Invesco Mortgage Capital (US:IVR)2021-08-05 16:04Financial Data and Key Metrics Changes - Earnings available for distribution for Q2 2021 were reported at $0.10 per share, with a change in terminology from core earnings to align with industry conventions [8] - Book value decreased by 12% to $3.21 during the quarter, reflecting underperformance in agency mortgages [10] Business Line Data and Key Metrics Changes - The portfolio remains predominantly agency-focused, with 92% of equity and 99% of assets allocated to agency mortgages [10] - The weighted average yield on agency RMBS holdings improved by 16 basis points to 2.04% as of quarter-end, while prepayments remained low at 6.4 CPR for the quarter [22] Market Data and Key Metrics Changes - Agency mortgages underperformed sharply during the quarter due to elevated net supply and reduced demand from commercial banks, with net supply totaling $290 billion, double the annual average from 2010 to 2019 [17] - The implied financing rates for dollar roll transactions improved during the quarter, increasing the attractiveness of the dollar roll market for investors in lower coupons [19] Company Strategy and Development Direction - The company is focused on rebalancing its capital structure, having redeemed all 140 million of its Series A Preferred Stock and raised an additional $145.9 million of common equity [9] - The strategy includes reducing exposure to agency RMBS through asset sales and prepayments, while maintaining a focus on lower coupon specified pools [20] Management's Comments on Operating Environment and Future Outlook - Management noted that many headwinds faced in Q2 remain intact, including elevated prepayment speeds and inflation uncertainty affecting the Fed's tapering plans [11] - The company expects that the recent widening of spreads and favorable funding environment will support the earnings power of the portfolio in the coming quarters [11] Other Important Information - The liquidity position remains strong, with $651 million of unrestricted cash and unencumbered investments at quarter-end [10] - The economic leverage, including TBA exposure, ticked modestly higher to 6.8 times debt to equity, reflecting a conservative positioning given rich valuations [25] Q&A Session Summary Question: Thoughts on spread widening ahead of a Fed taper - Management indicated that about 25 basis points of widening has occurred, with an expectation of an additional 10 to 15 basis points of widening over the next couple of quarters [31] Question: Update on book value trends - Book value has trended down roughly 2% quarter-to-date [33] Question: Outlook for prepayment speeds with falling rates - Prepayment speeds are expected to remain elevated, particularly for 2.5% coupons and higher, while the company anticipates low prepayment levels for its 2% pools [36][37] Question: Performance of MBS if tenure rates continue to move lower - Mortgages are expected to underperform in a flattening yield curve environment, but could perform well if rates back up due to banks having cash to deploy [38] Question: Impact of FHFA changes on portfolio positioning - New FHFA changes are expected to be more borrower-friendly, leading to elevated prepayments for higher coupons, which the company has avoided [41]