Welcome to the Invesco Mortgage Capital Fourth Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. Now I'll turn the call over to Greg Seals, 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 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 located on our website. Again, welcome, and thank you for joining us today. I'll now turn the call over to Invesco Mortgage Capital's CEO, John Anzalone. John?

Good morning, and welcome to Invesco Mortgage Capital's Fourth Quarter Earnings Call. I will offer brief remarks before turning the call over to our Chief Investment Officer, Brian Norris. Joining us for Q&A are President, Kevin Collins; COO, Dave Lyle; and CFO, Mark Gregson. Financial conditions improved during the quarter, supported by 2 Federal Reserve rate cuts, solid corporate earnings, improved financial conditions and strong economic growth. Equity markets extended their gains, credit spreads remained tight and agency mortgages outperformed treasuries, aided by lower rate volatility in a supportive supply and demand environment. Inflation readings trended modestly lower during the quarter with headline CPI at 2.7% and core CPI at 2.6%. Investors responded by reducing inflation expectations, reflected in lower breakeven rates on inflation-protected treasury bonds. Even with continued economic growth, the U.S. labor market continued to exhibit weakness as the economy lost 67,000 jobs during the quarter. Despite inflation running above target, the FOMC cut the federal funds target rate by 25 basis points at each of its last 3 meetings in 2025, citing labor market weakness. The Federal Reserve also ended its quantitative tightening program after reducing its treasury and agency mortgage holdings by more than $2.2 trillion since mid-2022, specifying that mortgage paydowns will be reinvested into treasury bills going forward. Markets are pricing in an additional 50 basis points of cuts through 2026. Interest rates were generally stable during the quarter and the decline in interest rate volatility that began after the sharp increase in April continued into year-end. With market expectations shifting towards a more accommodative monetary policy stance, agency mortgages delivered its strongest calendar year performance relative to U.S. treasury since 2010. Key drivers included a decline in interest rate volatility, broad inflows into fixed income and increased demand from Fannie Mae and Freddie…

Thanks, John, and good morning to everyone listening to the call. I'll begin on Slide 4, which provides an overview of the interest rate markets over the past year. As depicted in the chart on the upper left, despite 2 25 basis point cuts to the Fed funds rate during the fourth quarter, the 10-year treasury yield was largely unchanged, increasing less than 2 basis points to end the year at 4.17%, 40 basis points lower than where it started the year. Although 10-year yields were relatively stable over the quarter, the yield curve continued to steepen meaningfully with 2-year treasury yields falling 14 basis points, while 30-year yields increased 11 basis points. The difference between 2-year and 30-year treasury yields ended the quarter at 137 basis points. 83 basis points steeper than a year ago. The steeper yield curve benefits longer-term investments such as Agency RMBS and Agency CMBS and is supportive of our strategy. The chart in the upper right reflects changes in short-term funding rates over the past year, with the fourth quarter highlighted in gray. While financing capacity for our assets remained ample and haircuts unchanged, 1-month repo spreads began to indicate broad-based funding pressures in late September and continued into October, widening approximately 5 basis points. Positively, the Fed's decision to end quantitative tightening in December alleviated the pressure and its announcement at the December meeting to initiate purchases of shorter-term treasury securities as needed to maintain an ample supply of reserves led to notable improvement in repo spreads as we head into 2026. Lastly, the bottom right chart on Slide 4 highlights the significant decline in interest rate volatility since April, which provided a tailwind for risk assets, including Agency MBS in the second half of the year. Although we do not anticipate further…

[Operator Instructions] Our first question comes from Trevor Cranston with Citizens JMP.

I think in the prepared comments, I heard you characterize your view on MBS post the GSE buying announcements as a little more balanced. Can you talk about how you're approaching the leverage level post the tightening that's occurred and kind of where you guys are finding value within the coupon stack with marginal deployments today?

Trevor, it's Brian. Yes, so we did take leverage up a little bit in the fourth quarter, just reflective of that positive environment that we've continued to kind of see in the second half of the year. And so I think we're still relatively comfortable there. I think with the announcement with spreads a little bit tighter, we do kind of let leverage drift a little bit. So as book value increases, leverage could come down just a little bit. But I think we're still pretty comfortable because the environment overall, even though spreads are tighter, it's pretty supportive with limited spread volatility. As far as the coupon stack goes, I think I mentioned that there's been some notable improvement in the TBA dollar roll market. And that's really been across the coupon stack, but primarily in the belly, so call it 3.5 through 5.5s. And so I think we're finding pretty good value in those securities.

Got it. Okay. And I was curious within the specified pool portfolio, particularly in higher coupons, if you guys have seen any surprises within prepaid reports or if things have kind of behaved pretty much as you expected them to?

Yes, I wouldn't necessarily say that we've seen any surprises. We certainly saw an increase over the second half of the year in higher coupons in our 6s and 6.5s, prepayment speeds did increase. But because we do own prepaid protection, they certainly were less impacted than what you would see in generic collateral. Loan balance continues to, like I said in the prepared remarks, continues to be superior predictability of cash flows, and we continue to feel that way. I think certain FICO and LTV and even geo stories, a little bit less so, but still relatively in line with expectations heading into it.

Our next question comes from Jason Weaver with JonesTrading.

