretty convincingly that $50 million buyback next month or so, is there a evaluation or price or some sort of metric that says this is an absolute level where we buy back stock versus the natural level where it was compelling?.

No. I mean we are so -- its very compelling, I don’t think we are anywhere close to where it isn't compelling. I think our view in the mid-80s that there were competitive reasons why it didn’t necessarily make sense and so I think -- if you think of at that range we are below 70% book..

I think it always is -- it always is a decision based on where you can invest capital away from buy backs. And we have seen obviously with credit spreads wider it looks more attractive than it has been in the past few quarters to buy bonds, particularly surety bonds and CMBS.

But like Rich said, I mean we think we are pretty far away from it being competitive with stock buybacks..

Then you know it's not -- I just want to be clear, we don’t think for a second that buybacks have a push price on it. It's really the attractiveness of it is the increase in book value and the accretion to earnings at these levels..

Right. Some of the -- if I remember correctly some of the thoughts were around buybacks in the past, I mean clearly you have shown the acumen to do them before back at the end of '13 I think was in some ways buybacks increase our leverage, they reduce our -- essentially reduce our market cap, reduce our scale, reduce our size, what have you.

Is that just not part of the equation anymore? Is that part of the maybe the push and pull?.

It’s definitely part of the equation. It's just that the difference in amortization accretion at 30% discount relative to call it 15% to 20% is much more compelling. Yes. I am all else equal, it's not that we don’t want to continue to invest and grow the business.

We do think in the long run we grow more by being prudent and increase -- improving our earnings and book value this way..

Maybe a different thought since there have been a significant amount of spread widening, I don’t think you have been too interested in Agency maybe for a little while, but at what point does Agency start to become compelling given where swaps have really moved down to as an investment?.

Yes. I mean Agency is actually held in fairly well compared to say -- I mean we look at across the landscape and clearly I would say CMBS and credit risk central bonds have suffered a lot more than Agencies lately.

So I mean, still we don’t not like Agencies, we just don’t like some of the stuff that comes along with them which is just more difficulty to hedge, things like that. So not to say that we wouldn't buy Agencies but I think right now we had still be leaning towards incremental assets. We had be leaning towards things like CMBS..

Commercial loans..

And commercial loans clearly, right..

Got it. And then one final one for me since you are active users of the FHFA.

Have you heard any updates on kind of the policy or the regulatory front as to -- if there is anything maybe materializing by year-end or as we still kind of in the holding period where you don’t really know what's going on?.

There really hasn't been any fundamental change. We are waiting to hear from FHFA..

The next question is coming from Doug Harter of Credit Suisse. Your line is now open..

Can you talk about -- first off good morning. Can you talk about where you see leverage levels going and if we go into a more volatile period around kind of the first Fed move and as this quarter demonstrated.

Are you making any further changes to leverage to try to further reduce book value volatility?.

Yes. Let me just make sure that everybody understands that buying back stock doesn't mean higher leverage. We can manage our leverage, our portfolio's liquid. We have a lot cash flow and so leverage went up a little bit this quarter.

We are comfortable with our leverage and as I also think about this, our assets continue to season and become less volatile. I think you can see that in the book value volatility chart in the decline over time. So you think about it.

You buy a CBS it's got a nine year average life, three years ago, commercial mortgage -- commercial properties have appreciated a whole lot in the last three years I think like 14% last year.

And so you end up with loan-to-value effectively getting down towards 30% or something like that on the book plus something that was a nine year is now six year. So you end up with an asset that is just becoming better and better and lower and lower volatility both in terms of spread duration and just risk.

So the same leverage today on this portfolio versus a year ago is actually less risky and we are very comfortable with our leverage just given the high quality of our assets and the shortening. So to answer your question we are not intending -- we are comfortable with leverage where it is. We are not looking to increase it..

I mean I guess is it the best way to for us on the outside to see that comment about the reduced risk of the portfolio as it seasons is that in that book value volatility chart that you guys show?.

I think that's one way and I think we will think about some disclosures to, yes, show the improving quality of the portfolio..

Great. I think that would be helpful..

The next question is coming from Trevor Cranston of JMP Securities. Your line is now open..

Thanks. Understanding that you guys view the buybacks as kind of the most compelling opportunity right now.

Can you talk a little bit about where you see the returns on new asset investments to the extent that you would be making them today? And also maybe comment on any meaningful changes you have seen in spread levels since the end of the third quarter?.

Sure. I mean, we saw a pretty -- I will take the first part -- sorry the second part first on spread widenings. I mean the spreads were pretty much wider across the board in the third quarter as everyone knows.

