Invesco Mortgage Capital Inc. (IVR) Q3 2026 Earnings Call Transcript

Invesco Mortgage Capital's third quarter 2026 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 one 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 third quarter 2026 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 of the website. Our presentation today will include forward-looking Statements and cert to non-GAAP financial measures. Please review the disclosures on slide two of the presentation regarding these statements and measures, as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit for 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 IVR CEO Kevin Tollens for his comments.

Good morning, and welcome. I'll provide a few comments before turning the call over to Brian Norris. He'll discuss our portfolio in more detail. Also joining us on the call this morning for Q&A is our president, David Lyle. Now turning to the market, during the third quarter, we operated in a very challenging environment. Economic growth remained resilient, but financial conditions tightened as investors price treasury yields repriced sharply higher across the curve, driven largely by expectations for tighter monetary policy, but also stronger growth and concerns around fiscal deficits and increased treasury. So look, to put the magnitude of the rates move in perspective, this represented one of the most significant increases in treasury yields in the cycle of 2022. We saw two-year yields rise more than 70 bits, 10-year yields rise more than 80 bits, volatility also increased. The move index ended in the quarter at 110, up from 83. In order to date, our book values up from our EAD, it declined from 50 cents. So that largely, now regarding capital activities, we raised the prox. And I also want to note that we believe the liquidity and government guarantee of agency MBS enhances its appeal as investors are further agency RMBS.

And good morning to everyone. I'll begin on slide. As Kevin noted in his opening remarks, Treasury yields grow deepened modestly in the front end, as 5- and 10-year yields have a long end flat. Resilient economic growth, above-target inflation, and the FOMC, our target assets provides additional detail on agency mortgage RMBS materially and remain manageable. Positively demand, agency CMBS spreads were tied to about performance. The dollar roll market for higher Slide 7 summarizes the chain-only liquid portfolio and focus on active management provided numerous opportunities, tested monthly cash flows, and most of the year rate environments. In addition, we sold our remaining agency I.O. position over the last few years. When purchased, they offered attractive unlevered yields in the high single digits. Recent demand for these low coupon IOs declined to the 6% attractive dollar roll market, providing an ROE with well 2.5%, seeking to benefit from the resilience in agency CMBS valuations. As a result of this post-returns on production coupons specified high teens to 20% coupon spread, given the growth in specified pools of CTVA continuing to provide attractive leveraged gross returns in the high teens to low 20s ROEs, as implied financing rates, PCMBS spreads widen modestly and has been robust as we continue to fund our position. Despite the modest decline in our allocation, we continue to believe we continue to monitor the slide 8 details of our funding book at quarter end. Repurchase agreements collateralized by our 99% half of monetary policy. In addition, we continue to maintain $1 million of cash and unencumbered investment. Slide 9 provides detail in our hedge book at quarter end. The composition of our hedges remains weighted towards and remain comfortable focusing the majority of our hedges and interest. As shown in the table at the bottom of the slide, we adjusted the maturity profile of our hedge book to an additional amount of hedges, like $9 billion to $1.2 billion, and rotating that exposure, the retention of hedge maturities was a result of the sharp rise in interest rates. As we adjusted our hedges to account our EAD for the quarter, as the majority of our shorter hedges were added to bond rates than currently. Importantly, back on our economic return, given the substantial market value gains, and the slide 10 provides our model-based estimates of foot value sensitive, more attractive valuations moving forward, and allowing the company to conclude our prepared remarks, the management team remains committed to delivering exceptional investment performance. While the volatility of the third quarter certainly presented a challenging backdrop, we were pleased with how well the markets functioned throughout, allowing us, although persistent geopolitical risks and the uncertain path of near-term monetary policy may create some volatility, the medium-to-long-term outlook for our target assets remains constructive, underpinned by attractive valuations and supportive supply and demand technicals. Additionally, our liquidity position remains ample, providing substantial cushion to withstand additional market stress while maintaining the flexibility. Thank you.

Thank you. 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, just press Star 1 to ask a question. And one moment, please, for our first question. Our first question comes to Marissa Lobo with UBS. You may ask your question.

