Welcome to the Invesco Mortgage Capital Third Quarter 2025 Earnings Call. All participants will be in listen-only mode until the question-and-answer session. At that time, if you would like to ask a question, please press star 1, sorry, please press star followed by 1 on your telephone. As a reminder, this call is being recorded. Now, would I 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. The press release and presentation are available on our website, InvescoMortgageCapital.com. This information can be found by going to the Investor Relations section on 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 gap. 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 and thank you for joining us today. I'll now turn the call over to Invesco Mortgage Capital CEO, John Ansela.

Good morning, and welcome to Invesco Mortgage Capital's third 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 Regson. The strong momentum that began in mid-April continued throughout the third quarter, as expectations for easing monetary policy, strong corporate earnings, and improved economic growth fueled rallies across the financial markets. Financial conditions remained accommodative as volatility measures declined sharply and equity markets performed well, with the S&P 500 index and NASDAQ both posting strong gains. Inflation measures continued to run hotter than the Federal Reserve's 2% target over the quarter, with the headline consumer price index rising to 3% in September, up from 2.7 in June, while the core CPI increased from 2.9% to 3%. Investor expectations for future inflation, seen through TIPS break-even rates, increased modestly, reflecting concerns about the potential impact of fiscal and trade policies on consumer prices. Meanwhile, prior to the pause in data caused by the government shutdown on October 1st, labor market data pointed to continued sluggish growth. The economy added an average of 51,000 jobs in July and August, down slightly from 55,000 per month in the second quarter, while the headline unemployment rate increased to 4.3 percent in August. Despite persistent inflation above the Fed's target, the FOMC lowered its benchmark federal funds target rate by 25 basis points in mid-September, citing signs of a weaker labor market. On Wednesday, the FOMC cut its target rate in additional 25 basis points to a range of 3.75 to 4 percent and announced the end of quantitative tightening. Features pricing now indicates that investors expect three more cuts before the end of next year. Interest rates declined across the treasury yield curve during the quarter, with shorter maturities leading the way. This also reflected market expectations for a more accommodative policy stance from the Federal Reserve and continued weakness in the labor market. Interest rate volatility declined notably throughout the quarter on growing consensus for easing monetary policy. As a result, agency mortgages performed well during the third quarter, benefiting from the persistent decline in interest rate volatility as well as the overall supportive environment for risk assets. While demand from commercial banks and overseas investors remained relatively subdued, the steepening of the yield curve in the front end improved investor sentiment for agency mortgages. The outperformance was broadly distributed across the 30-year conventional mortgage coupon stack with discount coupons recording the largest gains. Performance in higher coupons was dampened by elevated prepayment risk as 30-year mortgage rate declined approximately 50 basis points during the quarter. Positively, premiums on specified pool collateral improved in higher coupons as investors sought prepayment protection. Agency's CMBS risk premiums declined quarter over quarter as investors to investor demand increased with broader financial markets these factors led to a four and a half percent increase in book value for common share to eight dollars and 41 cents a quarter end and when combined with our 34 dividend resulted in a positive economic return of 8.7 for the quarter leverage ticked up slightly as our debt to equity ratio increased to 6.7 percent at the end of the quarter up from 6.5 times as we continue to reduce the percentage of our capital structure comprised of preferred stock and position the company to further benefit from positive agency rmds performance during the quarter we raised 36 million by issuing common stock through our atm program maintaining a disciplined approach to ensure that this activity benefits existing shareholders. At quarter end our 5.7 billion dollar investment portfolio consisted of 4.8 billion agency mortgages and 0.9 billion agency CMBS and we retained a sizable balance of unrestricted cash and unencumbered investments totaling 423 million. As of last night's close we estimate book value was up approximately one and a half percent since quarter end. Given the notable decline in interest rate volatility, we remain constructive on agency mortgages, though we view near-term risks as balanced following its recent strong performance. Our longer-term outlook for the sector remains favorable, as we expect investor demand to broaden given lower interest rate volatility, a steeper yield curve, attractive valuations, and the end of quantitative tightening. In addition, agency CMDS continues to offer attractive risk adjusted yields and diversification benefits relative to our agency mortgage holdings supported by its stable cash flow profile and lower sensitivity to industry fluctuations lastly we believe anticipated changes to bank regulatory capital rules would increase investor demand for agency mortgages and agency cbs providing further tailwinds for both sectors now i'll turn the call over to brian can write more details thanks john and good morning to everyone listening to the call i'll begin on slide four which provides an overview of the interest rate markets over the past year as depicted in the chart on the upper left despite

