Welcome to Invesco Mortgage Capital Incorporated's Fourth Quarter 2015 Investor Conference Call. [Operator Instructions]. Now I'd like to turn the call over to Tony Semak in Investor Relations. Mr. Semak, you may begin the call.

Thank you, Ray and good morning, everyone. Again, we really want to welcome you to the Invesco Mortgage Capital fourth quarter 2015 earnings call. I'm Tony Semak with Investor Relations and our management team and I are delighted you joined us. We really look forward to sharing with you our prepared remarks, as we've always done in the past, during the next several minutes, before we conclude with a question-and-answer session. Joining me today are Rich King, Chief Executive Officer; Lee Phegley, Chief Financial Officer; John Anzalone, Chief Investment Officer; and Rob Kuster, Chief Operating Officer. Before we begin, I'll provide the customary forward-looking statements disclosure and then we will proceed to management's remarks. Comments made in the associated conference call may include statements and information that constitutes forward-looking statements within the meaning of the U.S. securities laws, as defined in the Private Securities Litigation Reform Act of 1995. And such statements are intended to be covered by the Safe Harbor provided by the same. Forward-looking statements include our views on the risk positioning of our portfolio, domestic and global market conditions, including the residential and commercial real estate market. The market for our target assets, mortgage reform programs, our financial performance, including our core earnings, economic return, covenants of any material changes in our book value. Our ability to continue performance trends, the stability of portfolio yields, interest rates, credit spreads for payment trends, financing socialist cost funds, our leverage and equity allocation. The impact of the restatement of our financial statements for certain periods and the adequacy of our disclosure controls and procedures and internal controls over financial reporting. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as will, may, could, should and would, as well as…

Thanks, Tony. Good morning, ladies and gentlemen. In the fourth quarter, Invesco Mortgage Capital earned core income of $0.42 per share and declared a $0.40 dividend. Core earnings per share increased slightly from the prior quarter, benefiting from multiple sources, including favorable prepay speeds, income from our JV investments, accretion from share repurchases and some benefit from reducing general and administrative expenses. The de-consolidation of our residential securitizations in Q4 will result in lower G&A going forward. In addition, it simplifies our financials, reduces GAAP leverage. It also reduces concentrated risk and the sales proceeds helped us to buy back shares during the quarter which was accretive. We had expected, going back a couple years, that non-agency securitization would return. But it has become evident to us that the private-label residential loans securitization market is unlikely to thrive any time in the near or medium term, due to many factors. Exiting that investment and focusing on better opportunities with our capital makes sense to us. Given the actions we have taken, our ability to continue share repurchases and the re-emergence of higher investment yields, we're feeling good about our earnings stability potential and maintaining the current dividend in 2016. Book value per share was down 2.9% in the fourth quarter, due principally to spread movements that drive the mark-to-market pricing on our assets and hedges. And I will detail that on the next slide. Economic return, defined as the change in our book value plus dividends paid, was slightly negative for the quarter and slightly positive for the year, reflective of financial conditions and wider credit spreads. The fundamentals underlying our investments are solid. Our asset quality is strong and improving, with a high credit-quality orientation. We've included more detail in this presentation on each of the residential and commercial…

Thanks, Rich and thanks again to everyone dialing in on the call. As Rich alluded to in his remarks, it has been a difficult past few months in the broader fixed income markets, as global concerns continue to weigh on asset prices. Unfortunately, the structured securities markets have not been immune and we have seen an environmental where valuations on our assets in many ways have been more correlated with the price of oil than with the value of the collateral they are backed by. Further compounding matters, we have seen a more challenging trading environment and the structured securities market is adjusting to a host of new rules and regulations. That's the bad news. On the positive side, we continue to believe that this is a good environment for the types of bonds that we own. And I'm going to spend a little bit of time over the next few slides describing in more detail the types of high-quality credit bonds that we own. Slide 6 shows our allocations on both an equity and asset basis. We still have nearly 2/3 of our equity and 40% of our assets allocated to credit. And despite the current environment, the fundamentals in both commercial and residential credit remains strong. Spreads were wider across all of our credit sectors during the fourth quarter and that spread-widening accelerated through January and into the beginning of February. And once again we saw swap spreads move in the opposite direction of credit spreads, tightening during the fourth quarter and continuing to tighten this quarter. Slide 7 shows our agency portfolio and it contains a good mix of fixed rate and hybrid ARM collateral. The portfolio is generally made up of higher-coupon, seasoned bonds that exhibit less industry sensitivity than longer-duration current-coupon paper. We saw prepayment…

[Operator Instructions]. Our first question is coming from Douglas Harter of Credit Suisse. Your line is open.

