Invesco Mortgage Capital Inc (IVR) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Invesco Mortgage Capital Incorporated First Quarter 2018 Investor Conference Call. (Operator Instructions)

As a reminder, this call is being recorded. Now I would like to turn the call over to Mr. Tony Semak in Investor Relations. Mr. Semak, you may begin.

Thank you, Amber, and good morning, everyone. To begin, we really want to welcome you to the Invesco Mortgage Capital First Quarter 2018 Earnings Call.

I'm Tony Semak with Investor Relations, and our management team and I are very delighted, as always, that you've joined, as we look forward to sharing with you our prepared remarks during the next several minutes before we conclude with our customary question-and-answer session.

Joining me today are John Anzalone, our Chief Executive Officer; Kevin Collins, our President; Lee Phegley, our Chief Financial Officer; and Dave Lyle, our Chief Operating Officer.

Before we begin, I'll provide the customary forward-looking statements disclosure, and then we'll proceed to management's remarks. Comments made in the associated conference call may include statements and information that constitute forward-looking statements within the meaning of the U.S. securities laws as defined in the Private Securities Litigation Reform Act of 1995, and such statements are intended to be covered by the safe harbor provided by the same. Forward-looking statements include our views on the risk positioning of our portfolio; domestic and global market conditions, including the residential and commercial real estate market; the market for our target assets; our financial performance, including our core earnings; economic return; comprehensive income and changes in our book value; our ability to continue performance trends; the stability of portfolio yields;, interest rates, credits spreads; prepayment trends, financing sources, cost of funds, our leverage and equity allocation.

In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts and future conditional verbs such as will, may, could, should and would as well as any other statements that necessarily depends on future events, are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainty and assumptions, and 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 caption's Risk Factors, Forward-looking Statements in Management's Discussion and Analysis of Financial Condition and Results of Operations in our annual report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission's website at www.sec.gov.

All written or oral forward-looking statements that we make or that are attributable to us are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure, if any forward-looking statement later turns out to be inaccurate.

To view the slides presentation today, you can access our website at invescomortgagecapital.com and click on the Q1 2018 Earnings Presentation link that you can find on the Investor Relations tab at the top of our homepage. There you may also select either the presentation or the webcast option for both the presentation slides and the portfolio -- and the audio.

Again we want to welcome you and thank you so much for joining us today. We really appreciate you being part of our call. And we'll now hear from our Chief Executive Officer, John Anzalone. John?

Good morning, and welcome to IVR's first Quarter earnings call. Joining me to help with Q&A following my prepared remarks will be Lee Phegley, our CFO; Kevin Collins, our President; and Dave Lyle, our COO.

I'll start on Slide 3 with an overview of our first quarter results. Our core earnings were $0.45 per share, which is down from $0.47 in the prior quarter, due primarily to higher funding cost. However, we're pleased that we once again comfortably covered our dividend of $0.42. While core earnings remained strong, continued increases in funding costs could potentially pressure core earnings going forward. On the positive side, higher rates and favorable seasonal factors should work to lower prepayments fees, which would support the core run rate.

Book value ended the quarter at $17.16 which is a 6.5% decrease since March 31. However, since the majority of the move occurred early in the quarter, book value is only down about 1.5% since we announced the level during our last earnings call in the beginning of February. The decrease in book value is due to a combination of widening spreads on agency mortgages, along with the impact of higher rates. Away from agencies, credit spreads performed comparatively well in relation to other fixed-income risk assets, amidst the spade of weakness during the quarter. Seasoned current assets, representative of our holdings, are outperforming more recent vintages as expected and continue to exhibit a strengthening credit profile, as they roll down the curve.

While this was a challenging quarter for book value, the silver lining is that we have seen the reinvestment outlook improve with accretive opportunities available in agency mortgages and in pockets of CMBS. For example, we're seeing hedged ROEs on 15-year fixed-rate agencies at 11% and 30-year fixed-rate agencies at 16%, which are levels that we haven't seen for quite some time. We feel we are positioned well to capture attractive opportunities as they emerge.

Slide 4 breaks out the components of the change in book value. As you can see from the bar chart, the main drivers were the decrease in value in our agency mortgage portfolio, which more than offset the gains in our hedge book. The empirical duration of the portfolio has been running at right around 1.5 years, and we intend to keep our empirical duration in a fairly tight range, given the likelihood that rate volatility persists. The graph on the lower right of the slide shows the volatility of our book value on a trailing 3-year basis.

As you can see, despite this quarter's negative trend, we have continued to reduce the volatility in our book value. As you may have read in our 8-K earlier this week, Jason Marshall, our CIO, is absent on medical leave, and as such, I'll cover the portfolio review section of the presentation.

