John Anzalone - CEO Jason Marshall - Chief Investment Officer Lee Phegley - CFO Kevin Collins - President Dave Lyle - COO.

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

Good morning, ladies and gentlemen. Welcome to Invesco Mortgage Capital Incorporated Third 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.

This presentation and 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 including 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, 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, 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.

Now, I would like to turn the call over to your host Mr. John Anzalone. You may begin..

Good morning and thanks for joining Invesco Mortgage Capital’s third quarter 2017 earnings call. Management team and I appreciate your participation today and we look forward to sharing our prepared remarks and receiving your questions during the Q&A session that will follow.

I’ll begin by providing a few highlights for the recent quarter and our outlook before I transition the call to Jason Marshall, our Chief Investment Officer, who will discuss our investment portfolio in more detail.

I am joined on today’s call by Lee Phegley our CFO; Kevin Collins our President; and Dave Lyle our COO who will be available to answer questions during the Q&A session.

I’m pleased to announce that IVR delivered another solid quarter with core earnings per share of $0.44, an increase of $0.03 per share or 7.3% over the prior quarter while book value increased modestly to $18.34. This produced an economic return of 2.6% for the quarter and brought our year-to-date economic return up to 11.8%.

This strong performance was highlighted by the mid quarter issuance at 287.5 million of our Series C preferred equity.

We were successful in investing all of the preferred equity issuance proceeds in assets with accretive ROEs before the end of the third quarter, which contributed to the incremental improvement in earnings though the full quarter benefits are yet to be realized until the fourth quarter and beyond.

Book value was up modestly during the quarter as you once again realized the value of our diversified portfolio.

While credit risk transfer bond spread widened in response to the potential impacts on collateral from hurricanes Harvey and Irma, this was offset by contributions from a legacy residential mortgages, commercial mortgages as well as agencies.

I’ll draw your attention to the graph on the bottom of Slide 4 which shows you that our book value volatility continues to fall which we view as an important part of our value proposition.

Importantly, our book value volatility also continues to follow the faster rate than our peer group average over the past nearly five years on a rolling three year basis. On Slide 5, I would like to point out some key performance metrics in relation to our peers.

Over this or any calendar year, annualized timeframe during the past three and five years we’ve delivered economic returns that have outperformed our peer group average. I just illustrated how the volatility of our book value has formed over the past nearly five years, the box in middle of the Slide 5 shows our book value performance compares.

In each period, we have outperformed and I’d point out the five year number in particular. While our book value has been relatively flat over the past five years, down less than 1%, our peers on average have rough nearly 19% of their book value.

Finally, we compared dividend performance, not only did we increase the stock dividend during the quarter we've been successful in earnings net dividend. Our core earnings per share, has been in line or above the declared dividend level during 10 of the past 12 quarters.

Before I turn the call over to Jason, I will take two minutes to discuss the factors that contributed to our increase in core earnings as well as our outlook for the next few quarters. As I pointed out earlier, the accretive benefit from the issuance of preferred equity was a tailwind during the quarter and will continue to benefit us going forward.

We are still seeing very good investment opportunities in 30 year agencies and in-select subordinate CMBS with hedged ROEs in the low teens reach. We believe prepayments speeds will continue to slow as housing market feels the impact of seasonal factors and this will be supportive of returns above the agencies as well as residential credit.

There are two other factors which are in related that will combine to help support the positive trajectory of our earnings stream. Our commercial loan book which now stands at 300 million is beginning to pay down.

While there are many aspects of that asset class that we like, return opportunities have diminished as new entrants have flooded the market. While as we're realizing returns in a LIBOR plus 8% to 9% range during 2013 to early 2016, returns on new loan have contracted notably.

So as these loans mature, we are recycling that capital back into much higher yield and assets. Related to that, we issued a $400 million exchangeable note in 2013 that is coming due in March of 2018. One of the reasons for issuing that note was to provide stable financing to the commercial loan effort.

Over the course of 2017, we have paid down almost 250 million of the note and we will pay off the remaining balance prior to maturity day in March. This also serves positively support our earnings per share outlook as we are replacing relatively expensive fixed rate financing with lower cost Repo.

As far as our broader outlook, we remain positive on the fundamentals that underpin our residential and commercial credit books. Our credit portfolio is well seasoned and as such is benefited from the impressive property price accretions across both residential and commercial collateral.

Because spreads have continued to tighten, we have been extremely selective in adding to our existing credit book. Agency mortgages have been well supported despite the fact that the Fed has begun to taper its portfolio. The slow pace of this reduction has been more than offset by increased demand from commercial banks.

While we believe that agencies will come under some pressure as Fed taper picks up steam later in 2018 and ‘19, in the near-term we believe agency spreads will remain well supported.

To wrap up, we believe IVR’s diversified portfolio is well positioned for the current environment and that the positive trajectory of our core earnings streams should continue to be well supported while creating the potential for further common stock dividend approval. With that, let me turn the call over to Jason who will review the portfolio..

