Invesco Mortgage Capital Inc (IVR) 2010 Q4 法說會逐字稿

This presentation and comments made in the associated conference call today may include statements and information that constitute forward-looking statements within the meaning of the US securities laws. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, targets, expectations, anticipations, assumptions, estimates, intentions of future performance. Forward-looking statements also include statements regarding our ability to deploy capital from follow-on common stock offerings and our ability to maximize earnings and dividends; the position of our portfolio for 2011; our focus for 2011; our ability to repeat performance trends in net income, net interest income, return on equity, portfolio yields, and expense ratios, interest rates and their effect on prepayment risks; the existence of favorable market conditions for mortgage assets and our ability to capitalize on those opportunities; the availability of financing, repurchase agreements, funding costs and terms, our portfolio composition and our ability to adjust to generate targeted returns; the constant repayment rates of mortgage-backed securities; the ability of our hybrid REIT strategy to capture available opportunities; our current focus on agency bonds, legacy credit returns; the ability of our diversified portfolio to minimize book value volatility and maximize dividends; credit performance of mortgage-backed securities and commercial loans; the new issue CMBS market; the exploration of loan opportunities; our ability to maintain a stable book value and our ability to complete additional follow-on common stock offerings.

In addition, words such as anticipates, believes, will, expects and plans, as well as any other statements that necessarily depend on future events, are intended to identify forward-looking statements.

Forward-looking statements are not guarantees. They involve risks and uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions, Risk Factors, Forward-looking Statements, and Management's Discussion and Analysis on Financial Conditions and Results of Operations, and our Annual Report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities & Exchange Commission's website at www.SEC.gov.

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Good morning, ladies and gentlemen. Welcome to Invesco Mortgage Capital's investor conference call March 1, 2011. (Operator Instructions). As a reminder, today's conference is being recorded.

Now I would like to turn the call over to your speakers today, Richard King, Chief Executive Officer; John Anzalone, Chief Investment Officer; Don Ramon, Chief Financial Officer. Mr. King, you may now begin.

Welcome, everybody, to the Invesco Mortgage Capital fourth-quarter 2010 earnings call. On the call with me today are John Anzalone and Don Ramon. We will discuss how our business fared in the fourth quarter for all of 2010, also our outlook for 2011, and at the end open it up for some Q&A.

IVR management has consistently stated that our goals are to, one, generate earnings which will allow us to pay an attractive dividend, and two, maintain a relatively stable or increasing book value. So how do we fair versus our goals?

On slide two of our deck, in the fourth quarter, we earned $1.00 per share and paid out $0.97 per share in dividends. For all of 2010, we had earnings of $3.78 per share and paid dividends of $3.49 per share for the year. Checkmark next to goal one.

Our book value at 12/31/10 was $20.49 per share, which is up $0.21 in Q4 and up $0.10 for the year. Checkmark next to goal two.

We also saw opportunity to grow in 2010 and were able to raise a total of $869 million in additional capital. As a result of the growth, we were able to reduce our G&A expense ratio by 40% to about 1.8%. After each race, we efficiently put the new capital to work in order to meet goals one and two. The liquidity of our stock also improved. We gained many new investors, and we better positioned IVR for coming changes in housing finance.

So what differentiated IVR in 2010 and allowed us to achieve these goals? First, early in the year, we largely avoided agency buyouts. Then, as the year played out, we saw definitive proof that our asset selection was working as our agency prepays were well better lower than others and our non-agencies earned higher than expected returns due to faster prepaids and lower severities.

The flexibility in our hybrid REIT model is also a differentiator. We used the flexibility to balance risk to our income and book value and to keep interest rate risks and leverage lower than a pure agency model.

We also used the flexibility to adjust asset mix, putting capital to work in the best risk-adjusted returns in the entirety of the US mortgage market across residential or commercial, across agency or non-agency, securitized or whole loans, and senior or subordinate position.

