Tony Semak - Head of Investor Relations John Anzalone - Chief Executive Officer Jason Marshall - Chief Investment Officer Lee Phegley - Chief Financial Officer Kevin Collins - President David Lyle - Chief Operating Officer.

Douglas Harter - Credit Suisse Eric Hagen - Keefe, Bruyette & Woods, Inc. Trevor Cranston - JMP Securities LLC.

Good morning, ladies and gentlemen. Welcome to Invesco Mortgage Capital Incorporated Fourth 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, an Investor Relations. Mr. Semak you may begin..

Thank you, Mark, and good morning, everyone. Again we want to welcome you to Invesco Mortgage Capital fourth quarter 2017 earnings call. I am Tony Semak with Investor Relations, and our management team and I are delighted you joined us.

We really look forward to sharing with you our prepared remarks during the next several minutes, before we conclude with the traditional question-and-answer session.

Joining me today are John Anzalone, Chief Executive Officer; Jason Marshall, our Chief Investment Officer; Lee Phegley, our Chief Financial Officer; Kevin Collins, our President; and Dave Lyle, our Chief Operating Officer.

Before we begin, I’ll provide the customary forward-looking statements disclosure and then we’ll preceed to the management 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, 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.

An archive of this presentation will be available on our website and the audio replay can be access through March 7, by dialing 800-925-4790 or for international callers 1-203-369-3533. Again, we really welcome you and appreciate you participating on our call today and thank you so much for joining us.

We will now hear from our Chief Executive Officer, John Anzalone.

John?.

Good morning, and thank you for joining Invesco Mortgage Capital’s fourth quarter earnings call. With me today are Jason Marshall, our CIO; Lee Phegley, our CFO; Kevin Collins, our President; and Dave Lyle, our COO. Jason will follow me and go through the portfolio section and Lee, Kevin and Dave will join me for Q&A.

I'll begin on Slide 3, where we show an overview of our fourth quarter results. As you can see, we had a strong end to 2017 with core earnings coming in at $0.47 per share, up $0.03 or 6% from the prior quarter. And book value up a $0.01 to $18.35 per share.

This generated an economic return of 2.3% for the quarter, which brought the economic return for the year to a very strong 14.3%. We are also very pleased with the full-year total returns for our common shareholders of 34.5% in 2017.

This full-year economic and total return results ranked among the very highest amongst our peer group, and reflected some milestone achievements, including the Series C Preferred offering to two consecutive quarterly increases in our common stock dividend, the inclusion of Invesco Mortgage Capital, and the S&P SmallCap 600 Index and four consecutive quarters of beating consensus core EPS expectations while reducing book value volatility.

For the fourth quarter, the increase in core earnings is attributable primarily to the full quarter impact of the Series C Preferred offering and to a lesser extent to a slowdown in prepayments with Speeds. Slide 4 breaks down the components of the change in book value during the quarter.

While agency mortgages were a negative contributor to book value performance, the benefit of our hedges exactly offset this drag, while the net impact of our credit risk exposure only mildly reduced book value.

I'd like to especially point out the graph at the bottom right, which shows our annualized book value volatility in relation to our peer group. You'll notice that we continue to compare favorably with our peers by this measure.

Of course, the recent bouts of increased volatility across our financial markets will likely cause book value volatility to increase across the space, but as I will talk about in a little bit, perhaps this is not such a bad thing.

We'll move to Slide 5 to highlight how we've continued to compare favorably to our peers across a few key metrics we believe are amongst the best measures of management effectiveness.

As highlighted on the slide, Invesco Mortgage Capital is consistently outperforming its peer group average and ranking among the best in earning its dividend, whether it’s economic returns, book value performance or dividend growth, IVR has delivered for shareholders.

I'll wrap up by giving up some high-level comments about the current environment and the outlook for IVR. While the fourth quarter was characterized by interest rates grinding higher and risk assets continuing their positive trajectory, the first six weeks of 2018 has seen a return of volatility in both the rates and risk markets.