Thanks, John, and likewise thanks everyone for joining our today. I’ll provide a short summary of our portfolio highlights before we conclude our prepared remarks and open the Q&A session.

While the core earnings increased and book value increase during the quarter were positive outcomes, we view the highlighted third quarter as the exceeding deployment of our 287.5 million preferred issue proceeds that occurred in August.

On a net basis, we had approximately 2 billion of 30 year agency 3 and 3.5, and 331 million in primarily investment grade CMBS, both with hedged ROEs in the 13% to 14% area.

Accretive investment opportunities in the RMBS sector remain limited during the quarter resulted in a decrease in portfolio of 155 million for the quarter primarily due to pay downs.

While we continue to maintain a long duration position, we did add 1.2 billon of new swaps that hedged some of the purchased activity related to the preferred proceeds and we maintained an overall profile by source of slight flattening in the yield curve.

Lastly, on the financing side as John indicated, we continue to repurchase the outstanding convertible note that matures in March of 2018 and we’re trying another 60.9 million during the quarter leave us with approximately 158 million left. I’ll now briefly discuss the sector performance during the quarter before moving onto the Q&A.

During the quarter, agency MBS, CMBS and legacy RMBS all tightened while CRT experienced some widening due to the impact of the storms in Florida and Texas, which our credit team does not expect although you have material impact on credit. Our generally more seasoned CRT portfolio also helped mitigate some of this impact.

Tightening in agency MBS was driven by strong commercial bank demand as loan growth remains somewhat lackluster.

While CMBS benefitted from an overall favorable return in the risk market and continued positive fundamentals in commercial real estate while spreads remain historically tightened, many objectives on which we operate we continue to have a positive fundamental outlook in residential and commercial credit and agency MBS.

We are obviously closely following the Fed balance sheet deduction program and spreads have been remained very resilient at the start of the program, and we do expect to probably see some widening and some increase in spreads volatility, but don’t expect a dramatic impact over the intermediate term.

Given the activity during the quarter coupled with our market in economic outlook, we expect the trajectory of core earnings of dividends to trend higher during the next several quarters.

For the fourth quarter specifically we will realize the full impact of the investment of the preferred proceeds, and as John noted, agency MBS will receive some seasonal benefit of slower turnover the in the housing market. Thank you again very much for participating in our call today. That concludes our prepared remarks.

Operator, please open the lines for Q&A session. Thank you..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Eric Hagen of KBW. Your line is open..

Thanks and congrats on the accretive capital rates.

As the exchangeable notes roll off in March, perhaps you’re not in commercial loans any more, but how do you think about putting another forms of term financing? Maybe you guys -- have you exposed another preferred capital rates as well?.

Yes, I would say in terms of preferred and we just did a preferred, and I think from where we are in our -- where our capital structure is now, we’re pretty comfortable with the amount of preferred we have on right now, and exploring other longer term financing options like converts and things like that, and we are always looking at that.

For now because we have been buying back the existing note overtime and kind of in pieces as we can buyback and it's been a slow process and rolling it into Repo has made the most sense, but we’re always looking to improve our capital structure..

Great, that’s helpful. And then if you could just maybe give a little more detail about the rotation into CMBS during the quarter. Where the stack are you buying these bonds? And how much additional tightening do you really see left in the credit market, especially well, if you can address both CMBS and RMBS that would be great? Thanks..

Okay, Kevin Collins, who runs our commercial effort is our President, is on the line. I will let him handle the CMBS portion of that..

Sure, to address that, our focus has predominantly been in the triple-B and BPs portion of the capital stack. We have been -- positively, we have been able to go in and add loans that were originated several years ago.

So since that time property prices have appreciated and as a result we believe we are benefiting from what is essentially a decline in LTV ratios. But at the same time, we are also adding exposures to new originated loans as well, again in triple-B and double-B space predominantly..

Great.

And then if you could just talk about how much tightening you really see left in the market I mean it’s pretty extraordinary, how tight credit spread are?.

Yes, I guess what would say on that note as it pertains to commercial real estate credit is, is the fact that at the top of the capital structure we have seen notable tightening. So, there’s certainly no disagreeing that. Where we have seen a little bit more of a lag has been at the bottom of the capital structure.

So, there we are still finding good value and we are looking for bonds that we want to hold on longer basis, and we think are still generating a really nice ROE. I would say that on the commercial real estate mezzanine loan side, we are seeing underwriting quality by and large holding fairly well and that’s been a positive.

But one thing I would note is that yield premiums have contracted as the space has just seen a growing number of entrants, that’s we will keep looking for opportunities on both sides..

Yes, Eric, I would say you mentioned RMBS earlier I think on the RMBS side as part of that spread outlook, we are not necessarily expecting a significant spread tightening from these levels.

I think to your point most of the tightening is behind us, that’s not to say that we couldn’t continue to kind of grind tighter at a slower pace here for the foreseeable future.