So we turn to page three of the deck, and we turn the page on a great year in 2010, but we're excited about the opportunities we see in 2011. We believe opportunities are many,and we have the breadth and depth to benefit from these opportunities.

First,the backup in long-term rates and resulting steeper yield curves make our agency strategy of buying, financing and hedging carefully selected pre-pay protected MBS as attractive as ever.

We also liked the opportunities we see and are seeing to buy new conservatively underwritten CMBS and RMBS. We expect significant opportunity as a result of GSE reform. We intend to post our views of the administration's white paper and its likely impact on IVR's shareholders shortly.

In summary, we think the likely outcome is a reduced government role where private capital like IVR get essentially three new opportunities -- an extended nonagency market with better yield due to lower agency confirming balances, lower conforming loan to value ratios, and increased guarantee fees; second, an opportunity to provide credit in front of agency guarantees and earn a return commensurate with that risk; and third, an opportunity to bid on assets sold from GSEs as they have to comply with portfolio reduction targets.

These opportunities will actually increase the odds of short-term rates remaining low in our view. The prospects of tighter fiscal policy and reduced support for housing means the Fed will be slower to tighten their policy.

IVR is positioned well for that environment with a portfolio of a balance between rate and credit risk. We have sufficient hedges to protect against a rise in loan rates, and at the same time, we are taking advantage of low borrowing costs and attractive asset spreads. We continue to focus on our two goals, to earn an attractive dividend and to provide stability in our book value.

With that, let me yield the floor to Don to cover the financials.

Thank you, Rich. We are very pleased with our performance in Q4, and our results are highly influenced by the capital raises we completed in the quarter. Net income came in at $40.9 million or $1.00 per share, and the net income was 48% growth from Q3, and we saw a similar percentage increase in net interest income. The EPS compares favorably to Q3, which was $1.01, which we still think is a great performance with the growth of the Company.

The other contributor to net income for the quarter was approximately $2.4 million from our PPIP investment, which we do consider part of our core portfolio of earnings and an additional $2.4 million in gain on sale of securities. For the quarter we paid out a $0.97 dividend, and for the year, it was $3.49. We consider both to be very strong considering what we accomplished while growing the Company.

Year-to-date EPS came in at $3.78, which was $0.41 improvement from 2010 and, again, was driven by the capital growth during the year. The team did a great job investing the capital quickly, which was key to our earnings improvement.

Turning to page five, we will take a look at some of the key performance trends. With the fourth-quarter capital raised invested more heavily in agency RMBS that John will discuss in a few minutes, you can see that the portfolio yield has declined as the -- as this became a larger percentage of the portfolio. By taking a little higher leverage on our total average, we were able to hold the growth ROE at 17.4%.

We have talked a lot about our Company growth during the year, but the graph on the lower right of this page highlights one of the key elements. For the year we were able to reduce our expense ratio by 40% down to 1.8%. We have a great platform that allows us to efficiently grow our business.

Now let me turn it over to John to get into the details of our portfolio.

Thank you, Don. Over the next few slides, I will go through the composition of the portfolio, as well as where we are finding value in the various sectors.

As Rich mentioned, we raised capital twice during the fourth quarter, and the chart on the upper left of slide six illustrates how our assets have grown. One of the big benefits of our hybrid strategy is that it allows us to capture the best available opportunities.

As you can say see on the chart on the lower left, while we have continued to add assets in CMBS and nonagency RMBS, our focus recently has been on the agency trade, and agencies now make up just under half of our equity allocation. As such, our overall leverage has increased to 4.1 times from 3.4 times.

Slide seven gives a little bit more detail on how the composition of the portfolio has evolved over time. Agencies now make up 48% of equity, non-agencies are at 37%, CMBS represents 9.5% with our investment in PPIP making up the balance.

On slide eight, I will go through the agency trade. During the fourth quarter, the stars aligned for the levered agency trade as a steep yield curve, cheaper MBS valuations, and tight swap spreads all benefited this opportunity. Further payouts on the type of specified pool collateral that we favor were very attractive. We continue to focus on low loan balance pools, pools comprised of credit impaired borrowers, as well as pools made up of investment properties.