Thank you. Good morning. I just wanted to start with the dividend. At the current level, it's paying out roughly 20% of book value. Can you give us an update on how you're thinking about the appropriate dividend level from here?

Yeah, sure, Marissa. Thanks for your question, and thanks for joining the call today. You know, I guess I'd start by saying that current ROEs, as was mentioned, for our target assets are 18% to 20%. So we're going to be discussing the dividend with the board at our upcoming meeting, really with an emphasis around market conditions and available investment opportunities.

Got it. Thank you. And just looking at the portfolio, you know, you noted TBA financing is attractive relative to repo. So how are you weighing that against the convexity benefits of specified pools when comparing returns?

Yeah, hey, Marissa, it's Brian. Yeah, I mean, I think, like I said, you know, agency TBA ROEs are certainly attractive given where applied financing rates are, but, you know, that can also, you know, not be as durable as the benefits that we see in specified pools. And so, you know, I think, you know, at about 8%, you know, we're very comfortable with our allocation to TBA at this level. But, you know, I noted, you know, convexity benefits of specified pools right now, are a bit more one-sided. You know, I think extension risk has largely played out in the market. You know, certainly as of the end of September, you know, we've seen a pretty decent rally in rates since then, so some of that has reversed. But we're still, you know, very comfortable owning the majority of our allocation and specified pools just given the kind of the not only, you know, It affects these benefits, but also, you know, fairly attractive ROEs and durability of those ROEs.

Thank you. Appreciate the answers.

Thank you. Our next question comes from Doug Harder with BTIG. You may ask your question.

Thanks, and good morning. Looking at slide 14 and slide 13, can you just talk about how you're thinking about the risk positioning, You know, both in leverage and in cash encumbered and kind of what, you know, what are levels that you're, you're kind of willing to kind of comfortably hold to the extent that we have, you know, kind of other pockets of volatility and, you know, say October's, you know, book value recovery, whatever it was.

Yeah. Hey, Doug, it's Brian. Yeah. You know, we're, we're certainly comfortable with the current level of leverage and cash done and covered. You know, it's, it's something that, you know, We obviously monitor on a daily basis and run against various risk models and metrics to determine the appropriate amount. And, you know, leverage has come down since the end of the quarter, just given the improvement in book value and mortgage spreads as well. So we're certainly comfortable. You know, we did let it drift higher over the course of the quarter, given that underperformance. And so, you know, we're comfortable at higher levels, but again, you know, we think valuations are pretty attractive, and supply and demand technicals are very supportive as well. So that all kind of blends into, you know, our view on where we're…

Got it. And, you know, I guess, you know, going the other way, like, how comfortable would you be to kind of take up leverage to take advantage of the current opportunity, Or do you feel like, you know, you kind of have the right risk positioning on?

Yeah, I think probably the latter. You know, I don't know that. You know, if we did see mortgage spreads kind of reverse from here, the recent tightening that we've seen, and go wider and take our leverage a little bit higher, you know, that's not something that we would be uncomfortable with. But it's not something that we're necessarily looking to do, you know, by adding assets.

Got it. Makes sense. Thank you.

Thank you. Our next question comes from Trevor Cranston with Citizens JMP. You may ask your question.

Thanks. You mentioned in the prepared remarks the potential for, you know, normalization of MBS valuations. Can you talk about, you know, what you guys see as the most likely driver of that normalization, if that's, you know, reduced interest rate volatility, or if you see some other factors potentially driving improved valuations? Thanks.

Yeah, sure, Trevor. Hey, it's Brian. Good morning. Certainly, interest rate volatility. You know, As that continues to normalize, you know, we should see mortgage spreads normalize along with that. Interest rate volatility has certainly been the closest tie or the biggest driver of mortgage spreads over the last number of years. So that's the number one thing that we would look to see. Now, what brings down interest rate volatility, I think, is, you know, for a little bit more debate, you know, I think it certainly is a clearer path of monetary policy, near-term monetary policy, and it's also, you know, some, maybe some conclusion or at least some progress on the Middle East front would benefit that as well. So, you know, I think, you know, recent stresses in credit markets aren't overly helpful from that perspective, but, you know, I think what it does do is make us feel a little bit better about interest rates and not, you know, maybe keeping a little bit more of a lid on where those can go.

