Earnings Labs

Invesco Mortgage Capital Inc. (IVR)

Q1 2021 Earnings Call· Thu, May 6, 2021

$8.29

-0.06%

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Transcript

Operator

Operator

Welcome to the Invesco Mortgage Capital Inc.'s First Quarter 2021 Investor Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Now I would like to turn the call over to Jack Bateman in investor relations. Mr. Bateman, you may begin.

Jack Bateman

Analyst

Thank you, and welcome to the Invesco Mortgage Capital First Quarter 2021 Earnings Call. The management team and I are delighted you've joined us and we look forward to sharing with you our prepared remarks and conducting a question-and-answer session. Before turning the call over to our CEO, John Anzalone, I wanted to provide a reminder that statements made in this conference call and the related presentation may include forward-looking statements, which reflect management's expectations about future events and our overall plans and performance. These forward-looking statements are made as of today and they're not guarantees. They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from our expectations. For discussion of these risks and uncertainties, please see the risks described in our most recent annual report on Form 10-K and subsequent filings with the SEC. Invesco makes no obligation to update any forward-looking statement. We may also discuss non-GAAP financial measures during today's call. Reconciliations of these non-GAAP financial measures may be found at the end of our earnings presentation. To view the slide presentation today, you may access our website at invescomortgagecapital.com and click on the Q1 2021 earnings presentation link under Investor Relations. Again, welcome and thank you for joining us today. I'll now turn the call over to John Anzalone. John?

John M. Anzalone

Analyst

Good morning, and welcome to Invesco Mortgage Capital's first quarter earnings call. I will give some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss the current portfolio in more detail. Also joining us on the call to participate in the Q&A are our President, Kevin Collins; our CFO, Lee Phegley; and our COO, Dave Lyle. I'm pleased to announce the core earnings came in at $0.11 per share for the quarter, exceeding our recently increased dividend of $0.09 per share and $0.01 better than last quarter. The increase core run rate reflects the benefit of having our portfolio fully reallocated to an agency-focused strategy, as well as a successful deployment of $161 million of common equity that we raised during the quarter. Our book value is down 5.4% for the quarter to $3.65 per share. The decrease in book value reflected the under-performance of lower coupon mortgages, as well as the repricing of pay-ups on specified pool collateral, which fell as the market priced in slower prepayment speeds as mortgage rates increased. The combination of the increased dividend and the decline in book value produced an economic return of negative 3.1% for the quarter compared to increases of 11% and 13.5% during the third and fourth quarters of 2020, respectively. Our cumulative economic return since June 30, 2020, was 22.1%. During the quarter, optimism around the prospects for increased economic activity was driven by the potential impact of stimulus programs, the continued rollout of vaccinations and the significant decline in new infections. While this renewed optimism was supportive of many risk markets through the quarter, fixed income investors began pricing in the potential for higher inflation. In fact, we saw price increases across commodities as well as in broader inflation gauges during…

Brian Norris

Analyst

Thanks, John, and good morning to everyone listening to the call. I'll begin on Slide 4, which details the changes in the U.S. Treasury yield curve during the first quarter in the upper left-hand chart. The successful early rollout of the COVID-19 vaccine and improving economic recovery and higher inflation concerns led to a fair steepening move in interest rates, as the short end remained anchored, while maturity 7 years and longer increased approximately 80 basis points during the quarter. This sharp move higher in interest rates resulted in elevated interest rate volatility during the quarter, as indicated by the light blue line in the lower left hand chart. The contrast between interest rates and equity market volatility, as indicated by the dark blue line in the same chart, is notable, as equity markets continue to improve despite the volatility in fixed income markets. The sharp move higher in interest rates and volatility negatively impacted our agency RMBS valuations, as the resulting increase in mortgage rates and slowing prepayment speed expectations led to lower specified pool pay ups and longer durations on our holdings. Positively, the upper right hand chart displays the impact monetary policy has had on short-term funding rates, which continued to improve during the quarter and is supportive of ROEs for our target assets. Lastly, in the bottom right chart, we detailed the growth in both commercial bank and Federal Reserve holdings of agency RMBS, which has been consistent and kept valuations relatively rich, despite their under-performance in the first quarter. While expectations for net supply in 2021 have increased to over $600 billion, eclipsing 2020s total of just over $500 billion, we anticipate demand from the Federal Reserve and commercial banks to more than absorb the increased amount, keeping supply and demand dynamics in the sector…

Operator

Operator

[Operator Instructions] Mikhail Goberman with JMP Securities.

Mikhail Goberman

Analyst

Just wanted to get a sense of maybe where you're seeing book value trending thus far in the second quarter.

John M. Anzalone

Analyst

Yes, this is John. Book value has been relatively flat since quarter end.

Operator

Operator

I'm currently showing no additional questions. [Operator Instructions] [ Jason George with JG Investments. ]

Unknown Analyst

Analyst

My question is, do you see any more headwinds in the future quarters like we had in Q1, for example, the steepening of the yield curve or higher mortgage rates that will affect the portfolio?

Brian Norris

Analyst

Yes, this is Brian. I think agency mortgage spreads are pretty tight, so valuations are relatively rich. But practically, the entire fixed income universe is hit pretty rich and valuations pretty tight as well. So I think that will help keep a lid on spread widening. And also pretty strong demand from the Fed and commercial banks will also prevent a significant amount of widening. But risks -- at this point, risks are likely to be skewed wider more so than tighter at this point.

Operator

Operator

[Operator Instructions]

John M. Anzalone

Analyst

Okay. Well, I guess if there's no further questions, we'd like to thank everybody for joining the call and we'll talk to you in another 3 months.

Operator

Operator

Thank you for your participation in today's conference. You may disconnect at this time.