CMBS was on AAAs are probably 20 wider in the quarter whereas single-As are anywhere from 40 to 60 depending on vintage and depending on the bond. We are probably another call it 10 to 15 wider during October and then stacker and the cap is -- T-bonds are also in that same range, 30% to 40%.

I think everything and other slightly wider during the third quarter but not nearly as dramatic as in Q3. In terms of where we see ROEs I mean those are definitely a lot better.

I mean, I think it's -- and we have talked on the last call or the previous calls, we didn’t see a whole lot in the double digits in terms of levered yields -- levered ROEs and now we are starting to see pretty much across residential credit. We are in both low double-digits call it 10 to 11 type range.

Credit risk transfer bonds are probably a few hundred basis points higher than that depending on the bond on rated tranches. Commercial again looks pretty attractive, there is a caveat there. We are not as -- we don’t like the low rate on the subordinate bonds on new issues. So it did widen a lot and huge ROEs if you are willing to buy those.

We are saying a lot we like those. So call single-A in higher type commercial in the very high single digits levered. So the environment is a lot better than it was..

Okay. That's helpful.

On the funding side have you guys seen any increase in rates so far for funding that goes across year end and do you think it's reasonable to expect the kind of the magnitude in the increased funding levels as we go into December would kind of be similar to what we saw in September around the Fed meeting?.

Yes, I think so. I mean we have seen a pretty strong pattern over the last few quarter ends that in prior years you would see -- you had only see funding pressures at year end or your balance sheet pressures and you see higher repo rates around the turn of the year.

And we are starting to see more recently is that effect is happening around quarter ends also. So if you look at where funding levels are on a day to day basis definitely around quarter end -- there is definitely an impact there. So I would expect that to continue into this year.

And yet again -- I mean as -- I think Fed meetings are another one, rather as the Fed prices different probabilities of a rate hike, that does directly gets priced into repo..

Thanks, guys..

The next question is coming from Joel Houck of Wells Fargo. Your line is now open..

I guess more of a conceptual question. You guys have been obviously around kind of for many quarters now have been allocating more capital to non-Agency and while I agree with you on the Fed regarding -- they do anything that is going to be limited. I don't agree that it's because everything is okay with the economy.

In fact, one would argue if they can't even raise 25 basis points in September there is something seriously wrong with our economy.

So the question is, there is probably more risk of deflation if the Fed raises 25 basis points, 50 basis points because that tightening relative to rest of the world is going to strengthen the dollar and there is all kinds of -- we have already seen the negative effects from that.

So wouldn't that mean that non-Agency we would see continued spread widening and that asset class probably today is not as attractive as Agencies and that the paradigm is changing on everybody in real time and so therefore, especially given where swap spreads have compressed to that the Agency trade on a hedge basis is far more attractive today than non-Agency.

I am just curious as to your thoughts on that..

Well I think -- well first of all, I mean the Fed could have raised rates in September, it's that they couldn't. The employment -- things have been gradually improving as far as I think most people would agree.

But -- so I think it's really more they don’t need to raise rates because there is nothing growth wise or inflation wise that's pushing it that things are gradually improving. That's our opinion.

As for the -- because where we are right now and we had rather own high quality credit assets with lower leverage where you have known cash flows and the subordination in these bonds is building up pretty dramatically. So super low LTVs and these CMBS that we own are -- AAA CMBS even from last year let's say.

So some of the issues with repo and different are a lot less because you only have three times the leverage and six, seven, whatever the gap on Agencies. So not a lot of benefits to really seasoned high quality credit assets.

I would agree with you probably if you are talking about really risky credit assets like emerging markets or new issue subordinate stuff. But our portfolio is really quite solid..

That's fair enough. The other dynamic going on here, as managers you have really the trade-off between new assets and buybacks and I think you have at least gone as far as actually doing buybacks to some of your peers that give lip service to it.

However if the Agency conflicts in your own estimation, not necessarily mine, but you guys know this stuff far better than we do. But if Agencies now are all that attractive why not shrink it even more buyback stock which is as everyone saw this quarter is clearly accretive to book value.

I think the market in the discount to your stock or anybody in my view that is aggressively buying back stock to increase book value is going to be far better received in terms of valuation than otherwise.

So what are your thoughts about the pace of buybacks and accelerating those and taking down kind of the least attractive asset class that you own?.

Yes. We are doing a lot of consideration there. I mean I hear you and we love the opportunity to create book value and create earnings through buybacks. But I do think you do have 40 odd considerations. You have lending agreements that have covenants based on changes in equity.

You have competitive concerns and I think we are going at this with a great deal of thought and doing what's best in our opinion for the shareholder..

Okay, guys. Thanks for the answers..

The next question is coming from Mike Widner of KBW. Your line is now open..