Whereas our book value was relatively unchanged during the fourth quarter, we have seen a combination of moves and that is taken our book value roughly 5% lower quarter-to-date. This is being caused almost equally by the sharp move [higher in][ph] rates and the widening in spreads in the agency sector.

Typically, we keep a long position in duration to help offset any adverse moves in credit assets as a macro hedge overlays since it too normally move in opposite directions. However, there are occasions when all assets become correlated and this is one of those times.

Active management is crucial during times like these, and we have been actively reducing our interest-rate exposure over the last several months.

While we view this decline in book value as temporary, particularly given that the widening in credit spread did not correspond with deteriorating underlying fundamentals we also believe that these moves will lead to much greater opportunities going forward. Hence this silver lining and a return of book value volatility that I alluded to earlier.

The steeper yield curve combined with the wider credit spreads is moving the ROEs on more of our target assets closer to accretive levels, so we welcome these new opportunities as they develop, and look forward to highlighting how we capitalize on them on future calls.

Finally, I want to make a couple of comments about core earnings and the sustainability of the dividend as that remains a high priority. Our core earnings have been trending higher the past few quarters as accretive preferred equity offering slowed prepayments fees and good reinvestment opportunities have all been tailwinds.

We anticipate that further improvements may moderate as we progress further into 2018. As rates markets are reflecting in the expectation for higher funding costs as the Fed continues to remove accommodation, which may ease pressure on net interest margins.

However, the dividend was recently increased with the expectation that it could be sustained in the near-term and again, we believe higher interest rates will present opportunities in addition to challenges.

So it's likely that we will – would also see ROEs and our new investments rise in such an environment, which could mitigate interest-rate risk to some degree.

Book value volatility has increased recently for the first time in more than four years, but importantly we remain deeply convicted in the strength of our credit assets and beliefs supportive underlying fundamentals remain paramount in the performance we ultimately deliver to our shareholders. With that, Jason will now discuss the portfolio..

Thank you, John. I’ll now take some time to discuss portfolio activity for the quarter and elaborate on some of the trends at John mentioned for both the fourth quarter and what we have seen since. During the quarter, accretive investment opportunities remained fairly limited as spreads move tighter.

Our activity for the quarter was limited to replacing portfolio paydowns, which included some commercial loan paydowns. We did this by purchasing $518 million of 30-year agency MBS, and $162 million of subordinates CMBS. These investments were all purchased at ROE levels of between 12% and 15%. Page 7 contains our current equity and asset allocations.

The most notable change here is the 4% increase in agency MBS as that remains our most actionable accretive investment opportunity. Turning to book value, the book value has little change during the quarter as spreads in all of the sectors we invested moved tighter, while the yield curve there flattened.

But we continue to be positioned for a flatter curve; our long-duration position did negatively impact book value during the quarter. As John mentioned, we have seen a notable pick up in rate and spread volatility thus far in the first quarter as rates are sold off in the curve is steepened.

Additionally, nominal agency MBS spreads have widened approximately 10 to 12 basis points when looking at the 3.5% coupon. Equity markets have corrected, but have since regained much of those losses.

Despite the correction in equities, structured credit spreads most notably CRT, CMBS, or non-agency spreads, held in relatively well during the sell-off, and now are in most cases tighter this year with the recovery in risk assets.

Much of the sell-off in rates and increased volatility has been related to fear of increased inflation, and consequently a more aggressive tightening by the Federal Reserve. The fear has primarily been driven by expectations of an increase in wage-push inflation.

While we do see some short-term potential for inflation to increase, it's important to keep in mind that inflation does remain below the Fed's communicated target of 2% when looking at the PC deflator that preferred measure.

Outside of wages, we don't see much catalyst versus state increase in inflation above the Fed's target range, and thus feel the market's myopic focus on inflation that recently maybe misplaced, as companies we believe still have limited pricing power, and are likely to absorb some increase in wages in their margins.