further easing of monetary policy in september treasury yields declined only modestly during the quarter as the deterioration in employment data was offset by robust economic growth fueled in part by the boom in ai investment positively the yield curve continued to steepen with two year treasury yields falling 11 basis points while 30-year yields were down just four basis points the difference between two-year and 30-year treasury yields ended the quarter at 112 basis points roughly 65 basis points steeper than a year ago and remained supportive of longer-term investments such as our agency rbs and agency cmds the chart in the upper right reflects changes in short-term funding rates over the past year, with a third quarter highlighted in gray. While financing capacity for our assets remained ample and haircuts unchanged, one-month repo spreads began to indicate funding pressures in late September and continued into October, widening approximately five basis points. Steady issuance of T-bills caused dealers to become very low and collateral, squeezing balance sheets and putting upward pressure on repo rates. we believe the fomc announcement on wednesday to end quantitative tightening at the end of november was largely in response to this pressure but further adjustments may be necessary before repo spreads can unwind the recent widening lastly the bottom right chart highlights the significant decline and implied interest rate volatility since the middle of april this improvement has provided the tailwind for risk assets in recent months particularly agency RMDS and is largely driven by diminishing tail risks across fiscal, monetary, and trade policies, as well as potential deregulation measures that should encourage greater investment in fixed income securities. Slide five provides more detail on the agency mortgage market. In the upper left chart, we show 30-year current coupon performance versus U.S. Treasuries over the past year, highlighting the third quarter in gray. agency mortgage performance was impressive during the quarter as the decline in interest rate volatility supported persistent demand for money managers and mortgage rates while net supply continued to undershoot expectations although bank and overseas demand remained subdued steady inflows into money managers and robust capital raising by mortgage rates helped offset the weakness resulting in strong returns to the sector 30-year mortgage rates declined during the quarter as tighter mortgage spreads lower interest rates and compression in the primary secondary spread led to a decline of nearly 50 basis points this decline in mortgage rates dampened the performance of higher coupons relative to those lower in the stack as investors were reluctant to increase prepayment risk in their portfolios while generic collateral and discount coupons outperformed treasury hedges by 90 to 130 basis points similarly generic collateral in 6% and 6.5% coupons, outperformed by a more modest 30 to 70 basis points. In the upper right-hand chart, we show higher coupon specified pool payups, which are the premium investors pay for specified pools over generic collateral and are representative of the bonds that IVR owns. Positively, payups improved during the quarter, offsetting a portion of their underperformance relative to lower coupons given increased investor demand for additional prepayment protection in premium coupon premium coupons although ivr's prepayment speeds were relatively unchanged during the quarter at just over 10 cpr higher coupons did indicate a faster refi response to the decline in mortgage rates in september and we expect a similar response in speeds this month this recent increase in refinancing activity is expected to be somewhat short-lived however as increased refi efficiencies result in swifter responses and reduced flag times with November speeds expected to decline we continue to believe that owning prepayment protection via specified pools particularly in premium price holdings remains a beneficial way to hold attractively priced mortgage exposure slide 6 details our agency RMBS investments and summarizes investment portfolio changes during the quarter our agency rmbf portfolio increased 13 percent quarter over quarter as we invested proceeds from atm issuance and maintained leverage as book value improved the majority of our net purchases occurred in four and a half percent through five and a half percent coupons with a decline in our six percent and six and a half percent allocations a result of paydowns and the growth in the overall portfolio although we continue to focus our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environments price appreciation in our holdings has resulted