Invesco Mortgage (IVR) Earnings Call Transcript

Image source: The Motley Fool.

Date

Friday, October 31, 2025 at 9:00 a.m. ET

Call participants

Chief Executive Officer — John Anzalone

Chief Investment Officer — Brian Norris

Need a quote from a Motley Fool analyst? Email pr@fool.com

Takeaways

Book value per common share -- Increased 4.5% to $8.41 at the end of Q3 2025, reflecting gains across agency mortgage-backed securities.

Economic return -- Delivered an 8.7% economic return, combining book value growth with a $0.34 dividend.

Leverage -- Debt to equity ratio rose to 6.7 times from 6.5 times, attributed to a shift away from preferred stock in the capital structure.

Common stock issuance -- Raised $36 million through the ATM program, focused on benefiting existing shareholders.

Investment portfolio -- Totaled $5.7 billion at the end of Q3 2025, including $4.8 billion in agency mortgages and $0.9 billion in agency CMBS, with $423 million in unrestricted cash and unencumbered investments at the end of Q3 2025.

Agency RMBS portfolio growth -- Increased 13% quarter over quarter, primarily through purchases of 4.5% and 5.5% coupons, using proceeds from common stock issuance.

Hedge ratio -- Declined from 94% to 85% in Q3 2025, with hedge composition shifting modestly toward treasury futures (77% swaps by notional, 63% swaps by dollar duration).

Current coupon spreads -- Ended near 170 basis points for the five- and ten-year silver blend, aligning with levered gross returns in the upper teens.

Preferred stock buybacks -- Bought back $2 million in preferred equity with minimal impact on capital structure.

Book value update -- Management estimates book value rose roughly 1.5% since the end of Q3 2025.

Summary

Invesco Mortgage Capital (NYSE:IVR) reported significant book value and economic return growth in Q3 2025. Supported by favorable agency RMBS performance and rising leverage, management highlighted a disciplined approach to capital structure via both equity issuance and targeted preferred buybacks. Shifts in hedge composition, persistent focus on low net duration, and strategic investment in specified pools reflected adaptation to industry volatility and changing monetary policy.

Brian Norris stated, "levered gross returns were in the upper teens. So net returns were kind of mid-teen area," supporting dividend sustainability at current levels.

Management does not plan share buybacks due to ongoing "relatively accretive investment opportunities" according to John Anzalone but would consider repurchases if persistent price-to-book discounts emerge and alternative opportunities fade.

The company indicated a slight increase in model duration risk due to more pools at premium prices. The company aims to keep empirical duration near zero over time.

Norris noted a current preference for interest rate swaps over treasury futures, anticipating swap spread normalization to benefit the portfolio.

Industry glossary

Specified pools: Mortgage-backed securities bundles with defined characteristics (e.g., loan size, location) that can reduce prepayment risk compared to generic collateral pools.

Pay-ups: Premiums paid by investors for specified pool MBS, priced above generic collateral, reflecting prepayment protection or other desirable attributes.

ATM program: At-the-market equity offering program enabling real-time issuance of common stock, often used to strengthen capital base without large block sales.

CPR (Conditional Prepayment Rate): Annualized measure of principal prepayment speed for mortgage bonds, indicating borrower refi and turnover activity.

Full Conference Call Transcript

The strong momentum that began in mid-April continued throughout the third quarter, as expectations for easing monetary policy, strong corporate earnings, and improved economic growth fueled rallies across the financial markets. Financial conditions remained accommodative as volatility measures declined sharply and equity markets performed well, with the S&P 500 Index and NASDAQ both posting strong gains. Inflation measures continue to run hotter than the Federal Reserve's 2% target over the quarter. The headline consumer price index rising to 3% in September, up from 2.7% in June. While the core CPI increased from 2.9% to 3%.