We also continue to favor a mix of higher coupons $0.15 and $0.30 and have also begun to selectively add some recent production hybrid ARM paper. Prepaid performance was once again a highlight with fourth-quarter speeds in our agency book in the mid to low teens. Also, from what we have seen so far in 2011, speeds on our pools have slowed down even further.

So leverage on the agency book was down temporarily to 6.9 times at year-end as we were investing the proceeds from our December offering.

Our duration gap remains at one-half to one year, and given our stable book value in the face of sharply higher rates this quarter, our empirical duration gap is close to zero.

As far as hedging goes, we had approximately 74% of our agency repo hedged, and importantly we extended the duration of our hedges, which obviously help with the material steepening of the curve we saw during the fourth quarter.

Moving on to slide nine, as I mentioned earlier, although we selectively added non-agencies during the quarter, our allocations fell as we put more money to work in agencies. This resulted in an equity allocation of approximately 37% as rising prices and unchanged fundamentals combined to cause loss adjusted reels yields to become relatively less attractive.

As prices rallied, we moved up in quality, focusing on cleaner legacy bonds, as well as on top of the capital structure new issue Re-REMICs. We would rather own a clean liquid bond than apply leverage and chase prices on lower quality paper when the fundamental credit quality of these bonds has not changed materially. Given our change in focus, our leverage on non-agencies increased to 1.2 times.

At the end of the fourth quarter, we also participated in a Basel III related restructuring trade. This was structured as a credit default swap where we sold protection on a block of legacy nonagency securities owned by a larger European Bank that was looking to obtain capital relief. This was a great trade for us as we were able to capture a return profile that is much more attractive than what we are currently seeing in the cash markets.

Finally moving on to CMBS on slide 10, in CMBS we kept our allocation roughly unchanged as we found opportunities in both legacy paper, as well as in new issue subordinate bonds. The new issue market has rapidly recovered, and we have found good value in new issues that benefit from improved underwriting. We are also able to refinance our TALF loans, which resulted in increased net yields, as well as in better advanced rates. The terms and availability of private repo continue to improve, and we have taken advantage of this both in new issue, as well as in legacy trades. And finally, we are continuing to explore opportunities in the loan space.

That wraps it up for our prepared remarks, and now we would like to open it up for questions.

(Operator Instructions). Bose George, KBW.

I had a couple of little questions. First, I just wanted to ask about the comment you made about the Re-REMICs seniors. A) like how much of that did you buy, and how did the economics of that work? Like how much leverage can you put on it? What kind of spreads do you get, etc.?

Yes, we did several of those trades. I don't have the numbers right in front of me in terms of how many. But basically the advanced rates and the repo terms on those, the advanced rates varied from call it, I think, the best we saw was 12.5% I think up to maybe 15% haircuts on those. So you can figure out the leverage from there that is available, and we are seeing yields probably in the low 4s on that trade.

Okay. So should we assume that the leverage that is available to you is reasonably high, and so we could see those kinds of transactions being levered up whatever, 6 or 7 times?

Yes, we like those trades. They are really stable cash flows. They are really un-impacted even in the worst stress numbers, and we hedged the rate risk and still come out with a really attractive ROE on the trade.

Okay. And then just switching to the other transaction that you mentioned, the CDS, how should we think of that in terms of the returns and the capital allocation, etc. into that one?

On that one, the capital invested was in the low $20 million, and the ROE on the trade is probably around 20%.

Okay. And then lastly, the capital that you guys raised in December, did you give when that was fully deployed by?

Yes, I would say mid-January.

Mid-January, okay. Okay. Great. Thanks a lot.

Steve DeLaney, JMP Securities.

Congrats on a great year. So following up on Bose's question, on the new CMBS trade and you referred to those John as subs, could you be a little bit more specific as far as where in the capital stack, are you looking kind of like single-A, BBB?