in a higher percentage of our pools valued at premium dollar prices therefore while we remain most comfortable with lower loan balance specified pool stories we've increased our exposure to borrowers with higher loan to value ratios given our expectation for slowing home price appreciation resulting in a reduced refi response for these borrowers overall we remain constructive on agency rmbs as supply and demand technicals are favorable and lower levels of interest rate volatility should continue to encourage strong demand for the sector we believe near-term risks have become more balanced following recent outperformance with nominal spreads tightening approximately 20 basis points during the quarter however valuations remain attractive with the current coupon spread to the five and ten year silver blend ending the quarter near 170 basis points equating to levered gross returns in the upper teams slide seven provides detail on our agency's cmbs portfolio risk premiums tightened during the quarter consistent with broader financial markets given the more attractive relative value in agency RMBS we did not add to our agency CMBS position during the quarter and maintained current holdings with our allocation declining modestly due to the growth in the portfolio despite the lack of new purchases we continue to believe agency CMBS offers many benefits mainly through its pre-payment protection and fixed maturities which reduce our sensitivity to interest rate volatility levered gross ROEs are in the low double digits and consistent with ROEs and lower coupon agency RMBS and we have been disappointed on adding exposure only when the relative value between agency CMBS and agency RMBS accurately reflects their unique risk profiles. Financing capacity has been robust as we continue to fund our positions with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation as the relative value becomes attractive, recognizing the overall benefits to the portfolio as the sector diversifies risks associated with an agency RMBS portfolio. Slide 8 details our funding and hedging at quarter end. Repurchase agreements collateralized by our agency RMBS and agency CMBS investments increased from $4.6 billion to $5.2 billion, consistent with the increase in our total assets, while the total notional of our hedges increased from 4.3 billion to 4.4 billion as our hedge ratio declined from 94 percent to 85 percent the table on the right provides further detail on our hedges at year end the composition of our hedges shifted modestly towards treasury futures quarter over quarter with 77 percent of our hedges consisting of interest rate swaps on a notional basis while on a dollar duration basis the allocation declined to 63 percent given a higher allocation interest rate swaps closer to the front end of the curve yield swap spreads widened during the quarter unwinding a portion of the tightening experienced in the second quarter serving as a tailwind for our performance despite the recent widening we continue to believe swap spreads are are still historically tight and should continue to normalize benefiting the company and we maintain our preference for interest rate swaps over treasury futures slide 9 provides detail on capital structure and highlights the improvement made in recent quarters to reduce our cost of capital further improvement in the capital structure remains a focus of our management team as we seek to prudently maximize shareholder returns to conclude our prepared remarks financial market volatility has declined notably since the beginning of the second quarter resulting in strong performance for most risk assets in the last five months IVR's economic return of 8.7% during the third quarter is a result of that positive momentum, but also reflects our disciplined approach to capital activity and our focus on shareholder returns. In recent years, we have taken significant yet prudent steps towards improving our capital structure and reducing the cost of capital to our common stock shareholders. We remain committed to that approach as we seek to further reduce expenses while enhancing returns and improving scale we believe our liquidity position provides substantial cushion for further potential market stress while also providing sufficient capital to deploy into our target assets as the investment environment involves evolves while we view near-term risks as somewhat balanced we believe further easing of monetary policy will lead to a steeper yield curve and lower interest rate volatility both of which will provide a supportive backdrop for agency mortgages over the long term Thank you for your continued support for Invesco Mortgage Capital, and now we will open the line for Q&A.

