Richard King - President and CEO John Anzalone - Chief Investment Officer.

Douglas Harter - Credit Suisse Joel Houck - Wells Fargo Trevor Cranston - JMP Securities.

This presentation and comments made in the associated conference call may include statements and information that constitutes 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, comprehensive income and changes in our book value.

Our ability to continue performance trends, the stability of portfolio yields, interest rates, credit spreads, pre-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 report on Form 10-K, and quarterly reports on Form 10-Q which are available on the Securities and Exchange Commission’s Web site 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. Good morning, ladies and gentlemen.

Welcome to Invesco Mortgage Capital, Inc.’s Third Quarter 2016 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 Mr. Richard King. Sir, you may begin..

Thank you. Good morning to all and thanks for joining today. We’re pleased to announce the third quarter Invesco Mortgage Capital core income of $0.41. Core earnings well above the dividend of $0.40, down $0.01 relative to the second quarter $0.42, due to a more conservative portfolio mix and somewhat faster prepayment speeds.

Prepay speeds were higher due to both lower interest rates earlier in the summer and higher seasonal housing turnover. Book value improved $1 per share or 5.9% in Q3, due to narrowing or improving credit spreads.

I mentioned on our second quarter call that we expected credit spreads to contract in this low volatility, low interest rate environment, and that is what occurred. In Q3, our comprehensive income was $1.40 per share. Our economic return, the change in book value plus dividends paid divided by the beginning book value, was 8.2% for the quarter.

Economic return has been 12.5% year-to-date through September. Our portfolio is positioned relatively conservatively with 44% of our equity invested in primarily shorter maturity Agency RMBS.

In the third quarter, we used cash flow from principal and interest payments and increased capital due to appreciation in our portfolio to expand our investment in 15-year Agency RMBS. We also reduced leverage in the portfolio. Our Agency RMBS debt to equity leverage was reduced to 7.9 times from 8.6 times last quarter and 9.7 times at March 31.

Our total debt to equity has been reduced to 6 times from 6.3 times at year-end 2015 and that’s despite moving our equity allocation from 33% to 44% Agency RMBS. Agency RMBS obviously have higher leverage relative to our credit positions.

Importantly, due to the repositioning of our Agency RMBS portfolio, we have much less maturity extension risks, less book value risk and better investment flexibility if we do see either higher rates, a risk episode in the market or some exciting investment opportunities with new risk retention rules about to take hold in the fourth quarter.

We see higher potential for tighter financial conditions in the next couple of quarters, due to the Presidential and Congressional Elections, a probable December rate hike, increased regulation and not just risk retention but also capital required for banks trading books.

Further, there’s the aftermath of money market reform, Brexit negotiations and just the potential impact on U.S. and world economies on the stronger dollar and delevering. We believe we are well positioned to capitalize on opportunities that may present as a result.

I’m pleased that we’ve been able to significantly reduce risk and still earn our dividend. John will go into more detail about our high-quality portfolio. But first, let’s look at Slide 4 in the presentation and more specifically at the components of the change in book value.

As I mentioned, credit spread tightening drove our book value per share by $1 higher. Here we disaggregate that net change into gross components. Rising rates in Q3 improved our swap hedges valuation. It’s labeled here as derivatives contributing $0.54 to book value per share.

Our efforts to shorten the Agency RMBS portfolio and Agency RMBS spread improvement limited the downside price movement from this component to $0.20. The CMBS and residential credit portfolio appreciated smartly despite higher rates and together contributed $0.65 to book value per share.

Most of that outperformance was in the residential component, as the GSE credit risk transfer market outperformed all other securitized sectors again this quarter. We paid $0.40 in common dividends of the $0.41 of core earnings. We’re very happy with the way things are going in the portfolio.

We have an attractive dividend, strong and improving asset quality, lower interest rate risk and declining book value volatility. We have room to increase risk when we see opportunity. Since our last earnings call, I announced I’ll be retiring March 1, 2017. And I’d like to take this opportunity to thank all of our shareholders for your trust in us.

The team here is quite talented and accomplished and it has great depth, and we’ve had very low turnover. Most importantly, we’re focused on the right thing which is the shareholders. I’m fortunate to have the opportunity to lead this team and this company. Invesco has resources and platforms to excel in both residential and commercial.

I’m confident IVR will be an important player in both the CMBS and non-Agency RMBS markets for years to come, and will continue to find the best risk-adjusted returns across the mortgage market.

In the long run, the major driving force behind the returns to IVR shareholders is the high level of dividends relative to pretty much any other equity group. Total returns on IVR stock have been among the best in the industry over the last one, three and five years.

It produced 15.4% annualized return over the last five years and 12.4% over the last three years, while the Bloomberg Mortgage REIT Index I believe is around 9% over those periods.

We expect to drive shareholder returns with strong and stable income and to see additional return from lift in the stock price as we do expect the discount will continue to narrow. Now I’m happy to introduce John Anzalone, our CIO and next CEO, to cover our investment strategy and current portfolio positioning..

Thanks, Rich, and thanks again to everyone joining us on the call this morning. I’ll start on Slide 6 with the portfolio review. Over the past few quarters, we have focused on maintaining a high quality credit book while improving our liquidity position.