Investor expectations for future inflation seen through TIPS breakeven rates increased modestly, reflecting concerns about the potential impact of fiscal and trade policies on consumer prices. Meanwhile, prior to the pause in data caused by the government shutdown on October 1, labor market data pointed to continued sluggish growth. The economy added an average of 51,000 jobs in July and August, down slightly from 55,000 per month in the second quarter, while the headline unemployment rate increased to 4.3% in August. Despite persistent inflation above the Fed's target, the FOMC lowered its benchmark federal funds target rate by 25 points in mid-September, citing signs of a weaker labor market.

On Wednesday, the FOMC cut its target rate an additional 25 basis points to a range of 3.75% to 4%, and announced the end of quantitative tightening. Futures pricing now indicates that investors expect three more cuts before the end of next year. Interest rates declined across the treasury yield curve during the quarter, with shorter maturities leading the way. This also reflected market expectations for a more accommodative policy stance from the Federal Reserve and continued weakness in the labor market. Industry volatility declined notably throughout the quarter on growing consensus for easing monetary policy.

As a result, agency mortgages performed well during the third quarter, benefiting from the persistent decline in new interest rate volatility as well as the overall supportive environment for risk assets. While demand from commercial banks and overseas investors remained relatively subdued, steepening of the yield curve in the front end improved investor sentiment for agency mortgage GAAP performance was broadly distributed across the thirty-year conventional mortgage coupon stack with discount coupons recording the largest gains. Performance in higher coupons was dampened by elevated prepayment risk, as thirty-year mortgage rates declined approximately 50 basis points during the quarter. Positively, premiums on specified pool collateral improved in higher coupons as investors sought prepayment protection.

Agency CMBS risk premiums quarter over quarter as investor demand increased with broader financial markets. These factors led to a 4.5% increase in book value per common share to $8.41 at quarter end. And when combined with our $0.34 dividend resulted in a positive economic return of 8.7% for the quarter. Leverage ticked up slightly as our debt to equity ratio increased to 6.7% at the end of the quarter, up from 6.5 times as we continue to reduce the percentage of our capital structure comprised of preferred stock and position the company to further benefit from positive Agency RMBS performance.

During the quarter, we raised $36 million by issuing common stock through our ATM program, maintaining a disciplined approach to ensure that this activity benefits existing shareholders. At quarter end, our $5.7 billion investment portfolio consisted of $4.8 billion agency mortgages and $0.9 billion agency CMBS. We retained a sizable balance of unrestricted cash and unencumbered investments totaling $423 million. As of last night's close, we estimate book value was up approximately 1.5% since quarter end. Given the notable decline in interest rate volatility, we remain constructive on agency mortgages and we view near-term risks as balanced following its recent strong performance. Our longer-term outlook for this sector remains favorable.

As we expect investor demand to broaden given lower interest rate volatility, a steeper yield curve, attractive valuations, and the end of quantitative tightening. In addition, Agency CMBS continues to offer attractive risk-adjusted yields and diversification benefits relative to our agency mortgage holdings, supported by its stable cash flow profile and lower sensitivity to industry fluctuations. Lastly, we believe anticipated changes to bank regulatory capital rules would increase investor demand for agency mortgages and agency CMBS, providing further tailwinds for both sectors. Now I'll turn the call over to Brian to provide more details.

Brian Norris: Thanks, John, and good morning to everyone listening to the call. I'll begin on Slide four, which provides an overview of the interest rate markets over the past year. As depicted in the chart on the upper left, despite further easing of monetary policy in September, treasury yields declined only modestly during the quarter. As the deterioration in employment data was offset by robust economic growth, fueled in part by the boom in AI investment. Positively, the yield curve continued to steepen, with two-year treasury yields falling 11 basis points while thirty-year yields were down just four basis points.