Maybe just to tee off of Trevor's first question there. Year-to-date, with new capital invested, have you continued rotating down in coupon? And maybe you can talk a little bit about the trade-off you see between elevated prepay risk and the positioning in some of those 5.5 and 6 pools.

Sure. Yes. Jason, it's Brian. Yes, I think certainly, there is a push by the administration on housing affordability, and they are directly focused on the mortgage rate and bringing that down. So to the extent that, that impacts higher coupons, I think the goal is likely to not necessarily reduce the allocation by selling, but to future purchases come a little bit lower in the coupon stack. So like I said earlier, more belly and lower coupons. Like I said, the TBA dollar roll market is pretty attractive in those coupons right now. So that's providing a nice boost as implied funding levels are significantly below SOFR.

Got it. And the only other thing is, did you give an updated estimated book value as of today?

I did say we were up about 4.5% through Wednesday.

Yeah you did, right. I missed that one, but I appreciate the color. Thank you.

Our next question comes from Doug Harter with UBS.

You continued kind of modest capital actions in the quarter, some small common issuance and some small preferred buyback. Can you talk about how you're thinking about capital structure and kind of the ability to raise capital going forward?

Yes. Doug, it's John. Yes, I think in terms of capital structure, we feel like we're in a better place than we've been. It's been improving. So that's -- we're happy about that. As far as the ATM goes, we do selectively access the ATM when the common stock provides clear benefits to shareholders. And we continue to view the ATM as the most efficient mechanism for raising capital. It was a pretty modest issuance during Q4 and conditions were slightly better in -- have been better in Q1. So you'll get an update later this month or actually in February when we report our monthly dividend, we'll provide more color on that.

[Operator Instructions] Our next question comes from Jason Stewart with Compass Point.

Just following up on the capital raising, just putting it in context with the investment environment. Is the decision on the ATM solely where the stock is? Or is part of this equation, what the pro forma ROEs look like? And on that front, would additional government action like an increase to the limit of the GSEs or removal of the PSPA cap or like a standing repo facility change your view of a spread range for MBS and change your view of capital raising on the second half of that?

Yes. I'll start with the first part, and I'll let Brian tackle the harder part, second part. I think it is a combination of things when we make a decision on whether to issue. I mean it obviously price to book is important. I mean that's the first metric. And then after that, it's other accretive investment opportunities. And so we tend to look at it as through the prism of how long is the payback period in terms of, okay, we're making accretive investments. And if we're trading slightly below book, we need accretive investments. If you're trading above book, you'd like to have accretive investments. But. Yes, I mean, that's how we kind of look at it. It's a combination of those 2 things. And then the second part of the question.

Yes. I would just add to that just -- this is Brian, Jason. Yes. I would just add, those are certainly kind of more quantitative aspects of it. There is a qualitative aspect as well, just, I guess, even economies of scale on reducing expenses, improving liquidity in the stock. Those are all things that kind of go into the factor on whether we are using -- utilizing ATM or not. As far as available ROEs, I did mention as of year-end, spreads versus SOFR were still pretty attractive around 140. We've seen about 10 basis points of tightening since then. So knock 1% or 2% off the available ROEs that we're seeing. But I think with the presence of the GSEs being more substantial now and being more prescriptive, that does help reduce volatility, brings greater comfort into potentially higher leverage. So I think there's a lot of positive things that despite slightly lower ROEs that there's a lot of reasons to kind of like the space right now.

Yes. Okay. That's helpful. But on the government intervention side or the presence of GSEs, is there anything that would sort of get you to the next level where it's less of a backstop view and more of the view that it's a tighter spread range and a lower spread range?

Yes, lower than where we are now?

Yes.

Yes. Certainly, if there was an announcement that they increased the caps from currently to $450 billion. That would be a signal. And maybe as we move along here throughout the year, if we start to see that the pace of purchases has increased notably. I think in December, the GSEs added a combined $24 billion between loans and mortgages, agency mortgages. So I think if we were to see that pace continue to increase, that would be a pretty clear signal that at some point, the administration or the treasury and the FHFA plan to increase those caps. And so that could potentially take us into another spread regime and take us another 10 to 15 basis points tighter from here.

And our last question comes from Eric Hagen with BTIG.

All right. So spreads have already tightened a lot. How should we think about the book value sensitivity and just like the overall upside to further spread tightening? Like would you say that the sensitivity or the magnitude is kind of similar as when spreads were relatively wider? Or how should we think about the magnitude because of the fact that spreads are kind of reset tighter?

Eric, it's -- sorry, didn't mean to cut you out there. I would say the magnitude of the change in book value to spread changes is the same, just given that our leverage is relatively in line with where it has been here recently. But our expectation for further spread tightening is significantly reduced. And so we kind of -- we saw a lot of spread tightening in 2025. We certainly would not expect that to occur unless there are, again, like I just mentioned, significant changes in the caps for the GSEs and their use of those retained portfolios. So we're not really expecting significant spread tightening from here. The $200 billion of purchases is largely priced into the market as we sit here today. So unless we start to see banks come in, in greater size and also increased caps. We don't necessarily expect spreads to tighten much. The expectation is that the longer we kind of stay at these spread levels, we'll see kind of money managers start to sell a little bit into it and kind of keep us here as opposed to taking us tighter.

And at this time, I'll turn the call back over to the speakers.

Okay. Well, thank you, everybody, for joining us, and we will talk to you next month. Thank you.

Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.