Invesco Mortgage Capital (IVR) - 2025 Q1 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported a positive economic return of 2.6% for the quarter, consisting of a $0.34 dividend and a modest $0.11 decline in book value to $8.81 [7][22] - The estimated book value per common share as of April 30 is between $7.74 and $8.06, reflecting a decline in April due to market volatility [8][21] - The leverage ratio was reduced from 7.1x to the mid-6s during the quarter, indicating a cautious approach in response to market conditions [21][23] Business Line Data and Key Metrics Changes - The agency RMBS portfolio increased by 9.5% quarter over quarter, with investments focused on higher coupon securities [17] - The company rotated its allocations from lower coupons to higher coupons, capitalizing on attractive valuations [18] - Agency CMBS exposure remained at approximately 15% of the total investment portfolio, with new purchases yielding low double-digit ROEs [19] Market Data and Key Metrics Changes - U.S. Treasury yields declined by 20 to 40 basis points across the yield curve during the first quarter, driven by concerns over economic growth [10][11] - The Fed funds futures market is now pricing in deeper cuts, with expectations for the target rate to be reduced three to four times in 2025 [12] - Agency mortgages underperformed treasuries in April due to increased interest rate volatility and market sell-offs [21][23] Company Strategy and Development Direction - The company remains focused on higher coupon Agency RMBS, anticipating improved demand as interest rate volatility declines [18][23] - The strategy includes increasing allocations to specified pools with predictable prepayment characteristics, particularly in a slowing economic environment [18] - The company is cautious about agency mortgages in the near term but maintains a favorable long-term outlook due to expected improvements in investor demand [8][23] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about tightening financial conditions and the potential impact of U.S. trade policies on economic growth [5][6] - The outlook remains cautious due to elevated interest rate volatility and policy uncertainty, but there is optimism for a steeper yield curve and improved demand in the long term [23] - Management highlighted the importance of maintaining liquidity to navigate potential market stress while capitalizing on investment opportunities as conditions improve [23] Other Important Information - The company noted that prepayment speeds remained low due to limited purchase and refinancing activity, but a decline in mortgage rates is expected to increase prepayment speeds in the coming months [6][7] - The funding market for the company's assets has been stable, with repo spreads remaining attractive [14] Q&A Session Summary Question: Discussion on leverage management during volatile periods - Management indicated that leverage was reduced by about 0.5 turns in April due to increased uncertainty regarding monetary and fiscal policy [26][28] Question: Comments on returns and spreads - Management noted that levered ROEs are in the low 20s on higher coupons, indicating attractive spreads [30] Question: Changes to the hedge portfolio - The hedge ratio was increased in response to uncertainty about near-term monetary policy, maintaining a mix of swaps and treasuries [34] Question: Impact of portfolio size on dividend levels - Management confirmed that the recent dividend reduction is still comfortably covered by current earnings [36] Question: Opportunity set in agency compared to previous peaks - Management expressed that the current opportunity in mortgages is attractive, but there is caution due to potential inflation and its impact on monetary policy [40][41] Question: Relative value of loan balance pools - Management discussed the rotation from low loan balance pools to more credit-constrained pools, driven by economic uncertainty and pricing dynamics [42][44] Question: Forward rate outlook and hedge portfolio development - Management emphasized a conservative approach to hedging and leverage, given the uncertainty in interest rate cuts [50][52] Question: Opportunities in commercial credit - Management stated that they are currently not looking to add credit exposure and have sold remaining credit investments, focusing solely on agency assets [61][62]