The difference between two-year and thirty-year treasury yields ended the quarter at 112 basis points, roughly 65 basis points steeper than a year ago, and remain supportive of longer-term investments such as our Agency RMBS and Agency CMBS. The chart in the upper right reflects changes in short-term funding rates over the past year, with the third quarter highlighted in gray. While financing capacity for our assets remained ample, and haircuts unchanged, one-month repo spreads began to indicate funding pressures in late September, and continued into October, widening approximately five basis points. Steady issuance of T-bills caused dealers to become very low in collateral, squeezing balance sheets and putting upward pressure on repo rates.

We believe the FOMC announcement on Wednesday to end quantitative tightening at the November was largely in response to this pressure but further adjustments may be necessary before repo spreads can unwind the recent widening. Lastly, the bottom right chart highlights the significant decline in implied interest rate volatility since April. This improvement has provided a tailwind for risk assets in recent months, particularly Agency RMBS, and is largely driven by diminishing tail risks across fiscal, monetary, and trade policies, as well as potential deregulation measures that should encourage greater investment in fixed income securities. Slide five provides more detail on the agency mortgage market. In the upper left chart, we show thirty-year current coupon performance versus U.S.

Treasuries over the past year, highlighting the third quarter in gray. Agency mortgage performance was impressive during the quarter, as the decline in interest rate volatility supported persistent demand for money managers and mortgage rates, while net supply continued to undershoot expectations. Although bank and overseas demand remained subdued, steady inflows into money managers and robust capital raising by mortgage rates helped offset the weakness, resulting in strong returns to the sector. Thirty-year mortgage rates declined during the quarter, as tighter mortgage spreads, lower interest rates, and compression in the primary-secondary spread led to a decline of nearly 50 basis points.

This decline in mortgage rates dampened the performance of higher coupons relative to those lower in the stack, as investors were reluctant to increase prepayment risk in their portfolios. While generic collateral and discount coupons outperformed treasury hedges by 90 to 130 basis points, similarly, generic collateral in 66.5% coupons outperformed by a more modest 30 to 70 basis points. In the upper right-hand chart, we show higher coupon specified pool pay-ups which are the premium investors pay for specified pools over generic collateral and are representative of the bonds that IVR owns. Positively, pay-ups improved during the quarter, offsetting a portion of their underperformance relative to lower coupons. Given increased investor demand for additional prepayment protection in premium coupons.

Although IVR's prepayment fees were relatively unchanged during the quarter at just over 10 CPR, higher coupons did indicate a faster refi response to the decline in mortgage rates in September. And we expect a similar response in speeds this month. This recent increase in refinancing activity is expected to be somewhat short-lived, however, as increased refi efficiencies result in swifter responses and reduced lag times, with November speeds expected to decline. We continue to believe that owning prepayment protection via specified pools, particularly in premium price holdings, remains a beneficial way to hold attractively priced mortgage exposure. Slide six details our Agency RMBS investments and summarizes investment portfolio changes during the quarter.

Our Agency RMBS portfolio increased 13% quarter over quarter, as we invested proceeds from ATM issuance, and maintained leverage as book value improved. The majority of our net purchases occurred in 4.5% versus 5.5% coupons, with a decline in our 66.5% allocations as a result of paydowns, and the growth in the overall portfolio. Although we continue to focus our specified pool allocation on prepayment characteristics, that are expected to perform well in both premium and discount environments. Price appreciation in our holdings has resulted in a higher percentage of our pools valued at premium dollar prices.

Therefore, we remain most comfortable with lower loan balance specified pool stories, we increased our exposure to borrowers with higher loan to value ratios given our expectation for slowing home price appreciation resulting in a reduced refi response for these borrowers. Overall, we remain constructive on Agency RMBS, as supply and demand technicals are favorable and lower levels of interest rate volatility should continue to encourage strong demand for the sector. We believe near-term risks have become more balanced following recent outperformance, with nominal spreads tightening approximately 20 basis points during the quarter.