Slide 6 highlights our diversified portfolio. Our equity allocation remains balanced with 44% in agencies and 56% in credit. This is important because our credit book exhibits favorable duration and convexity characteristics. Credit fundamentals are strong across the board, which I'll highlight a bit later. I'll go through each of the sectors over the next few slides starting with agencies on Slide 7.

Our agency portfolio is well diversified, with the mix consisting of 62% specified pool 30-year collateral, 21% 15-year paper and 15% hybrid ARMs. To specify, pool 30s help mitigate prepayment risk, while the 15s and hybrids are naturally shorter in duration. Prepayment speeds have been well contained as seasonal factors have been largely offset by the impact of higher rates. As I mentioned earlier, our expectations are for prepayments to continue to be benign over the next -- over the coming quarters, as seasonal factors turn to favor slower speeds.

One other factor that has worked in favor of agencies has been relatively favorable financing cost, as the agency repo rates have more closely tracked the OIS rate rather than LIBOR. Given the strongly accretive ROEs available in the sector, we've been active in putting money to work in agencies.

Moving on to commercial credit on Slide 8. Our CMBS portfolio consists of, what is, for the most part, a combination of well-seasoned A/AAA bonds and AA/AAA bonds that are financed at the home loan bank. Fundamentals have been strong, as favorable trends in property prices have provided support for the sector. Despite weakness in spread levels across much of the fixed income universe, spreads on CMBS paper have held in extremely well, modestly tightening during the quarter.

Slide 9 highlights the credit quality of our commercial portfolio. The chart on the left shows the average effect of LTV on our CMBS and CRE portfolios, where they've average ratios of 35% and 68%, respectively. The chart on the right highlights the seasoned nature of our CMBS book. And I point out that our A/BBB bonds are largely from 2014 or earlier. Our commercial loan portfolio continues to run off, with a balance of $212 million remaining and a weighted-average maturity of about 1 year.

Slide 10 covers our residential credit portfolio. This portfolio is also well diversified with 42% in GSC CRT paper, 41% in legacy bonds or legacy Re-Remics and 15% in post-2009 prime paper. Fundamentals are also strong here, as economic strength and healthy consumers are more than offsetting the impact of higher mortgage rates. As you can see through the chart at the bottom of the slide, durations are very low across the portfolio. Spreads here have also been very well supported, as fundamentals -- as positive fundamentals and negative net supply have led the spread tightening during the first quarter. As spreads have tightened, we've seen less reinvestment opportunities, of late, in residential credit, instead favoring agencies and CMBS.

Slide 11 covers the credit quality of our residential portfolio. As you can see from the chart on the left -- I'm sorry, as you can see from the charts on the slide, fundamentals remain strong. The dollar price of the book is largely above $90, and high priced bonds typically exhibit less pricing spread volatility, affording them favorable financing terms. Our legacy positions consists of prime and Alt-A paper, while our CRT positions are concentrated in earlier vintages.

I'll end on Slide 12, in financing. The only real change we saw this quarter was an increase in financing cost consistent with the increase in short-term rates. As I talked about earlier, agency repo rates, which are not exclusively index to LIBOR, lagged the sharp increase in LIBOR. This provided us with a modest benefit relative to our swap hedges, which are all indexed to LIBOR. One other thing I'll point out is that we paid off our exchangeable note in March out of available cash. So that ends my prepared remarks, and I'll open the call up for Q&A. Amber, are you able to provide instructions for queuing up for Q&A?

(Operator Instructions) Our first question will be coming from Doug Harter of Crédit Suisse.

Can you talk about -- you mentioned, John, that your pay-ups -- can you talk about, kind of, how those performed in rising rate? And, kind of, I guess how much more, kind of, pay-ups you have on the specified pools? And whether there's risk to that, if rates go further?

Yes. I mean, we did -- obviously, pay-ups are going to be correlated with rates to some respect. Most of the pools that we've purchased recently have been lower pay-up type bonds, and they're more current coupon, and so we haven't paid up as much. We're not buying very high pay-up premium bonds. So we've seen a little bit of decrease there, but not significant. I mean I think, we -- what we saw in spread widening was more just general mortgage spread widening. And as prepays slow, I mean, our book is -- generally speaking, prepaid slower than the market. So I would assume that as speed slow, our portfolio, which is really consisting of either newer production, lower coupon bonds or very, very well-seasoned, specified-pool, higher-coupon bonds. I would expect those to slow equally, if not more. And we may get a little pressure on pay-ups, but the slowing speed is a big benefit.