Thank you.

Thank you. Our next question comes from Jason Lieber with Jones Trading. You may ask your question.

Good morning, guys. Thanks for taking the question. First of all, given the discount to book, it seems like the appeal of issuance is a bit more muted here, but have you discussed internally pursuing anything in repurchase? It seems like the ROE is kind of comparable to new investment, but is there a discount level at which it becomes, you know, much more urgent? Yeah, good morning, Jason. Thanks for joining our call. I'll start with, you know, the ATM front and issuance and then kind of circle back to repurchases. But as you probably noted, we raised approximately $50 million of capital in Q4. You know, I think as we're thinking about things as it pertains to buybacks, we do have a common stock repurchase program in place. And if our shares, you know, trade at a meaningful discount to book value for what I would consider a sustainable, it's certainly something that we stand ready to do and we'll read back. It'll be relative to read. We want to make sure that we carefully, you know, relative to what we're doing. And then it looks like spec payups fell a bit while rates rose. I think you have about $50 million at risk there. With mortgage rates still north of $7 million now, where do you see the floor on?

Yeah, hey, Jason, it's Brian. Yeah, I think, you know, I mean, most of the universe is in a discount price area, so I think, you know, we're probably very close to that floor. It's really hard to say. I mean, obviously, you know, during particular times of stress, those payoffs can, you know, decline notably, but typically we'll bounce back, you know, quickly after that. So, you know, I think to directly answer your question, I think, you know, extension risk is largely out of the market. And so, you know, I think, you know, payoffs are about as low, you know, as they would likely go in this environment.

Okay. That's good. Great color. I appreciate it.

Thank you. And this question comes from Jason Stewart with Compass Point. You may ask your question.

Thanks. Good morning. Going back to the dividend, when you have that discussion with the board, what factors are most important? Is it incremental returns? Is it how much credit you think the stock is getting for the dividend, which is obviously quite low? Other investment opportunities like repurchase? If you could just walk through maybe the thought process and how you consider those different factors, or if I missed one, add to it.

Yeah. Good morning, Jason. Yeah, thanks for your I'll list through those and then kind of circle back to, you know, ultimately how we think about the dividend big picture. So just in terms of factors that are considered, I would certainly say market conditions, which have changed quite meaningfully recently and are still somewhat kind of settling into new ranges. So we'll kind of see how that takes hold. The second I would say is obviously current earnings. Third is portfolio composition. And as I mentioned, I believe in my response to Marissa's question, we're going to think about available investment opportunities in relation to our current payout on book value because in this, you know, ultimately, we want to be mindful of changes in the market and mindful of all the things that I just kind of walked through and how some of those may have changed to ensure that our dividend is supported by the portfolio, excuse me, earnings power. And then obviously, you know, think about it from a lens of providing stability and making sure that.

Got it. Okay. That's helpful. And then on the MBS front, I mean, it seems like we've got a little bit of a mixed picture from the GSCs in terms of buying activity in September. How much does that factor into your decision on leverage and overall comfort with the portfolio and current spreads?

Hey, Jason. It's Brian. Yeah. Yeah, it's a bit of a mixed bag here. I think, you know, clearly Fannie's been more active year-to-date on the securities front. You know, I think, you know, by my calculations, the combined entities still have about $135 billion of capacity So that's pretty substantial. I mean, they've only added about $45 billion year to date. So, you know, it certainly, you know, gives us more comfort on leverage at modestly higher levels. You know, I think in September, Fannie in particular served as a bit of a backstop adding a fair amount. And over the third quarter, I believe the two entities added about $15 billion to their retained portfolios. And so that's, you know, that's a notable number. And, you know, I think with mortgage spreads kind of in that 160 area, which is, you know, where we were in March, that kind of seems to be the level that the market shakes out in a stress environment. So I think, you know, from that perspective, that certainly gives levered investors more comfort as we move forward. Got it.

Okay. Thanks a lot.

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

If there's no other questions, I just want to thank everyone for their interest in Invesco Mortgage Capital. We are appreciative of you joining this morning's call and look forward to engaging in the weeks ahead.

Thank you. And this concludes today's conference. We thank you for your participation. And at this time, you may disconnect your lines.