This will be important if the market faces a number of potential sources of volatility over the balance of the year; Elections, Fed meetings and Brexit negotiations to name just a few. Having redeployed recent cash flows into 15-year Agency paper allows us to keep some powder dry to redeploy into credit assets when spreads widen.

In the meantime, 15-year Agency provide great liquidity, have better convexity characteristics and have a shorter duration profile. Often, this should be valuable over the coming months. Currently, we have 44% of our equity allocated to Agencies with 56% allocated to credit.

As I’ll discuss shortly, while we are still favorable on credit fundamentals we are simply waiting for an opportunity to purchase credit at wider spreads in the future. Let’s move to Slide 7 on Agency mortgages.

With the recent purchases of call protected 15-year collateral, our Agency portfolio is well balanced between high coupons specified for 30s, 15s and seasoned hybrid ARMs. This gives us an Agency book that is relatively defensive in nature with less exposure to interest rate risk and convexity risk.

Speeds have ticked up recently but we expect to see those moderate due to higher rates as well as seasonal factors. Moving to Slide 8 on residential credit. Our residential credit book continues to maintain a good mixture of legacy positions, more recent securitizations as well as CRT bonds.

Overall, the housing market remains strong supported by favorable trends in employment and demographics along with limited supply in low mortgage rates. Our credit performance is benefitting from strong house price appreciation and borrower performance.

Over the quarter, spreads tightened considerably as we continue to see demand for credit assets in general and housing assets in particular.

Underscoring a favorable fundamental environment, we saw positive rating actions in our CRT book as Fitch assigned ratings of 353 million of our previously unrated bonds and upgraded another 7 million to investment grade.

While this obviously validates our favorable opinion of these bonds, it also has tangible value as financing terms improve along with rating upgrades. Slide 9 provides a snapshot of the credit quality of our residential credit portfolio. The big picture takeaway is that this is a very high-quality book.

The chart on the left shows the average dollar prices on our portfolio. These high dollar priced bonds tend to have fewer issues with collateral performance, less price volatility, and allows us to get financing at favorable terms. The chart on the right shows the break on the portfolio by vintage and sector.

As you can see, the legacy paper is high quality Prime in Alt-A paper, while our CRT positions are largely from 2013 to 2014. This is important because these vintages have lower price volatility while still benefitting from the positive trends we’ve experienced in house prices. On Slide 10, we take a look at our commercial book.

The story here parallels the story in residential credit, as the fundamentals are positive as well and we own a high quality portfolio.

In CMBS, our positioning has been good with concentrations in A, BBB from 2011 and 2012 that have benefited from the run up in commercial property prices and the strong underwriting from those vintages; and AA, AAA from 2013 and 2014 which we’re financing at favorable terms to the home loan bank.

Slide 11 gives you an update on our commercial loan book. It stands at a little over 300 million and has experienced no delinquencies. We have been relatively quiet here recently as we await opportunities that the new Dodd-Frank imposed risk retention brings. Slide 12 shows a snapshot of the credit quality of our commercial credit portfolio.

The loan to value ratio remain remarkably well with the average LTV on our commercial loans is 67% and the average LTV in our CMBS at only 34%. A full 94% of the loans underlying our CMBS originated pre-2014. And the properties behind these loans have experienced strong property price appreciation over the past several years.

Our newer paper is predominately AA, AAA, which have higher subordination levels to begin with. And as we saw in the previous slide, our CRE positions are all performing well. Finally, Slide 13 in financing.

The financing market remains very robust while we have seen a small increase in financing costs as LIBOR increased due to money market reform, this is largely offset by the receipt side of our swaps as well as by the increased payments on our LIBOR-based floating rate assets.

Further, our home loan bank financing is indexed off of the home loan bank cost of funds index, and that did not increase along with LIBOR. That’s all we have for our prepared remarks. Operator, please open the floor to questions..

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

Thanks. First off, Rich, congratulations on the retirement.

I guess, John, when you're looking at the CRT assets given how much those spreads have tightened, can you talk about the relative attractiveness of those today and whether you would look to sort of scale back that position sort of ahead of the volatility events that you've highlighted?.

We like what we own now. I think the key is that what we own is basically pretty well seasoned from 2013, 2014. So we like those positions still. We’ve been cautious about adding more at current levels, certainly in new production type paper. So I think we’re kind of waiting around for spreads to widen a little bit before we add more.

But fundamentally, we still really like the paper. It’s just a matter of the price level..

Okay.

And I guess what have CRT spreads done so far or what did they do in October?.

I think in October, things have been relatively flat to a little bit wider. Generally speaking, since quarter end, we’ve seen credit spreads across most of the structured securities base flat to slightly wider [indiscernible]..

Not the B tranches but in the unrated tranches like we --.

And I guess with Fitch rating that one tranche over that one group of securities, is that something that is it likely to continue and is that something where you could expect further benefits from that, or is that kind of a one-off situation where Fitch rated those securities?.

It can continue. We can’t really predict what Fitch is going to do. But certainly from when those securities were issued, there’s been tremendous amount of home price appreciation and so the subordination required is much less. So it could continue..

