Welcome to the Invesco Mortgage Capital First Quarter 2025 Earnings Call. All participants will be in a listen-only mode until the question and answer session. At that time, to ask a question, press the star followed by the 1 on your telephone. As a reminder, this call is being recorded. Now I would like to turn the call over to Greg Seals in Investor Relations. Mr. Seals, you may begin the call.

Thanks, Operator. and to all of you joining us on Invesco Mortgage Capital's quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today. Press release and presentation are available on our website, InvescoMortgageCapital.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures in Slide 2 of the presentation regarding the statements and measures as well as the appendix for the appropriate reconciliations to cap. Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome. Thank you for joining us today. I'll now turn the call over to Invesco Mortgage Capital's CEO, John Anselmo.

Good morning, and welcome to Invesco Mortgage Capital's first quarter earnings call. I'll provide some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning for Q&A is our President, Kevin Collins, our COO, Dave Lyle, and our CFO, Mark Gregson. The first quarter of 2025 was characterized by tightening financial conditions, as both equity markets and credit spreads reacted negatively to anticipated U.S. fiscal and trade. Although inflation measures stabilized during the quarter, investors increased expectations for future inflation, given concerns about the potential forecasts were increasing.

Given the reduced pay, typically in the first half, 6.5% coupons during the rotating and discuss, continues to take. Slide 6 details our agency, RMBS, and the table on the right provides further detail on our hedges at year-end. The composition of our hedge portfolio shifted modestly towards interest rates on a notional basis for our portfolio as of April 30th. As previously discussed, the Liberation Day tariff analysis of agency mortgages notably underperformed treasuries during this time, as money managers liquidate. In addition, further improvement in the capital structure remains a focus of ours as we seek to maximize shareholders. To conclude our prepared remarks, financial market volatility began to increase in the latter half of the group on A to CRMBS and indicated much of this impact, given our recent reduction certainty warrants a caution.

Thank you, gentlemen. If you would like to ask a question, please press star, followed by the number one. Take a moment to unmute your phone and record your name clearly when prompted. That is needed so you know when your line is open. One moment, please, for our first question. And our first question is from Doug Harder with UBS. Your line is now open.

Thanks. Appreciate the update on April. Can you just talk through the decision to take down leverage and kind of how you think about managing volatile periods as to whether you let leverage float or you take portfolio action?

Yeah. Hey, Doug. Thanks. It's Brian. Yeah. So in April, we essentially took leverage down about a half a turn where it began the month. You know, and that just really reflects increased uncertainty regarding monetary, fiscal, and trade policy and how that uncertainty kind of impacts the demand for mortgages. I think bank buying was fairly light in the first quarter. I think the increased uncertainty will likely mean that bank demand gets delayed into the second half of the year in the midst of higher supply through the housing season. certainly the increased debt mixed with modestly. And I think, you know, as mortgages were underperforming in early April, you know, leverage was certainly ticking higher. And, you know, at a certain point, we do let it, we do let it drift. And, you know, it's not, you know, it's not something that we're doing all at once.

Great. I appreciate it. Can you just talk about where you see returns on an incremental basis today?

Spreads are very attractive, particularly versus swaps given tightening and swaps spread still quarter to date. So, you know, levered ROEs are kind of in the low 20s on higher coupons.

Great. Appreciate it. Thank you.

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

And thank you for the portfolio update on April 30th.

One question related to that, um can you comment on any changes to the hedge portfolio that were major made in april along with the the portfolio reduction yeah hey trevor it's brian again yeah we did um you know we did increase our our uh hedge ratio um you know just given you know again kind of uncertainty about near-term monetary policy uh we decided to be a little bit closer to home um as far as the hedge ratio goes. Now, as far as the mix between swaps and treasuries, I think that's still, you know, within the range that we've kind of been stating over the last couple of quarters, kind of in that 20 to 30 percent range of treasury futures relative to swaps. So, there hasn't been a notable shift.

Okay, got it. And then, you know, with the smaller portfolio size as of the end of April, does that have any impact on how you guys think about the right dividend level for the company, or does the relatively wider spreads and somewhat positive intermediate turnout look sort of outweigh the reduction in the size of the portfolio?

Yeah. Hey, Trevor, it's John. Yeah. As far as the dividend goes, I mean, we just reduced it last quarter. So, you know, still comfortably covering it. So that's good. And I think, you know, to Brian's point about ROEs and, you know, what we're seeing off the portfolio and what we're reinvesting are supportive also. So, yeah, we don't have any, you know, given where we are now.

Thank you. Our next question now is from Jason Weaver with Jones Trading and your line is open.

Hey, good morning, guys.

Thanks for taking my question. um first uh i wonder if can you discuss how you see the opportunity set in agency today compared to the prior peak and spreads in october of last year yeah hey jason it's brian yeah you know i think um you know spreads are uh you know pretty consistent with previous widening episodes so certainly the the environment um or at least i'm sorry the opportunity is is attractive in mortgages. I do think that, you know, the reason that we feel a little less comfortable from a leverage perspective is that, you know, with the potential, you know, reinvigoration of inflation that, you know, it could cause further delays in monetary policy adjustments, which, you know, right now the market is pricing in, I think it's, you know, close to three. I know it just shifted a little bit yesterday after the Fed meeting, but three cuts in 2025, you know, we do think that, you know, there's a risk that there's fewer than that, and mortgages may not respond, you know, all that well to a shift into zero cuts or potentially even pricing. And, you know, we do think that being a little bit more conservative relative to where we were maybe the last fall when the prospect of hikes were, or of zero cuts was.

