Welcome to the Invesco Mortgage Capital second quarter 2021 investor conference call. All participants are in a listen-only mode until the question-and-answer session. . 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 your call.

Thank you and welcome to the Invesco Mortgage Capital's second quarter 2021 earnings call. The management team and I are delighted you have 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 are 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 a 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 Q2 2021 Earnings Presentation link under Investor Relations. Again, welcome and thank you for joining us today. I will now turn the call over to John Anzalone. John?

Good morning and welcome to Invesco Mortgage Capital's second 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 am pleased to announce earnings available for distribution for the second quarter came in at $0.10 per share. As we you noted in our press release, we have replaced the term core earnings with earnings available for distribution. This is in keeping with changing industry conventions and does not reflect any change in how the measure is calculated. Despite an extremely challenging quarter for agency mortgages, earnings available for distribution continue to be supported by strong dollar rolls, relatively slow prepayment speeds on our specified pool collateral and the more favorable reinvestment environment. During the quarter, we made progress in rebalancing our capital structure by redeeming all $140 million of our Series A Preferred Stock and raising an additional $145.9 million of common equity. The portfolio remains predominantly agency focused with 92% of our equity and 99% of our assets allocated to agency mortgages. Our liquidity position remains strong as we held $651 million of unrestricted cash and unencumbered investments at quarter-end. Agency mortgages sharply underperformed during the quarter, as elevated net supply, reduced demand for commercial banks, persistent prepayment concerns and an increased likelihood of the Federal Reserve's timeline for reducing asset purchases would be accelerated more than offset steady Fed demand. Our book value performance reflected this underperformance, ending the quarter down 12% to $3.21. Looking ahead, many the headwinds that the mortgage bases faced through in the second quarter remain intact. Prepayment speeds moderated during the quarter, but remained elevated and the lower interest rate environment at quarter-end should keep prepayments near historic highs over the coming months. Increases in inflation across many parts of the economy keep the uncertainty around the Fed's plan to taper its asset purchases at a heightened level. While these factors remains challenging, we expect that the recent widening of spreads along with a favorable funding environment through both traditional repo and via dollar rolls to continue to help support the earnings power of our portfolio over the coming quarters. I will stop here and let Brian go through the portfolio.

Thanks John and good morning to everyone on the call. I will begin on slide four, in the upper left-hand chart, which details the changes in the U.S. treasury yield curves since year-end. As indicated by the dark blue line, the second quarter ended with a partial reversal of the first quarter sharp rise in long term yields, resulting in a flattening of the yield curve. Market optimism, resulting largely from the successful rollout of COVID-19 vaccinations and reopening of the service sector, became a bit more muted after an uptick in cases due to the more contagious Delta. variant In addition, the Federal Reserve successfully dampened the market's initial concern regarding the notable increase in year-over-year inflation by effectively communicating their projections for a softening of inflation pressures as the reopening of the economy moves forward. As noted, these adjustments resulted in a ball flattening of the yield curve as short term interest rates with three years or less to maturity increased by a modest five to 10 basis points, while longer term 10 to 30 year rates declined approximately 30 basis points. This move was exacerbated by short covering in the interest rate swap market as positions designed to benefit from a move higher in rates were forced to unwind, resulting in tighter swap spreads during the quarter, as indicated by the chart in the lower left hand section of slide four. Both the flatter yield curve and tighter swap spreads had negative ramifications for the agency RMBS market despite a continuation of attractive funding rates, as indicated in the upper right-hand chart and strong demand from both the Federal Reserve and commercial banks, indicated in the lower right hand chart. Moving on to slide five, where we provide more detail on the agency RMBS market. In the…

. And the first question is coming from Doug Harter of Credit Suisse. Your line is open.

Good morning everyone. This is Josh, on for Doug. I appreciate the color on muted spread widening in the back half of the year expected. I just wanted to get your thoughts on how much more spread widening you think we could potentially see ahead of a Fed taper versus how much may already be priced in? Thanks.

Yes, Josh. Hi, this is Brian. We have seen about 25 basis points of widening from the types that we saw in mid-May. The expectation is that we will probably see another 10 to 15 basis point of widening. That's not necessarily going to occur before tapering begins but kind of throughout the process. So we think that any further widening will be much more gradual than what we saw during the second quarter. So I think ultimately about 40 basis points wider from the types that we saw in May is a reasonable assumption over the next, call it, couple of quarters.

Great. Makes sense. Thanks for that, Brian. And then curious if you could give us an update on how book value has trended quarter-to-date? Thank you.

Yes. Quarter-to-date, we are roughly down about 2%.

Great. Thanks so much for the comments.

. The next question is coming from Trevor Cranston, JMP Securities.

Hi. Thanks. Good morning. I was wondering if you can talk about your outlook for prepay speeds with rates continuing to fall in July, the removal of the adverse market charge? And specifically, how responsive you think the coupons you guys own would be to mortgage rates dropping back meaningfully below 3%?

Yes. Hi Trevor, this is Brian. I think generically speaking for the market, we expect prepayment speeds to remain fairly elevated. As you noted, I think the 30-year mortgage rate is around 2.80% now. So certainly it's dropped 40 or 50 basis points from March levels. So we think that prepay speeds particularly in 2.5% coupons and higher are going to remain elevated. For our bonds, we continue to see pretty low levels of prepayments and that's partially due to, well, the lack of seasoning of our holdings. So we do expect that to drift a little bit higher. We don't expect it to be too dramatic. We still have a fair amount of our holdings in 2% pools, which we expect to continue to pay relatively slow at these rate levels. If we were to move even lower than that could come into question. But we expect our 2.5% and 3% pools to drift a little bit higher from here but are 2% to be relatively stable.

Got it. Okay. That's helpful. And then with respect to the interest rate environment, it seems like agency spreads been more stable in the third quarter, as rates have come down. I was just curious to get your thoughts on how you think MBS would generally perform in tenure does continue to move lower and the yield curve flattens? And conversely, how you think they are performing if they get back up in rates again?

Yes. The widening that we have seen since quarter-end has been a little bit more gradual, as we noted, relative to kind of the second half of the second quarter. Mortgages should continue to underperform and to ball flattens. So as long as rates continue to rally. But conversely, I think mortgages could do okay. I think banks have a decent amount of cash to put to work. So they are just waiting for kind of a modest back up in rates and mortgages should handle that pretty well.

Okay. Got it. I appreciate the comments. Thank you.

The next question is coming from Jason Stewart, JonesTrading. Your line is open.

Hi. Good morning. Thanks for taking the questions. A quick follow-up, I guess, on the FHFA changes. How are you thinking about what Senator Thompson may or may not do in positioning the portfolio for any potential impact?

Yes. We do think that the new changes that at the FHFA should be more borrower friendly, which means that it should be easier for higher coupon borrowers and lower credit borrowers to refinance. So that means that higher coupons should continue to see elevated prepayments, particularly at these rate levels. So we have avoided anything higher than 3% coupon. And we think that those coupons will continue to struggle in this environment.

Okay. Do you have a house view on how the policy evolves from this point going forward?

As far as conservatorship, I think that they are clearly going to approach that more slowly than the previous administration. So I think we have a fair amount of time. But again, I think the new policies will be more geared towards being borrower friendly and increasing access to these lower mortgage rates.

Okay. I appreciate it. Thanks.

At this time, we have no further questions in queue.

Okay. Well, I would like to thank everybody for joining us on the call and we look forward to talking to you next quarter. Thanks.

This concludes today's conference. All parties may disconnect at this time.