However, valuations remain attractive with the current coupon spreads in the five and ten-year silver blend ending the quarter near 170 basis points, equating to levered gross returns in the upper teens. Slide seven provides detail on our agency CMBS portfolio, Risk premiums tightened during the quarter consistent with broader financial markets. Given the more attractive relative value and agency RMBS, we did not add to our Agency CMBS position during the quarter, and maintained current holdings with our allocation declining modestly due to the growth in the portfolio. Despite the lack of new purchases, we continue to believe Agency CMBS offers many benefits, mainly through its prepayment protection and fixed maturities, which reduce our sensitivity to interest rate volatility.

Leveraged gross ROEs are in the low double digits and consistent with ROEs and lower coupon agency RMBS, and we have been disciplined on adding exposure only when the relative value of Agency CMBS and Agency RMBS accurately reflects their unique risk profiles. Financing capacity has been robust, as we continue to fund our positions with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation as the relative value becomes attractive, recognizing the overall benefits to the portfolio as the sector diversifies risks associated with an Agency RMBS portfolio. Slide eight details our funding and hedging book at quarter end.

Repurchase agreements collateralized by our agency RMBS and Agency CMBS investments increased from $4.6 billion to $5.2 billion, consistent with the increase in our total assets while the total notional of our hedges increased from $4.3 billion to $4.4 billion as our hedge ratio declined from 94% to 85%. The table on the right provides further detail on our hedges at year end. The composition of our hedges shifted modestly towards treasury futures quarter over quarter, with 77% of our hedges consisting of interest rate swaps on a notional basis. While on a dollar duration basis, the allocation declined to 63% given a higher allocation interest rate swaps closer to the front end of the curve.

Yield swap spreads widened during the quarter, unwinding a portion of the tightening experienced in the second quarter, serving as a tailwind for our performance. Despite the recent widening, we continue to believe swap spreads are still historically tight and should continue to normalize, benefiting the company and we maintain our preference for interest rate swaps over treasury futures. Slide nine provides detail on our capital structure, and highlights the improvement made in recent quarters to reduce our cost of capital. Further improvement in the capital structure remains a focus of our management team, as we seek to prudently maximize shareholder returns.

To conclude our prepared remarks, financial market volatility has declined notably since the beginning of the second quarter, resulting in strong performance for most risk assets in the last five months. IVR's economic return of 8.7% during the third quarter is a result of that positive momentum, but also reflects our disciplined approach to capital activity and our focus on shareholder returns. In recent years, we have taken significant yet prudent steps towards improving our capital reducing the cost of capital to our common stock shareholders. We remain committed to that approach as we seek to further reduce expenses while enhancing returns and improving scale.

We believe our liquidity position provides substantial cushion for further potential market stress while also providing sufficient capital to deploy into our target assets as the investment environment evolves. While we view near-term risks as somewhat balanced, we believe further easing of monetary policy will lead to a steeper yield curve and lower interest rate volatility, both of which will provide a supportive backdrop for agency mortgages over the long term. Thank you for your continued support for Invesco Mortgage Capital, and now we will open the line for Q&A.

Operator: We will now begin the question and answer session. Again, press star 1 to ask a question. Our first question comes from Trevor Cranston with Citizens JMP. Your line is open. You may ask your question.

Trevor Cranston: Hey, thanks. Good morning. You were just talking about the changes in the hedge portfolio moving a little bit towards treasuries this quarter. Can you talk in general about kind of where your net duration exposure is at? And if you have any general position on with respect to the shape of the yield curve?

Brian Norris: And then a second question on the hedge portfolios, how you guys are thinking about potentially using options given the decline in the cost of volatility? Thanks.

Trevor Cranston: Hey, sure, Trevor. Good morning. Thanks for the question. Yeah, I'll tackle the yield curve first. We've kind of had a bit of a steepener on for a while now, and we started to reduce that a little bit, preferring to move more of our hedges into the front end of the curve. Obviously, the Fed did cut rates on Wednesday. Chair Powell did express that future cuts are a little less certain than the market was expecting. And so I think that would result in a bit of a flatter curve than what we've been seeing. So as potentially those cuts start to get priced out of the market.