Can you talk about is what you guys actually did that caused the deconsolidation of the residential credit and what about that caused the book value was?

Essentially we solved the bottom of the stack and so some of it was -- the prices were lower, but some of it was also that you have some expenses that are capitalized do get taken out. So it was a combination of those two things.

And the decision to sell those was basic -- what was the rational to sell those? I guess you mentioned funding the buyback was part of it?

Right. Yes, part of it. But really just looking across the company and finding assets that had lower ROEs and using that capital to fund buybacks and we look across the Company and try to find assets with lower ROEs regularly and sell them and this one had a number of other benefits aside from improving accretion and ROE and so forth and that we could lower G&A expense going forward, lower our GAAP leverage numbers and so it made sense to do that.

So the remaining 18% of the residential credit book, that's a new issue. Were those higher credit rated tranches that you still hold then?

Yes, they are be rated tranches and primarily higher-rated.

Our next question is from Bose George with KBW. Your line is open.

First, just can you talk about you find the most attractive investment opportunities and then just give some characterization of ROEs in the different segments?

I would say right now buy back stock obviously is going to have the most attractive, so that was number one on the list. But aside from that, most of our investments have been going into CRE lending. We really like the profile -- I think we talked about that a little bit, the reasons why in terms of book value stability and also we do think as you move forward it's important to stay involved in the market and also we think there's going to be good opportunities coming up over the next year also with some of the new regulations start affecting the CMBS market that potentially can create some more opportunity within CRE lending. So I think CRE is second in terms of that. In terms of where we see current ROEs, I think credit risk transfer is probably the highest in terms of if you just considering where spreads have moved to and where you can finance those, if you are talking high teens kind of numbers or mid to high teens kind of numbers. The issue there has been there is lot of spread volatility, you know the funding calendar is really impacted spreads and you have to be cognizant that in terms of finding counterparties that want to finance those. I mean there are number of factors that limit the amount that you want to do and they are not lead friendly, in their current forms that's another limiter. In terms of ROEs across other sectors I think within commercial looking at low double-digit type numbers for AAAs, obviously that lower down the stack you go to hire the numbers get but we're not really interested in buying lower rated BBBs right now considering the underwriting and then within agencies I would say it really depends on where you’re looking within agency space, but for 30 year current coupon types you’re probably in the low double digits and [indiscernible] you’re probably in the high single-digit.

On the commercial loan side, is there a plan to use leverage over time?

Yes, so we buy the loans and they are unlevered so they are not -- they are not collateralized [indiscernible]. In the sense we do have leverage on them and that we have -- we have a 5% corporate note, $400 million outstanding so when you think of that you essentially get call it a close to 9% unlevered yield on the CRE book to a forward curve and then you've got a 5% financing so you’re 12% to 13% on the investment.

And then just actually one more, on the G&A expenses going forward, after the deconsolidations etcetera, is the run rate that you guys had this quarter a good run rate to look at?

I guess, I think so.

I'm sorry, I just kind of missed that -- your question it was G&A? Yes, that's right.

Our next question is from Trevor Cranston of GMP Securities. Your line is open.

I have a question on the hedge portfolio. Looking at the schedule on the 10-K there's fairly large amount that’s said to mature with fairly high rates over the course of this year, can you guys just talk about how you are thinking about that if there's any intention to replace some of that stuff as it matures or if you’re just kind of happy with the current [indiscernible] exposure you’re having, you’re going to let that expire? Thanks.

We actually have taken hard look at that and we've taken off in the first quarter a fair amount of those early because essentially they are not doing much good and we've reduced our overall duration over time of asset sales and seasoning, keeping our duration and the band that we have over a number of years' slightly positive duration. We're able to take those out so you should see a in the next quarter a lower balance there.

Our next question is from Brock Vandervliet of Nomura Securities. Your line is open.

I just wanted to start off, it sounded like you are pretty constructive on the earnings power and the dividend going forward from your opening remarks, just wanted to confirm that.

No, that's correct. We're seeing we saw a little bit improvement in the fourth quarter and that's continuing. So we think that the $0.40 dividend makes a lot of sense. I think there are things that are going to improve earnings a little bit going forward but we also, we recognize that with the drop in rates that we’ve seen lately and the seasonal is coming up in the second quarter that while we have some positives there also could be some negatives in the form of a somewhat higher prepayment. So we would say we're confident in the current run rate.

[Operator Instructions]. Carry on, sir.

Operator, if there aren't any further questions we will end the call here and I will like to thank everybody for joining today once again.