Invesco Mortgage Capital (IVR) - 2022 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The book value declined during the quarter, ending at $16.16, but showed improvement in the third quarter with a high single-digit increase through the end of July [7][10] - The net interest margin expanded due to wider spreads on new investments in higher coupon mortgages and favorable funding rates [9] - The weighted average yield on Agency RMBS investments improved from 2.54% at the end of Q1 to 4.07% at the end of Q2 [19] Business Line Data and Key Metrics Changes - The company reduced overall exposure to agency mortgages, decreasing economic leverage from 6.5 times to 3.9 times [7][23] - The allocation to credit securities declined from $98 million to $52 million during the quarter, with non-Agency CMBS representing 55% of the remaining portfolio [21] Market Data and Key Metrics Changes - The S&P 500 Index declined approximately 17% over the quarter, while the Bloomberg US Aggregate Bond Index declined roughly 4.4% [6] - US commercial banks slowed their purchases of agency mortgages during Q2, leading to significantly lower demand for the sector [14] Company Strategy and Development Direction - The company aims to improve its capital structure by repurchasing preferred shares and reducing leverage to mitigate volatility in book value [28][30] - The focus is on higher coupon investments due to attractive valuations and reduced supply from lower origination volume [25] Management Comments on Operating Environment and Future Outlook - Management noted that while conditions in the Agency RMBS market are becoming more favorable, challenges remain due to elevated market volatility and reduced demand from commercial banks and the Federal Reserve [24][25] - The company remains cautious but sees today's valuations and production coupons as attractive entry points for long-term investors [26] Other Important Information - The liquidity position remains strong with $677 million of unrestricted cash and unencumbered assets at quarter end [8] - The economic leverage increased modestly to approximately 4.4 times debt to equity at the end of July [23] Q&A Session Summary Question: Portfolio construction and capital structure to mute volatility - Management has lowered leverage and repurchased preferred shares to reduce volatility in common equity [28][30] Question: Range for a normalized capital structure - The target for preferred shares is historically in the low 20s percentage range [32] Question: Trade-off between protecting book value and missing spread tightening - Management is comfortable keeping leverage low to offset market volatility, with earnings available for distribution well supported [36] Question: Dividend and earnings level considerations - The company retained about 40% of earnings available for distribution to support book value, with future dividend decisions to be made by the Board [38][39]