Yes, exactly. It was single-A and BBB, and really what we found is that in the new issue market, there is a lot of -- we found a lot of investors chasing the top of the capital structure and a lot chasing the bottom. And we found pretty good value and putting capital to work kind of in the middle there was rewarded.

And are you looking -- those bonds -- we see the new issue kind of the pricing sheets that come. Do you look at those as having like about a 10-year life?

Yes, approximately.

Okay. So you would probably do some sort of hedging?

Absolutely.

Okay. Because those are priced, kind of priced versus the swaps.

Exactly.

Okay. That is helpful. Thanks. And then this is more of a big picture question if you don't mind, sort of on -- because you guys we know what you have available in broad infrastructure within the whole Invesco family. And you have referred several times over the last couple of calls to whole loan opportunities. Could you maybe like on the resi and commercial side just very briefly touch on when and what you might do in the whole loan space?

Yes, on the commercial side, the thing is those trades just have a really long time line. So we have been working on several of those. They did not show up directly in the portfolio in the fourth quarter. But we do see opportunities through working with our real estate team to provide some mezzanine GAAP financing on deals we really like, and we are evaluating those.

And the resi space, we continue to work with dealers to evaluate opportunities to partner and provide financing to new deals. But so far just like in the Re-REMIC trade, we liked the senior bonds. In the new securitization space, new well underwritten whole loans, we actually also like the senior part of those trades better. So we have not yet started on collecting loans to securitize in a new deal. It is just we think that is going to be a great opportunity, but that trade, it is just not time for it yet. But we do like the seniors and some of those.

Okay. And on the commercial, it sounds like that maybe a little farther along, but that would be more like a mezzanine loan or a bridge loan, something of that description?

That is right.

Douglas Harter, Credit Suisse.

I was just wondering, as we go through first quarter, have you seen any sort of changes in your equity allocation in the portfolio?

Not really, and we got ramped, call it, mid-January. So just investing cash flows, but it has been fairly similar. I think may be a little bit more in non-agencies, but as we found some of the Re-REMICs in that, but nothing material.

And as you guys get repayments today, would you still be looking -- what opportunities do you find the most attractive today?

I would say still agencies still look very attractive, although sort of the non-agency side, those opportunities are -- they are a little lumpier, and the agency trade is kind of a continuum where you can always buy agencies any day whereas on non-agencies you have to find the right opportunity. So we have been constantly looking for more opportunities in that, but it's been a little bit chunkier there.

This is Rob. There is a number of CMBS new issue opportunities that we are looking at right now as well. So we are continuing to probably put money to work there as well.

Great. And then just one final one. Your investment in the PPIP declined in the fourth quarter. I was just wondering if you could just talk about that and your expectations for that? Will that continue to ramp going forward, or is that kind of peaking out now?

It really depends on that. On the RMBS side, it is probably peaking out. And obviously since we raised capital and you can't commit more capital to PPIP, that declines as we grow. But when we made that investment, we did commit $100 million because we expected it to grow.

So that is really it for PPIP. We are still evaluating whole loan opportunities for the other side of that fund, the fund, the Invesco Mortgage Recovery Fund. So we will continue to make investments, and it really just depends on what we see there. I think we have only probably deployed about 60% of the $100 million, so it could continue to grow.

Jason Weaver, Sterne, Agee.

Congratulations on the quarter. First of all, can you tell may the approximate cost on the new agency acquisitions and what you view as the main sources of prepaid protection on those new securities?

Yes, I would say the cost is approximately 103. We can get you a more exact number than that on the kind of new stuff.

But we have really tried to keep the same profile in finding tools that are structurally pre-paid protected whether -- I mean loan balance is still a large part of the story. The investment properties, another pretty decent-sized chunk of it, as well as a mix of 15 to 30. We still do like higher coupons, and naturally we are seeing those slow down, as you know -- credit availability and agency roles is just getting tighter and tighter. So I mean that is actually helping the (inaudible) coupon trade. We have actually seen higher coupons perform quite well because of that over the last couple of quarters.

