Welcome to Invesco Mortgage Capital Inc.'s First Quarter 2023 Investor Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. Now, I would like to turn the call over to Greg Seals in Investor Relations. Mr. Seals, you may begin the call.

Thanks, operator, and to all of you joining us on Invesco Mortgage Capital's quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website, invescomortgagecapital.com. This information can be found by going to the Investor Relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slide 2 of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are loaded on our website. Again, welcome, and thank you for joining us today. I'll now turn the call over to John Anzalone. John?

All right. Well, good morning and welcome to Invesco Mortgage Capital's first quarter earnings call. I'll 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. As we entered 2023, agency mortgages continued the strong performance we saw during the fourth quarter of 2022 as industry volatility eased in anticipation of the end of the Fed's tightening cycle. However, favorable market conditions quickly deteriorated as several regional banks failed and concerns around the health of the banking system grew. These concerns impacted mortgage valuations as interest rate volatility spiked, and investors became concerned about the potential liquidation of mortgage assets seized by regulators. Swift actions by both, the Federal Reserve and the FDIC were effective in reducing fears of further contagion, and mortgage spreads ended the quarter only modestly wider. Since quarter-end, regional banking troubles were ignited and mortgage spreads continued to be pressured as volatility remains heightened. Despite heightened market volatility, IVR's earnings available for distribution remains strong, increasing to $1.50 per share versus $1.46 last quarter. Our focus on higher-yielding, higher-coupon mortgages in combination with the hedging strategy benefiting from low-cost, pay-fixed swaps drove the increase in EAD. Over the coming quarters, we expect EAD to remain well supported as our repo hedge ratio remains elevated and forward-starting swaps come on line. Importantly, these hedges provide benefit for the long term as the weighted average maturity of our pay-fixed swap portfolio, including the forward-starting swaps is over seven years. ROEs on new investments have also been a positive contributor to EAD as wider spreads on new purchases are attractive…

Thanks, John, and good morning to everyone listening on the call. I'll begin on slides 4 and 5, which provide an overview of the interest rate and agency mortgage markets over the past year. After a strong start for fixed income in January, interest rate volatility moved higher in February as the pace of disinflation slowed. During the first half of March, volatility then spiked sharply higher, given the turmoil in the banking sector before declining into quarter end as measures were taken by the FDIC, Treasury and Federal Reserve to mitigate further distress for banks. Yields on U.S. treasuries ended the quarter roughly 40 basis points lower at maturities from 2 to 10 years. Meanwhile, short-term rates rose in line with further increases in the expected Fed funds rates as the market pushed out anticipated timing of a pause in monetary policy tightening. As shown in the lower-right chart, U.S. commercial banks further reduced their holdings of Agency MBS during the quarter, concurrent with runoff of the Federal Reserve's balance sheet, resulting in increasing reliance on money manager and foreign investments for the sector. Positively, the organic supply of agency mortgages to the market continued to decline into the -- in the quarter as refinancing activity and housing turnover slowed substantially, largely offsetting the decline in demand. Slide 5 provides more detail on the Agency RMBS market. In the upper-left chart, we show 30-year current coupon Agency RMBS performance versus U.S. treasuries over the past 12 months, highlighting the first quarter in gray. Exceptional performance in January was offset by underperformance in February and March with the sector ending the quarter modestly weaker. As shown in the lower-left chart, nominal spreads remain attractive for current coupon MBS as uncertainty regarding monetary policy, further stress in the banking sector and…

[Operator Instructions] Our first question comes from Douglas Harter from Credit Suisse.

Thanks and good morning. Hoping you could talk about how you kind of see your current leverage and what capacity you would have to -- if any, to take advantage of kind of current wide spreads?

Yes. Hey Doug, it's Brian. Good morning. I think we would view current leverage kind of in the midpoint of where we would see our range. We certainly have capacity to add. We're somewhat hesitant to do that at this point just given continued elevated volatility. But as that volatility declines, we believe given current valuations that it would be attractive to do so.

And just on that being attractive to do so, do you view that as kind of a longer term attractive carry, or do you see kind of meaningful potential for the basis to tighten?

Yes. That's a good question. I think given what's going on with banks lately, the question is how involved they'll be with the sector on a longer-term basis. We do believe that they'll be somewhat involved, maybe not as much as they had been in the last couple of years. And certainly, the liquidations from the FDIC over the next, call it, 7 to 9 months will likely keep spreads relatively attractive over that time period. So, I think we're probably not in an environment where spreads will go back to where they were, call it, pre-COVID, but they will -- they should tighten modestly from here over the long-term period.

Our next question comes from Trevor Cranston from JMP Securities.

Hey. Thanks. Can you talk a little bit more about how you guys are thinking about Agency MBS performing going forward as bank sales continue to hit the markets and if you think any other -- any further underperformance from here would likely be concentrated in the coupons that are being sold or if you think there could be some sort of sympathy widening in the higher coupons as well? Thanks.

Yes. Hey Trevor, it's Brian. Good morning. We do think that there will likely be continued kind of near-term volatility as liquidations work their way through the system. The lower coupons have held in relatively well this month. But we do think as we're only three weeks into liquidations and we still have, like I said, another probably 7 to 9 months of selling. So, over that time period, we do think that spread volatility will remain somewhat elevated, which is why we're keeping our leverage kind of in the midpoint of our typical range. So, as those liquidations start to work their way through the environment, we think that it will probably make sense to take advantage of relatively attractive valuations at this point to move leverage modestly higher.

Our next question comes from Matthew Erdner from JonesTrading.

Hey, guys. Matthew on for Jason this morning. Thanks for taking the question. How are you valuing deploying capital in new investments versus share repurchases? And then, in addition to the share repurchases, could you talk about the preferred a little bit?

Yes. Thanks. This is John. Yes, I think the decision between new purchases and share buybacks, I mean, for new purchases, like I think Brian mentioned on the call, we're seeing solidly mid-teens ROEs on new purchases. And depending on -- obviously, our book value and as mortgage valuations have been quite volatile, it's been bouncing around quite a bit. So, I think if we hit a time when our evaluations are low enough, I mean, we'll certainly look at buying back common. But given where we're seeing ROEs right now, we're not quite there yet. And buying back common would further make our common-to-preferred ratio out of line. So, there's that hurdle also. And as far as preferreds go, I mean, we are certainly looking and we're aware that the preferred market in general, I mean, is another sort of secondary victim of the regional banking crisis given that whole sector is mostly made up of financials. And most mortgage REIT preferreds got swept up in that also recently. So certainly, I think that where we are seeing them trading now, they've become much more attractive to try to go back and buy some. The challenge there always is just the limited trading volume that we see on a daily basis, but certainly we're going to make every effort to try to repurchase preferreds where we can.

I'm showing no further questions at this time.

Okay. Well, thanks, everybody, for joining us. And we look forward to meeting again in about three months for our second quarter call. Thanks.

That concludes today's conference. Thank you for participating. You may disconnect at this time.