All right. Thank you..

Thank you. Our next question is from Joel Houck from Wells Fargo. Your line is open..

Thanks. Good morning, and Rich, congratulations on the retirement as well. So just to kind of continue along the theme on the credit side. When you look at your overall opportunities between commercial CRT and kind of legacy paper, obviously they’ve all been performing well this year.

But on the margin, if you had to handicap where to put new capital, how would you kind of rank order the investment opportunities set on the credit book?.

Right now the legacy stuff is probably the most attractive given that it’s at this point pretty low volatility, pretty short and given that we kind of think credit spreads are relatively narrow, had the least volatility..

Great..

And also in CMBS, we’re kind of at the cusp of risk retention happening in another six weeks or seven weeks I guess. So it’s a little bit hard to tell what opportunity is going to be there, because we haven’t seen exactly how that’s going to play out yet. So that one is a little bit harder to handicap.

We do expect to see pretty good opportunities in CMBS once those rules take place and once we kind of see what the leveling [ph] looks like..

Okay. Thanks, guys..

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

Thanks. Good morning, guys. Derek [ph] on for Bose. And Rich, congratulations on your retirement. I want to talk about leverage.

It looked like it did tick down and I’m curious if that’s just due to the appreciation in book value and where you see that trending and where you’re kind of comfortable with the portfolio, especially as you rotated a little bit more into Agency?.

We took leverage down on purpose for sure and it’s been over several quarters and really for the reasons we’ve talked about just to reduce book value volatility and wait to put capital to work at better levels. In front of the Fed meeting it makes sense to reduce kind of our duration risk and convexity risk, so we liked the 15-year space.

So that’s really it. And I think you have seen our leverage drop a lot more on a holistic basis. If we had kept the same mix but – because the mix moved from non-Agency and CMBS which are at 3 times to Agency which we’ve had between 8 or up 10 times at times.

We’ve really reduced leverage quite a bit given that it came down just by increasing the Agency component..

And to your point on volatility in the curve and the Fed raising rates, would you think about putting some hedges onto the longer end of the curve? How do you think about restructuring the hedge portfolio potentially heading into next year?.

We’re probably more inclined to hedge like the belly of the curve rather than the long end. And most of our duration is more in the belly rather than long..

Okay. And I wanted to just quickly ask on the Dodd-Frank risk retention stuff. And maybe you can elaborate just a little bit.

In an ideal world once that takes effect, what would the environment have to look like again sort of in an ideal state to get you a little more excited about the market?.

As far as the risk retention rules?.

Yes. I think you – if I heard your statements correctly, you’re taking a sort of defensive posture until those rules go into effect.

So what would the environment have to kind of shape up to look like, or what would have to happen in order for you to get a little more excited about that?.

Well, that I maybe I misstated that a bit. I think we’re looking at that as an opportunity that’s likely to present opportunities for private capital to be able to put money to work in the space where it didn’t exist prior. We’re not nervous about how those rules come out.

The credit spreads in front of the Election and Fed meetings and Brexit is really more what could increase volatility and actually we’ve just seen that in the last few days in the BEX Index [ph] is pretty much the highest since Brexit was announced. So we are seeing a little bit in that and hopefully there won’t be any and that’s fine.

I think we just think it’s prudent and that we hold a bit of more unencumbered assets and so forth in front of year end and look for opportunity in the beginning of the year probably..

I would add on the CMBS and I think what we’re looking for is with risk retention rules, part of the idea there is that there would be better alignment of interest between issuers. And we think that that should present better opportunities to invest at lower levels down the capital stack with better underwritten properties.

So I think that’s like the main takeaway. Whether we get an opportunity to partner with issuers in actually taking down those retention pieces where we need to hold them for five years, that remains to be seen on how that’s going to play out.

But certainly we think there’s going to be opportunities regardless of how it shapes out to invest in better underwritten properties and potentially down the capital stack, which should provide better spread levels..

That makes sense. Thanks, John. I appreciate it. Thanks, guys..

Yes..

Thank you. [Operator Instructions]. Our next question is from Trevor Cranston from JMP Securities. Your line is open..

Hi. Thanks. And I’ll add my congratulations to Rich.

Given the kind of conservative stance you guys are taking ahead of some potential volatility, can you talk about maybe how you were thinking about potentially buying back shares where they’re trading today versus continuing to build liquidity for potential investment opportunities over the next few months? Thanks..

Sure. We look at constantly where our stock’s trading and the relative opportunities between buying back shares and investing. I think the current focus was to increase liquidity and decrease leverage, which are both kind of uses of our liquidity and current uses of our capital, if you will.

So buying back shares is not on the front of our mind right now, because we use that space in the portfolio and that opportunity set that you just opened up and take it away.

So that’s a short answer but basically what we’re looking at is let’s get through the next couple of months and then assess the best opportunities, whether that be share buybacks or putting money to work in risk retention or wider spreads on credit, et cetera..

Okay. Thank you..

Thank you. At this time, we have no further questions..

Well, thank you, everybody. I appreciate your interest and we will talk to you next quarter..

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