So we like being we're still positioned for a bit of a steepener, but we did reduce that just a little bit. As far as the overall net duration of the portfolio, we like we have historically preferred to have empirical duration as close to zero as we can get it. But given the fact that most of our pools or a larger percentage of our pools are now in premium prices, we do think that we have a little bit more risk towards a rally in interest rates. And so at least from a model duration perspective, we are running model duration just slightly long versus kind of being more historically flat.

So we still do prefer interest rate swaps. We do think that, like we said, we do expect swap spreads to continue to normalize. And as that occurs, we'll kind of continue to move more into treasury futures, just given some of the benefits that we see there from a liquidity and margining perspective. But right now, we still think that there's we still have a bit of widening to do in there. So we'd like to lean more heavily into swaps.

Trevor Cranston: Got it. Okay. That's helpful. And then with the tightening that we saw in agency spreads, in the last quarter, you talk about where you're seeing returns on kind of marginal capital deployment relative to the existing dividend level? Thanks. Yeah.

Brian Norris: So at the end of the quarter, levered gross returns were in the upper teens. So net returns were kind of mid-teen area. So that's pretty consistent with where our dividend to book yield is. So we feel like it's supportive of that level. And we've seen a little bit of compression so far in October just given further outperformance in mortgages. Recently, we have seen those levels kind of back up a little bit since the Fed meeting. So I think mostly in line with what the earnings power of the portfolio currently is.

Trevor Cranston: Got it. Okay. Appreciate the comments. Thank you.

Operator: Thank you. Next question comes from Doug Harter with UBS. Your line is open. You may ask your question.

Doug Harter: Thanks and good morning. Can you talk about your appetite for continuing to kind of change the capital structure with the buyback of the preferred and issuance of common? And, you know, I guess, as you look at those transactions, you know, the combined effect of that transaction, did that have any impact on book value in the quarter?

John Anzalone: Yeah. Hey, Doug. It's John. Yeah. On the preferred buybacks, I mean, those are relatively small. Obviously, I think there is you know, that so the impact was pretty minimal on that, around $2 million, we bought back. So, I mean, those you know, it's just harder sliding on those because the volume of trading is relatively low. So, you know, we'll continue to buy those back as long as that makes sense in their trading below 25, which so that you know, didn't have a big impact on the capital structure, although it went the right directions. Oh, and then, yeah, and then, issue and comment.

Obviously, in terms of common stock, I mean, we're trading at a been trading at a discount. We have not issued any recently, which would go in the right direction for you know, improving the capital structure. In terms of going the other way in terms of buybacks. You know, we have been active in the past. Buying back shares. Typically, we look for you know, times when the price to book ratio is persistently low, over extended period of time. I mean, it kind of bounces around quite a bit. And so, you know, if we look for persistent, discount and also when investment opportunities are not accretive.

So, you know, right now, we're still seeing relatively accretive investment opportunities. So know, we're not buying back shares now, but certainly, you know, if those conditions occur, we will certainly look at doing that.

Doug Harter: Great. And then moving back to the investment opportunities, just how you're seeing the relative value between agency CMBS and agency MBS today?

Brian Norris: Yeah. Hey, Doug. It's Brian. I mean, ACRMBS continues to provide a more attractive ROE. I think Agency CMBS, like I said in my comments, the return potential there is a bit more in line with what we would call, you know, lower coupon Agency RMBS and continues to have a lot of benefits. So I think to the extent that Agency RMBS is still mid to upper teens, we would probably look to see a bit more compression between the two before we would look to significantly move more towards Agency CMBS. But we do like continuing to hold those securities as they do provide a lot of convexity benefits for the portfolio. Great. Thank you.

Operator: Thank you. At this time, I'm showing no further questions. Turn the call back over to the speakers.

John Anzalone: Thank you, everybody, again for joining. And look forward to speaking to you next quarter.

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

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.