Got it. And then a few other mortgage REITs have mentioned that they have just, kind of, recently been looking at the kind of the new production jumbos again and/or have purchased retained bonds there. Is that something you're looking at, sort of, getting back into that, and how do you view that opportunity today?

Yes, Dave, are you on? Yes...

I'm here. That is the opportunity in jumbos, especially as supply picks up, up here in, kind of, recent months is something that we're always keeping tabs on and, kind of, gauging the economics of the trade there, so I think the answer to the question is, yes. With potentially more supply comes potentially better economics, and that is something -- that's one of the many opportunities that we could potentially get more active in down the road.

Next question will be from Eric Hagen of KBW.

Please give my best to Jason. My first question is on leverage. It just looks like leverage in the credit segment has risen a bit recently. Can you just provide some color on, I guess, how you think about leverage in that segment going forward, especially given how tight credit spreads are?

Yes, Eric, thanks. Yes, I would say that the tick-up in leverage really is a function of lower dollar prices on our bonds in a general sense, so we just have less -- the assets are less or worth a little bit less. And so your -- obviously -- your financing is mark-to-market, so your leverage appears higher as rates increase. So I mean that's largely what it is. So really I think, if there's any difference between where it is on versus CMBS or agency, that's really just a matter of the mix of where we find the best terms, so it's not really any real decision to, like, lever the credit anymore or anything like that, and I think overall, like, our leverage, we didn't really move to make leverage higher. It was just simply a matter rates moving up.

Yes. Yes. Now that makes sense. And then just a question on CPRs, just kind of a technical question. I guess, the CPR that you reported for the nonagency MBS, is that a collateral CPR, or is that the runoff of your actual bond?

Yes, on -- this is Dave. On nonagencies, that is a collateral CPR. So it accounts for all voluntary prepayments as well as the recovery portion of defaults.

Great. And maybe I can press you just a bit on the prepaid, sort of, legacy Alt-A segment, and how you see that trending going forward?

It's a very seasoned book. It's not nearly -- the CPR on Alt-A, it is not nearly as sensitive to prevailing mortgage rates as newer production, obviously, and especially conforming production. So we don't expect dramatic changes. There is some sensitivity there, obviously. It's -- it will oscillate a bit, and it'll continue to have -- faster prepays are good on legacies, obviously, given the discounted basis. I think we'll continue to see some tailwinds from further equity recovery in terms of borrower equity and flexibility that gets borrowers to through refi. So that could continue to -- or that should continue to support prepays to an extent and offset some of the slowing prepay effect of higher rates.

Yes, I guess the obvious follow-up question to my first one about CPR is just what is your actual bond CPR, I mean, just given where you are in the capital structure? And how we should think about the runoff in that portfolio going forward?

Yes, I don't want to misquote a specific number. I don't have it in front of me. We disclose a certain level of CPR detail in our filings, so I would check there, but overall, in the book, it tends to be close-- quite a variety of assets that go into that number that we disclose, but that number tends to be very low double digits.

(Operator Instructions) Our next question will be from Trevor Cranston of JMP Securities.

A couple of questions on the swap portfolio. I guess first, I didn't see the notional anywhere, so if you can give that, that'd be helpful. And then second on the receive side, on the press release, you show there, the receive rate for the first quarter at 1.68%, which is lower than where 3-month LIBOR was throughout the quarter, so can you say how much of the swap portfolio is indexed to 1-month versus the 3-month LIBOR, that'd be helpful as well.

Yes, I don't have the exact notional now in front of me, but that would be in our filing. So I'll defer there for a bit, but as far as the -- what we're receiving, it's approximately half and half, 3-month and 1-month LIBOR.

Okay, that helps. On the notional, would you say -- was there any meaningful additions since the…

We added -- we did add hedges. Yes, we added about $650 million of hedges during the quarter, and it's up to $9.2 billion and then another $800 million came on board, obviously, forward-starting swaps.

Forward-starting, okay.

Right, so yes -- so it did increase over the quarter, right.

Okay, perfect. And then second question, on book value with rates moderately higher again this quarter, can you give an update on where you guys are seeing book curve?

Yes, it's basically unchanged. It's basically -- yes. So we've added swaps, so our interest rate sensitivity has leveled off a bit and agencies have settled down a bit also. Spreads have been pretty well behaved. So we've seen book value remain pretty, pretty stable.

Speakers, at this point we have no further questions. I'd like to hand the meeting back to you.

Well thanks, Amber. We appreciate your help with the call today, and we want to thank everyone who's joined us. And as always, [since] there might have been a question that comes to mind afterwards, we'd also like to help, and you can reach to out to us. So we really appreciate, as always. Have a great day. Thanks, everyone.

Thank you, speakers. And this does concludes today's conference call. Thank you all for participating. You may now disconnect.