Got it. That's good color. And just as a follow-up, I see that you've been, for three quarters now, you've been reallocating your spec pool exposure away from the low loan balance and into more credit constrained. Can you talk about how you see the relative value there? Is it just a function of pricing? Is there some other risk to loan balance pools that you're seeing?

Yeah, it's a couple of different things, Jason. And it's, you know, first of all, yes, I mean, loan balance pools are certainly kind of the premier spec pool story out there. So, you know, because of that, they tend to be pretty fully priced. Now, you do get, you know, prepayment certainty out of that, so there is a benefit to paying up for that. But, you know, with, like I said, you know, with increased economic uncertainty and potential slowdown, we do think that kind of those lower FICO pool borrowers, we could see increased demand for that and potentially, you know, slower housing, HBA as well. So, you know, LTV stories also kind of make sense from that perspective. But kind of the second portion of that is, you know, it's generally, you know, our rotation from lower coupons into higher coupons, most of our lower coupon holdings were in a loan balance as opposed to as we're rotating into higher coupons, we want to have a little bit less. It's partly just maintaining a little bit lower profile from a pay-off perspective.

That's actually very helpful. Thanks for your time, guys.

Our next question now is from Jason Stewart with Janie. Your line is open.

Hey, thanks. Good morning. I wanted to follow up on your comments about the forward rate outlook. Are you in the camp where, you know, it's sort of either six or seven cuts if we have a recession, no cuts if we don't? Maybe, like, if you could give us some comments on how you're thinking about that in relation to how you develop the hedge portfolio, that'd be helpful. Thanks.

Hey, Jason. It's Brian. Yeah, thanks. Yeah, you know, I think listening to Chair Powell yesterday, The takeaway was just greater uncertainty about policy going forward. It's kind of a wait-and-see approach, whether, you know, we still see strength in hard data while soft data is certainly pretty weak. So it's just a matter of, you know, the timing on when those two converge and how they converge. I think, like I said, there's about three cuts being priced in for 2025. We see a fair amount of economists out there saying zero cuts and a fair amount saying that they're going to have to be pretty aggressive. So I think in that environment, our goal is to just be conservative and keep things close to home both from a hedge notional ratio perspective as well as leverage because you know if things were to swing in either direction you know that could you could be offsets okay that's fair enough so no strong view either way on which way we're headed no we don't we don't like to take interest rate risk uh in the reach so um you know we try to keep duration gap uh pretty close to zero um You know, we may be leaning slightly towards a steeper curve, but I'm not being there.

Okay. Got it. That's helpful. And then in terms of the ATM activity, I'm coming up with about $8.55 a share on issuance.

Did you give us a sense for, you know, your estimate on the impact of book value and 1Q from ATM issuance and where you're comfortable issuing going forward? yeah you know i think um you know i think given where spreads are uh we feel like the investment environment is attractive enough um you know i think that's probably about right from a from a share price perspective so you know the the the impact would have been pretty modest um but again you know given where we're able to put money to work we think overall it's it's certainly improving the economics of the REIT and to shareholders. And also, issuing through the ATM helps us reduce expenses.

Okay. Thanks. Appreciate the caller taking the questions.

Thank you. As a reminder, to ask a question, please press star 1. Presently, my last question now is from Eric Hagan with PTIG, and your line is open.

Hey, thanks. Good morning. Good discussion here around the Fed. I guess I have one follow-up. You know, like our mental framework has typically been for mortgage spreads to tighten if the Fed cuts interest rates. And I feel like that's probably still the case. But do you think that's different or has the potential to be different in this environment because of the macro and its impact on, you know, just the flow of capital? And should we necessarily take a Fed cut as being a catalyst for spreads to tighten? Or how do you think about that?

Yeah, hey, Eric. Thanks. It's Brian. Yeah, and I hope the conference is going well. Sorry we couldn't be there. But yeah, I think that, you know, generally speaking, that's correct. You know, a slowing economy should lead to a steeper curve, which helps a mortgage valuations. I also think, you know, in the near term here, you know, a Fed on hold isn't necessarily a bad thing for mortgages. You know, it does reduce short-term volatility, so mortgages could do okay here with the Fed kind of taking a wait-and-see approach. But, no, I think, you know, a slowing economy does – it certainly helps mortgages versus other credit assets. And versus treasuries, I think they hold in just fine. And then, you know, are poised to do pretty well as kind of, you know, as other asset classes kind of start to catch up as the economy maybe comes off of the slowdown and starts improving.

Right. Right. All right. Thanks for the color. Are you guys seeing any opportunities in commercial credit and maybe, you know, picking up some more share there and how you guys think about relative value versus RMBS right now? Thank you, guys.

Yes. I mean, we've been relatively hesitant to add credit exposure in this environment. You know, I think certainly, you know, we are not interested in financing versus with market-to-market financing. So we haven't been looking to add. We've actually have sold our remaining credit investments that were, you know, pretty modest coming into the year, but we're completely out of those and found, you know, fairly decent levels to get out of those. So, you know, we're 100% agency at this point, and we don't anticipate that. Got you. Thank you, guys. Thanks, Eric.

Thank you. Thank you both. As I have no further questions in queue, I would like to turn it back to management for any closing remarks.

No, we'd just like to thank everyone for joining us this morning, and we look forward to getting together again next quarter.

We are now concluded. Thank you again for your participation. Please disconnect at this time.