Let me ask you a real simple one first. You talk about the benefits of kind of hybrid arms in the portfolio and rate resetting.

Recently just what percent roughly speaking, I don’t need the exact number of your Agency hybrid arms are what you would call current reset arms are actively rate resetting or rate resetting in the next say 12 months?.

Yes. It is relatively small. I mean we have got mostly I say five, seven -- 51s and 71s..

The benefit really on those isn't necessarily the short-term reset, it's the expansion rather of limitation..

Yes. I was just curious if that was 30% or something but it sounds like it's pretty minimal..

Yes. It's small. The prepayment risk is kind of real short, which means that stock can be pretty difficult to manage..

Yes. I guess I was surprised to see your speeds on your arms were actually pretty low relative to what we saw in the industry. So I think that's pretty good. Let me follow-up on I think a couple of questions, Joel's, but some of the others as well.

You talk about spreads having kind of widened out across asset classes which they obviously did during the quarter and then that making the more attractive.

So what in particular would you say has become the most attractive to you right now given that spread widening? You already said you were in all that throughout that that Agencies, even with the spread widening there?.

Great. Credit risk transfers have really had quite a dramatic widening lately. So those we are looking at close to mid-teen ROEs on those. And of course they are floaters so we really like that aspect of it. So then that would probably on the high end of where things are.

CMBS you are getting close, I mean, you are talking about AAA bonds you are getting close to double digit ROEs on which are pretty attractive also. So I think those two areas -- and then again on the CRE loans we really like that because the loans are making a floating rate again, same sort of thing, pretty attractive risk profile there..

Yes. We look at that -- I mean that has an awfully business component to where we want to be constantly in the market and we have been -- we have come down with vendors and particularly mezzanine loan space. So we want to be consistent in that business and always be providing capital..

Okay, thanks. That makes sense. So, I guess it's a two-part question here.

Spreads, I think everything moved wider and one of the questions people have is, why did spreads move wider and what might cause that to change? And then related to that, where do those spreads stand relative to so-called normal levels and I think what you guys would probably agree with and at least I hope so, is we're coming from a place where spreads across pretty much everything were extremely tight by historical norms.

They've widened out to levels that some might argue are widened, some might argue were closer to normal depending on how long that time period and sort of what kind of parts of the cycle you include in the definition of normal.

So, I guess the first part of the question is, what do you think was actually driving the spread widening in the most recent quarter? And then as you guys think about whether spreads are wide versus tight.

How do you think about where we are in the cycle? More specifically that means -- I think most people would argue there was virtually no credit risk pricing anything six, nine, 12 months ago, spreads have been widening all year, and we might be back to a level where a modest amount of credit is sort of priced in.

But are we closer to the next recession, then the end of the last.

And so how do you think about the credit risk component, whether or not we're adequately priced for that, especially given what you have said about the economy? And the Fed's not realistically in a position -- the economy is not realistically in a position where we're going to go; things are firing on all cylinders and we really got to clamp down on rates because growth is just too good and we're overheated.

I mean we're improving, but I mean we're limping along and it's pretty hard to call impressive. That's a very long multi-part question but I will let you take it from there..

So on the kind of wide spreads widening, the thing that we think about the most is that for what we actually own the underlying fundamentals still look good. So I mean that's the first thing. So we see spread widening along -- we see spreads widening along with like high yield and emerging markets and sort of corporates to some extent..

Yes. As I say they are a real concern, in emerging markets you have got concerns over what's happening in China. In a large part it's high yield that's going to be impacted by oil prices. I mean, that you have real fundamental concerns in other parts of fixed income.

And if we look at our markets and think, wow, there is not really any fundamental reasons directly related to housing or commercial real estate. So we view that as we are not overly concerned in terms of the actual assets, like there is this point I think high quality assets are the key..

I mean a lot of its seasonal. We have had every -- if you look at the kind of second and third quarter relative to the fourth quarter and first quarter, I think at least over the last five years you have seen that same pattern. And I wouldn't be at all surprised to see that again.

And then on top of it the whole thing about will the Fed go or won't they go is, I think everybody rationally probably agrees that, yes, there is -- there is a beginning of a normal kind of business cycle thing really tightened a lot because there is no reason to it.

So I think there is a reasonable argument to make that when the Fed actually does raise rates and give some verbiage around that, that you might actually see spreads tighten because there is just a lot of uncertainty priced in.

Then the last thing is just, if you think of the overall kind of credit market this year there and I think next year as well there is a ton of corporate supply.

In past cycles I want to go back to your comment about normal spreads, because CMBS spreads are really why compared to where they were basically from the beginning of that market until the credit crisis. They were much tighter. So they are abnormally wide given the fullness of time.