That said, we have reduced our overall equity duration since the end of the year, and continue to be cognizant of the market focus on what would likely be higher volatility compared to last year. While this is likely to create some challenges, and some opportunities, we’re confident in our ability to navigate this environment.

This concludes my prepared remarks for today. Operator, could you please open the Q&A session. Thank you..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] First question is from Douglas Harter of Credit Suisse..

When you were talking about spread widening, can you just talk about kind of what you think is the more relevant measure in the nominal spread or the OAS? And then kind of how those two have moved so far in the first quarter?.

Yes. We’ve seen nominal spreads roughly 10 basis points wider. They did tighten during the fourth quarter have been at pretty historically tight levels. OAS on the other hand, has widened probably only 6 or 7. We tend to focus on nominal because most of the institutions like REITs, commercial banks, don't really hedge, explicitly hedge volatility.

So we think that nominal is the more relevant measure to look at and as more germane to what ROE you can expect and things of that nature given that we don't actively increase the vol component of our portfolio..

It makes sense and can you just talk about kind of your expectation for spreads kind of as we go through 2018 with the Fed reducing its balance sheet?.

Sure. Yes, a lot of the widening that we've seen recently has been related to duration extension in the sell-off.

We do think that ultimately as the Fed taper program progresses, I think we're still kind at $8 billion, but by the fourth quarter, assuming that all goes as planned with higher rate levels they really won't be reinvesting anything because of the 20 cap. We'll be probably above what they are receiving in monthly prepays.

We estimate kind of optimistically that it could result in 10 to 15 basis points of widening. We could certainly see, they’re moving a little bit wider, but I would say kind of our worst case is maybe 20 basis points of overall widening over the levels where we started the year. Some people have more aggressive estimates all up to 30.

But I think probably 10 to 15 will ultimately end up being the right number. So we're not really – as my comments on inflation maybe indicated, we're not really looking for a big spike [higher] [ph] yields certainly from these levels.

But even at these levels higher mortgages will reduce supply some and we think commercial bank demand will still remain relatively strong, so that's kind of what's behind our 10 to 15 basis point nominal widening estimate..

I guess with that as a backdrop, how are you thinking about the ability to use this widening we've seen to date as an opportunity to add further to agency versus kind of the rate risk component?.

Yes. I think at this point, we'll still look to cover our monthly prepays portion of that in agency, and probably in CMBS unless we get some other accretive opportunities.

If we were to have new capital come in and we don't have any current intent to take up leverage or anything to add to any sector, but if we had some incremental capital coming in, I think we'd be comfortable adding agencies with some of the widening we've seen in the curve steeping. We've seen hedged ROEs moved maybe closer to 14% type levels.

So we still see it as attractive. But right now, just given kind of increase in volatility, we would hedge out all the rate exposure. As I mentioned, we've taken down our duration risk some since quarter-end, and we're not likely to add to it at anytime soon..

All right, that’s very helpful. Thank you..

Thank you. Next question is from Eric Hagen of Keefe, Bruyette & Woods. Your line is now open..

Thanks. Good morning and congrats on a good quarter – another good quarter.

You just sort of talked about it, but can you just elaborate maybe a little bit on how you are thinking about leverage in the current environment?.

Yes, I think we're pretty comfortable running around that six levels that we have generally been at for the past several quarters. Yes, there is some for timing. We have seen some increase involved. I think that could continue as people now have varying expectations of what the Fed might do and you can argue that risk assets are relatively tight.

So that's likely to lead to an increase in volatility and potential opportunities, as John said, but I don't think we are to a point where we'd take up leverage right now. Maybe if something looked very compelling to us, if something were to widen and appeared compelling, maybe we'll take up leverage a little bit to take advantage of that.

But as of right now, I think we're kind of right around that six area give or take call it 1.2 years just based on market value fluctuations..