And then one other area that we are actually finding interesting again is in hybrid ARM. We really post our pre-buyouts, we did not like the risk profile there because it was very difficult to obtain pre-paid protection in those pools. But now with some of their recent production pools and rates were a lot higher, we think that some of those bonds are going to have very good return profiles going forward. So we have started to find some decent value in both 5.1s and 7.1s on the new issue front.

Okay. And just along those lines, do you have any color on what experience you have seen in the prepaid losses in a couple of months of this current quarter?

Yes, I mean we have actually seen our prepaids slow down a little bit from where there are -- from where they were at the end of the fourth quarter.

So a couple of CPRs.

A couple of CPRs. I mean at this point, once we are in the -- we are getting close to 10 CPR for the book. It's kind of hard to slow down much more from there. You just have some natural turnover that is going to occur. But we have seen it continue to look pretty good.

Okay. And just changing gears, I wondered if you could talk a little bit more about how, if at all, your hedge -- (technical difficulty) 74%, but have you remapped anything that you actually had on those previously, or are you just adding the new swaps -- (technical difficulty)?

No, we are entirely adding new positions on the swap book. And now we have -- the composition of that swap book has changed a little bit since the last few capital raises in that we have extended the duration of those. So I think on average we are -- it seems to be getting a fourth quarter on average, our swaps are over five years in duration. So we have moved out on the curve.

Got it. Okay. And finally, on the CBS transaction, can you tell me anything about the notional spread that was done at, as well as any kind of detail on the -- (technical difficulty) securities underlined?

Yes, the notional that we did was about $115 million. The spread, the premium we got paid was 300 basis points. And the beauty of it was, I mean it is actually a pretty nice pool underlying, but we are only writing protection for the top 75% of the capital structure. So essentially you have the protection that is afforded and that the underlying bonds are senior bonds, and then the buyer of the protection takes the first 25% bonds. So we don't expect to ever have any losses, and that is just collecting premiums.

(Operator Instructions). Daniel Furtado, Jefferies.

Congratulations on a nice quarter. I have two real quick questions. Help me understand the change of opinion? Was the fourth quarter or if I understand you more correctly the first quarter here the first time you have invested in senior Re-REMICs, or have you had those in the past?

Actually I think the first quarter is when we put money to work in senior Re-REMICs. So yes, actually -- they were not in the portfolio at the end of the year.

Okay. But what is kind of -- I know they are senior cash flow securities, and that is predominately if not entirely your nonagency book, but what is kind of triggering your interest in that type of nonagency security as compared to any other time in the recent past?

A couple of things. One, there has been a really strong Re-REMIC bid for the mezzanine. And so as nonagencies have richened, the senior staff really has not so much. So it kind of became relatively cheaper.

And then the other thing is, since they are highly rated securities, it really helps with the financing. So we are able to get financing at much better levels on those and get it for longer terms and get much better advanced rates.

Got you. Okay. And then the other quick question is, just if you from the standpoint of -- not necessarily has IVR traded whole loans or resi whole loans, but are you hearing anything about whole loan trades going on in the market or not?

On whole loan, are you talking about legacy trades?

No, more from a new production standpoint. Like are you seeing anybody -- obviously there has been one deal in the space, but I'm just wondering if you're seeing something below the surface where investors are trading pools of newly or relatively newly originated whole loans with obviously the intention to one day put those into some type of vehicle?

No. No, there is really not. And, in fact, the banks are really hungry for opportunities to keep loans on balance sheet. And so that is part of the problem. It is very tough to get your hands on that collateral. You have to partner with people, and really it is an investment in the future for the people that are doing it. It is not, as we said before, a very lucrative trade right now. So, yes, there is not a lot of activity in that space.

Excellent. Thanks a lot for your time, and again, congratulations on a nice quarter.

Mr. King, there are no further questions on the phone lines at this time.

Okay. Then thanks, everybody, for listening and for your questions, and that concludes today's call.

Thank you. That does conclude the conference call. Thank you for participating, and you may disconnect at this time.