Economic Return: Positive economic return of 2.6% for the quarter. Dividend: $0.34 per share. Book Value: Declined by $0.11 to $8.81 at the end of the quarter. April Book Value Estimate: Between $7.74 and $8.06. Agency RMBS Portfolio Growth: Increased by 9.5% quarter-over-quarter. Repurchase Agreements: Increased from $4.9 billion to $5.4 billion. Hedge Ratio: Decreased from 95% to 85%. Leverage Ratio: Reduced to mid-6s from 7.1 times debt to equity at the end of March.

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Release Date: May 08, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

Invesco Mortgage Capital Inc (NYSE:IVR) reported a positive economic return of 2.6% for the first quarter of 2025. The company maintained a stable funding market for its assets, with haircuts unchanged and one-month repo spreads remaining between SOFR plus 15 basis points to 18 basis points. Invesco Mortgage Capital Inc (NYSE:IVR) increased its agency RMBS portfolio by 9.5% quarter-over-quarter, focusing on higher coupon agency RMBS, which are expected to benefit from a decline in interest rate volatility. The company successfully reduced its leverage ratio from 7.1 times debt to equity to the mid-6s, reflecting a cautious approach amidst market volatility. Invesco Mortgage Capital Inc (NYSE:IVR) maintained a robust financing capacity for its agency CMBS purchases, with multiple counterparties at attractive levels.

Negative Points

The company's book value per common share declined in April, with an estimate for April 30th between $7.74 and $8.06. Agency mortgages significantly underperformed treasuries due to increased interest rate volatility and risk asset sell-offs. Swap spreads tightened significantly, negatively impacting the company's book value. The company remains cautious on agency mortgages in the near-term due to elevated interest rate volatility and continued policy uncertainty. Invesco Mortgage Capital Inc (NYSE:IVR) sold its remaining credit investments and is now 100% agency, indicating a lack of interest in adding credit exposure in the current environment.

Q & A Highlights

Q: Can you discuss the decision to reduce leverage in April and how you manage during volatile periods? A: Brian Norris, Chief Investment Officer: We reduced leverage by about half a turn in April due to increased uncertainty regarding monetary, fiscal, and trade policy. This uncertainty impacts demand, particularly with bank buying being light and potential delays in bank demand. We let leverage drift to a certain point but decided to take action when it reached the high end of our range.

Story Continues

Q: Where do you see returns on an incremental basis today? A: Brian Norris, Chief Investment Officer: Spreads are very attractive, particularly versus swaps, with levered ROEs in the low 20s on higher coupons.

Q: Were there any changes to the hedge portfolio in April? A: Brian Norris, Chief Investment Officer: We increased our hedge ratio due to uncertainty about near-term monetary policy. The mix between swaps and treasuries remains within our stated range, with no notable shift.

Q: Does the smaller portfolio size impact your view on the dividend level? A: John Anzalone, Chief Executive Officer: We recently reduced the dividend and are still comfortably covering it. The portfolio's ROEs and reinvestment opportunities are supportive, so we have no concerns about the dividend at this time.

Q: How do you view the opportunity set in Agency today compared to the prior peak in spreads? A: Brian Norris, Chief Investment Officer: Spreads are consistent with previous widening episodes, making the environment attractive. However, potential reinvigoration of inflation could delay monetary policy adjustments, so we are more conservative with leverage compared to last fall.

Q: How do you view the relative value of low loan balance versus credit-constrained pools? A: Brian Norris, Chief Investment Officer: Loan balance pools are fully priced but offer prepayment certainty. With economic uncertainty, we see increased demand for lower FICO pool borrowers. Our rotation from lower to higher coupons also influences our allocation.

Q: What is your outlook on the forward rate and its impact on the hedge portfolio? A: Brian Norris, Chief Investment Officer: We see greater uncertainty about policy, with economists divided on the number of cuts. We aim to be conservative, keeping hedge ratios and leverage close to home to manage potential swings in either direction.

Q: Do you see any opportunities in commercial credit versus RMBS? A: Brian Norris, Chief Investment Officer: We are hesitant to add credit exposure in this environment and have sold our remaining credit investments. We are 100% agency and do not anticipate changing this in the near-term.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.

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