Yes, that makes sense. Thanks for that. And then how should we think about prepayment speeds in the non-agency segment? I mean how incentivized do you think homeowners are to refi or move locations if they've previously been underwater? Thanks..

Yes, hey, this is Dave Lyle. Obviously, our seasoned non-agency bonds, the prepays are not going to be nearly as sensitive to prevailing mortgage rates as on some of the new issue, the agency. Obviously as well as the CRT just given the seasoning on those bonds. So it's not a huge matter of rate incentive as you I think alluded to.

It comes down in a lot of cases to the equity position, a lot of buyers. Prepays have been somewhat suppressed because buyers have been in LTV situation where they were not able to refi in that as we see home prices continue to appreciate more recently on an accelerated rate. That does bring more buyers into a position where they do have more options.

So that can benefit prepay speeds a bit on discount bonds..

Yes. Thanks for that.

Maybe you can just give us a little color on book value quarter to-date that would be really helpful?.

Yes. I mean we mentioned that it was down about 5% as of – actually as of last night I guess, the latest estimate, but – and really that has been – most of that has occurred since the end of January. So it’s been the last couple of weeks to really seen agencies start to widen. So that’s kind of where we are..

Yes. And I think like agencies should be pretty directional here. And so if we see a continued sell off and break above 3% on [10s] [ph] you’ll probably see mortgage widening some, but we've actually seen them tighten in the past several sessions as [10s] have kind of hung at around 290, high 280s here.

So we'll be somewhat directional over the short-term. But I think if you kind of stay around this rate level, we'll probably see some decent buying. We'll probably recover some of that widening that we've seen, so year-to-date..

Yes, thanks for the color. That was helpful..

Thanks..

Thank you. Next question is from Trevor Cranston of JMP Securities. Your line is now open..

All right, thanks. You guys mentioned in the prepared remarks that you would typically run with the long duration position, because you’d expected to have inverse relationship with your credit spreads. And you also made the comment that you’ve taken down your rate exposure, some since year-end. So couple questions on that.

One, can you say what your duration gap was around at the end of the year? And then second part, can you just elaborate on how you reduced the rate exposure since year end if it's been through changes in the asset composition or through additional hedges? Thanks..

Sure. We ended the year with kind of empirical equity duration. I'd say around 10 to 12 area. We’ve reduced that three or four years through swaps and future hedges since year-end. So yes, I'd call this probably in the 7 to 8 area right now for empirical equity duration.

Yes, and part of the reason, aside from the Invesco relation with the spread assets that we've kept that on is. Yes throughout last year, we were pretty confident that rates were going to be range bound. So by not kind of delta hedging, duration moves within that range, you're preserving income and book value in a lot of cases.

We try to be patient – based on our view and establish our range to where we'll kind of allow rates to drift.. So we're not kind of delta hedging rate profits and book value. And certainly, we've broken them out of that range this year. But think that it's pricing and increase in supply and increase in inflation expectations.

Yes, but I think we could start to see some signs of stability here, but some clearly there is some more risk to higher rates, so that's why we're kind of tightening up that duration position a little bit more..

Got it. Okay, that’s helpful. And then the second question, just a point of clarification on the comment that book values declined about 5% since the end of the year.

Can you say if that includes accrued earnings for the quarter so far or if that's just pure mark-to-market number?.

That’s just a clean mark-to-market number..

Gotcha. Okay. Thank you..

Thanks.

Mark, are there any further question that you see?.

We show no further questions on queue. [Operator Instructions] Thank you..

Mark, if there are no further questions, we are prepared to close the call. End of Q&A.

No additional questions on queue speakers..

Okay. Well, again, we want to thank everyone for participating and joining the call. And we appreciate your interest and certainly if there are follow-up question that points of clarity that you might need, we’re happy to help with those along the way. So thanks again. Have a great day, everyone. Take care..

Thank you. And that concludes today’s conference. Thank you all for your participation. You may now disconnect..