We will now begin the question and answer session. If you would like to ask a question, please press star 1. You will be prompted to record your name. To withdraw your question, you may press star 2. Again, press star 1 to ask a question. And one moment, please, for our first question. Our first question comes from Trevor Cranston with a Citizens JMP. Your line is open. You may ask your question.

Thanks. Good morning. You were just talking about the changes in the hedge portfolio, moving a little bit towards treasuries this quarter. Can you talk in general about kind of where your net duration exposure is at and kind of if you have any general position on with respect to the shape of the yield curve? And then a second question on the hedge portfolios, how you guys are thinking about potentially using options given the decline in the cost of volatility.

Thanks. Hey, sure, Trevor. Good morning. Thanks for the question. Yeah, I'll tackle yield curve first. You know, we kind of had a bit of a steepener on for a while now, and we started to reduce that a little bit, preferring to move more of our hedges into the front end of the curve. You know, obviously, the Fed did cut rates on Wednesday. Chair Powell did express that you know future cuts are a little less certain than the market was was expecting and so you know I think that would result in a bit of a flatter curve than what we've been seeing so as potentially those those cuts start to get priced out of the market so we like being you know we're still we're still positioned for a bit of a steepener but we did reduce that just a little bit as far as the overall net duration of the portfolio you know we we like we have historically preferred to have empirical duration as close to zero as as we can get it but you know given the fact that most of our pools are a larger percentage of our pools are now in premium prices we do think that we have a little bit more risk towards a rally in interest rates and so at least from a model duration perspective we are running model duration just slightly long versus kind of being more historically flat. So, you know, we still do prefer interest rate swaps. We do think that, you know, like we said, you know, we do expect swap spreads to continue to normalize. And as that occurs, we'll kind of continue to move more into treasury futures just given some of the benefits that we see there from a liquidity and margining perspective. But right now, we still have a bit of widening to do in there, so we like to lean more heavily into swaps.

Okay, that's helpful. And then with the tightening that we saw on agency spreads in the last quarter, can you talk about where you're seeing returns on kind of marginal capital deployment relative to the existing dividend level?

Yeah, so at the end of the quarter, you know, levered gross returns were in the upper teens. So, you know, net returns were kind of mid-teen area. So that's pretty consistent with where our, you know, dividend to book yield is. So we feel like it's, you know, it's supportive of that level. And, you know, we've seen a little bit of compression so far in October, just given further outperformance in mortgages. but you know recently you know we have seen those levels kind of back up a little bit since the fed meeting so I think mostly in line with what you know the earnings power of the portfolio currently is got it okay appreciate the comments thank you thank you and as a reminder if you'd like to ask a question just press star one our next question comes from Doug Harder with UBS Your line is open.

You may ask your question.

Thanks, and good morning. Can you talk about your appetite for continuing to kind of change the capital structure with the buyback of the preferred and issuance of common? And I guess as you look at those transactions, the combined effect of that transaction, did that have any impact on book value in the quarter?

Yeah. Hey, Doug, it's Sean. Yeah, on the preferred buybacks, I mean, those are relatively small. Obviously, I think there is, you know, so the impact was pretty minimal on that, around 2 million we bought back. So, I mean, those, you know, it's just harder sliding on those because the volume of trading is relatively low. So, you know, we'll continue to buy those back as long as that makes sense, and they're trading below 25, which, so that, you know, didn't have a big impact on structure, although went in the right directions. Oh, and then, yeah, and then, obviously, in terms of common stock, I mean, we're trading in a, we've been trading at a discount, so we've not issued any recently, which would go in the right direction for um you know improving the capital structure um you know in terms of going the other way in terms of buybacks you know we have been active in the past buying back shares um typically we look for you know times when the price to book ratio is persistently low um over over extended period of time i mean it kind of bounces around quite a bit um and so you know we look for persistent um discount and also when investment opportunities are not accretive um so you know right now we're still seeing relatively accretive investment opportunities so um you know we're not buying back shares now but certainly you know if those conditions occur we will certainly look at doing that great and then moving back to the investment opportunities you know just how you're seeing the relative value between um agency cnbs and agency mbs today yeah hey doug it's brian um yeah i mean acr mbs uh continues to provide a more attractive

roe um you know i think you know agency cnbs like i said in my comments you know the return potential there is a bit more in line with what we would call you know lower coupon agency rms And it continues to have, you know, a lot of benefits. So, you know, I think, you know, to the extent that agency RMBS is still mid to upper teams, we would probably look to see a bit more compression between the two before we would look to, you know, significantly move more towards agency CMBS. But we do like continuing to hold those securities as they do provide a lot of convectivity benefits for the portfolio.

Great.

Thank you. At this time, I'm showing no further questions. I'll turn the call back over to the speakers.

Thank you, everybody, again, for joining and look forward to speaking to you next quarter.

Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.