It’s just that they got so wide in that credit crisis and then people like to think of things in the last six year context. They are tighter -- they are a lot tighter than they were so why it's -- they are definitely a lot of tighter this time..

And with better credit underwriting standards, generally..

And way better credit underwriting standards..

So, if I just might -- I don't want to say push back on that a little bit, but just earlier this week, we had the head of the OCC, make comments about concerns in multi-family credit standards and are they adequately being reserved for bank balance sheets and the growth in that space.

And he's certainly not the first to suggest that maybe underwriting is slipping and that we've certainly heard plenty of people say we've got an asset bubble in commercial credit markets, multi-family markets.

I don't want to draw parallels between mortgage and subprime auto, but I mean certainly you've heard many people complain or I would assume you've heard concerns and issues about the ease in standards there. Again, I don't know -- I mean..

Well I mean I think you have to draw comparisons between resi and commercial being -- there is a reason why we have started out buying BBBs and have moved into capital structure because credit standards and competition has caused credit underwriting to loosen in commercial generally. But that doesn’t happen in resi generally..

Well that's why they keep an article coming out every once in a while saying I got some subprime guy got a loan, which is ridicules because credit standards have never been this tight and they are not loosening..

Keep getting tighter..

Yes. So I think in the resi space we continue to get like 5% appreciation per year and home prices and really no measurable loosening in lending standards. And in the commercial side really for us there is just the underlying property depreciations and so big that the LTVs are really low at this point through our portfolio..

So again I don't want to push back too much on that, I guess I hear this story a lot that credit is extremely tight, poor borrowers can't get loans and at the same time I look around, I go well you can get a government mortgage at more or less all time low rates with kind of standard.

I mean there are -- DTI and LTV standards are if anything easier than a government loan was in the past. FICO scores and availability are going way down. The government's doing accommodative programs where you can include income from other tenants in your house if you are a low income borrower.

So while I hear this story I look at the actual facts to those loans, I mean other than the fact that you actually have to provide documentation I would push back on this notion that credit standards are actually tight.

I mean, I think it's their diligence in terms of prove everything that you wrote, but I am not sure -- I guess tell me who is the borrower that is not being served today that would have been served at any time other than 2003 to 2006?.

Our main concern as a company is I think maybe off track worried about underserved borrowers. I think the big deal here is look at our results in terms of delinquencies.

I think we had close to 4,000 loans in our securitization book and we have no delinquent -- no serious delinquencies, so I think the proof is in the pudding, Mike, as far as credit standards and what the results are..

I'm not going to agree with you, and we've said for many notes now that you are soft ticks. I don't want to be on the wrong side of raising concerns.

I think the valuation everything you said is great, we love your portfolio and I think your avoidance of deep credit risk is actually one of your strengths, so I don't want to be perceived as being on the wrong side of that debate. I think the narrative to your question about why does the stock trade where it is.

I mean the narrative that investors don't -- doesn't resonate with investors it just feels like bonds in general have a lot of risks. And, so that's why I push on kind of -- some of the concepts I hear from investors is, that the economy is not strong and so anyway, I'll stop there. I think that you guys have done a fine job.

I think it was a fine quarter and I agree with you about buying back stock, and I agree with you on the valuations. So, thanks for all the answers as always, nice quarter. I will shut-up..

Thanks, Mike..

[Operator Instructions] The next question is coming from Brock Vandervliet from Nomura. Your line is now open..

Thanks for taking my question and good morning. I appreciate your discussion on I guess on Page 9 of the slide deck of how you originally got into the BBBs, when not only the assets were depressed coming out of the financial crisis, but underwriting standards were super tight.

How do you look at mezz now, kind of on the flip side of that when we have seen so much appreciation in commercial? And specific to this deal could you talk about some of the economics around this $34 million loan?.

So on the CMBS side we have not been investing in BBB CMBS in any of the latest deals like what you have seen..

In the last couple of years..

Yes. I mean in a while. Fortunately we do like the AAA underwriting and AA and AAA and we have been able to finance the home loan and so we have pretty good ROEs on what we think are very well underwritten at least for that part of the capital structure on bonds. So that's part of it..

On the commercial loan we are -- we have been in the same ballpark and call it LIBOR plus 7% to 9% unlevered in the commercial space and we can really pick our spot. We have the big real estate franchise in Invesco that we used to help us originate these loans and we see that as a strong business going forward and I will continue to do that..

And that asset there, was that multi-family or office or what?.

I don’t think we have disclosed that. So let me double check before we say on this call..

Okay. Thanks..

[Operator Instructions] At this time, there are no questions in the queue..

All right. Thank you. Thanks everybody to listening on the call today and we will talk to you next quarter..

That concludes today's conference. Thank you for participating. You may now disconnect..