But given that much of our book was put on at cheaper level and it's generating a book ROE that’s quite attractive, we are happy to continue to hold those assets without the expectation of kind of continued price appreciation..

Thank you. Our next question is from Doug Harter of Credit Suisse. Sir your line is open..

Could you talk about how agency spreads have performed so far in the fourth quarter and some of your expectation there?.

Yes, Jason do you want to?.

Yes, we went into kind of the announcement of the Fed tapering program and the types of year. I think we’ve drifted maybe just marginally wider since then, but spreads have been very resilient and it still remains at tight levels whether you're looking at one or three year or five year type chart.

I think we’ve been very strong bank demand, if you look at some of the big bank earnings reports, your loan growth, I think it's still below where they would like it to be. So obviously they’re using the MBS market to add some asset exposures. The deposits continue to grow.

And we really don’t see that dynamic changing, as the Fed gradually does increase the amount that they don’t reinvest as they laid out in the program, assuming the trajectory of the program remains as they lay out. And we do expect spreads to widen some. We’ve generally been at the lower end of the range of some of the estimates that we’ve seen.

Initially, we were thinking there'd be 10 basis points over the intermediate term as the CMBS spread volatility and pick up at the market, is the market supposed to absorb some of that that was otherwise being reinvested by the Fed.

So, we are currently at tight levels and we do expect some widening probably over the next several months as this program continues to evolve, we don't see dramatic widening on the horizon..

And then can you just talk about your interest rate risk exposure to the end of the third quarter or today kind of given the addition of the agency portfolio during the quarter?.

Sure. Yes, we’ve been running at empirical durations of roughly four years during the quarter and at the end of the quarter, and I don’t expect that we would go any longer from there.

Arguably, if we see our empirical durations start to increase from these levels, it's likely that we will take some action in the hedge book, but we do think that rates are especially longer rates are likely to remain ranged down, I know, maybe call it to 2% to 2.50% to 2.60% and in the 10 year note.

So, we’ve allowed our empirical durations to drift within that band instead of delta hedging where some of our earnings color. But it's something we’re always minored and certainly this is I would characterize it as kind of the longer end of where we would operate..

And just given low volatility, what are your current thoughts around kind of optional hedging?.

Yes, it's something that we’ve looked at.

We've always periodically looked at potentially adding swaptions, but vol just been low for quite a long time and doubled -- seeing a cat -- I mean, it's always hard to identify the catalyst that results in short-term spike in volatility, but as of right now I think we don’t have any immediate plans to add swaptions or optionality to our hedge portfolio..

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

A question on the agency portfolio, it sounds like you guys continue to find some attractive opportunities in 30 year sector. I was wondering on the remainder of the portfolio and specifically the hybrid ARMs.

Can you tell us how long those ARMs are generally to the reset? Can you also comment more generally on how you'd expect that part of the portfolio to perform, if deal curve continues to flatten? Thank you..

Yes, I think I don’t have the information right in front of me, but I think the average months to roll on that book is probably right in the 4 to 4.5 year area. Speeds have been relatively contained.

We have concentrated our book mostly in Tier 1 issuers that are little of less responsive to prepayment to some kind of credit and non-bearing affiliated originators. And so, our prepay experience has been favorable.

Certainly, if we do continue to get our flattening of the curve, we would expect to see some increase in speed especially as those borrowers get closer to their reset.

So, it’s something we're concerned about and something we're keeping an eye on, but don’t expect immediate impact as we generally still have four plus years of the fixed period left for those borrowers..

And on the financing side, I mean recently we’ve heard from some companies who been able to add like non-mark-to-market financing specifically for credit assets.

Could you guys talk about what you guys are seeing in terms of the financing markets for credit in particular, if you are seeing any improvement in terms of increased liquidity there? Thanks..

Yes, sorry about that. Yes, I think generally speaking we’ve seen financing levels for credit being pretty steady, and we haven’t seen a lot of changes within that. We have not done any sort of term facilities lately, but anyway we're always looking at those so when they make sense.

But really for the kind of assets we have owned Repo has been the best option at least in the current environment in terms of where financing rates are..

Thank you. Next, we have Eric Hagen of KBW. Sir, your line is open..

Thanks for the follow-up. Just if you could us a little color on book value quarter-to-date that would be really helpful for us? Thanks..

Yes I think book value estimates as of last night were very flat to maybe up just a tiny bit since quarter end. So I guess Jason has mentioned agencies have lagged a bit, and I think CRT has come back from retraced a lot of the widening that we saw at end of last quarter.

And I think CMBS and legacy RMBS have been obviously I'd say relatively flat to maybe moving a little bit tighter. But generally speaking, I think we’re flat to up just there..

[Operator Instructions] At this time, we have no questions on queue [Operator Instructions]..

Okay, operator, if there is no further questions we will wrap up the call..

Okay. Sir, there are no questions..

Okay. Well thanks everyone for joining us..

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