Invesco Mortgage Capital Inc.
Q3 2020 Earnings Call Transcript

Published: 10 Nov 2020

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[Operator:]

Welcome to Invesco Mortgage Capital in the third quarter, 2020 investor conference call. All participants will be in a listen only mode until the question and answer session at that time to ask a question, please, press star, followed by the one on your telephone as a reminder, this call is being recorded. Now, I would like to turn the call over to Jack Bateman and Investor Relations, Mr. Bateman. You may begin the call. Thank you.

[Jack Bateman:]

Thank you and welcome to the Invesco Mortgage Capital, third quarter 2020 earnings call, the management team and I are delighted you've joined us and we look forward to sharing with you our prepared remarks and conducting the question and answer session for turning the call over to our CEO, John Anzalone. I wanted to provide a reminder that statements made in this conference call and the related presentation may include forward looking statements which reflect management's expectations about future events and our overall plans and performance. These forward looking statements are made as of today and are not guarantees. They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from our expectations for discussion of these risks and uncertainties. Please see the risks described in our most recent annual report on Form 10K and subsequent filings with the S.E.C.. Invesco makes no obligation of any forward looking statement. We may also discuss non financial measures during today's call. Reconciliations of these non financial measures may be found at the end of our earnings presentation. To view the slide presentation today, you may access our website at Invesco Mortgage Capital Dotcom and click on the Q3 2020 Earnings Presentation Link Under Investor Relations. Again, welcome and thank you for joining us today. I'll now turn the call over to John Anzalone.

[John Anzalone:]

Good morning and welcome to Invesco Mortgage Capital's third quarter earnings call. I'll get some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss the current portfolio in more detail. After a tumultuous start to the year brought on by the impact of the covid-19 pandemic, the financial markets continued to recover during the third quarter. And I believe we have made tremendous progress in implementing our agency MBS focused strategy and opportunistically reducing our exposure to credit assets for the quarter quarter earnings came in at six cents per share, exceeding our recently increased dividend of five cents. Book value is three dollars and forty seven cents at quarter end, which represents an increase of about nine and a half percent for the quarter. The combination of the increased dividend and our books, our appreciation produced an economic return of 11 percent for the quarter improvement in book value has continued since quarter end, as we estimate that book value is up approximately six percent since quarter and through last Friday. The results of our activity can be seen on slide three of our presentation during the quarter, we purchased five point six billion in specified pool agencies and invested an additional nine hundred million in agency TBAs.

[Brian Norris:]

Thanks, John, and good morning and thank you to everyone listening to the calls. I'll begin on Slide four, which summarizes our agency Llambias assets and trading activity during the third quarter. Consistent with the strategic transition we've communicated since June, we purchased five point six billion of agency. Brambilla specified pools during the quarter. Strong demand for our credit assets provided opportunities for dispositions at attractive prices, freeing up capital for allocation to the agency focused strategy. As detailed on the chart on the top left, we were able to source attractively priced new issue collateral stories, including loan balance, low FICO, high LTV and geo pools, which consist exclusively of borrowers in lower paying states such as New York, Florida and Texas. We also focus on a significant portion of our purchases on new production pools originated and serviced exclusively by banks in order to mitigate our exposure to pay up premiums while benefiting from improved prepayment protection relative to nonbank originators and servicers. While payouts under specified pool holdings range from less than a quarter point to up to four points, the weighted average payoff on our portfolio is approximately one and a quarter points, representing approximately 70 million of market value at quarter end. We believe low mortgage rates and historically fast prepayment speeds should continue to keep paying premiums near current levels as strong demand for prepayment protection supports valuations. All purchases in the quarter consisted of 30 year collateral with coupons ranging from one and a half to three percent with the majority and twos and two and a half years, as indicated in the chart on the bottom left. Given our expectation for continued pressure on prepayment speeds as mortgage rates fell to all time lows, we focused our purchases on lower coupon pools, which typically experienced lower prepayments due to lower mortgage rates on the underlying loans and benefit from lower purchase prices, which reduces the negative impact of prepayments.

[Operator:]

Our first question will come from Doug Harter with Credit Suisse. Your line is now open.

[Doug Harter:]

Thanks. Hoping you could just give a little more color behind the fourth quarter book value mood you know, kind of how you would see that between credit and agency. And then just also directionally, you know, obviously some big moves yesterday, kind of if that was kind of a further positive to book value.

[Brian Norris:]

Yeah, hey, Doug, this is Brian, I can I can start with that one and, you know, I think for the for the month of October and here in the first nine days of November, agencies, particularly lower coupon agency mortgages, have performed pretty well. So, you know, we do think that a good portion of the increase that John mentioned, you know, the up six percent through Friday is is related to mortgages, agency mortgages. But, you know, our credit investments continue to trade, you know, pretty well and hang in there. So I think, you know, there could be a small bit of tightening in those as well. Just that, you know, we're as we reduce that credit portfolio, it becomes, you know, less of an impact on the portfolio, obviously. Yeah, and yesterday, yesterday, mortgages actually held in really well, so we don't have you know, we don't have a number for that quite yet, but we believe that, you know, given that mortgages perform pretty well into yesterday's back up and they're performing pretty well this morning as well. So we don't we don't think that that number would change dramatically.

[Kevin Collins:]

This is the need for additional context, you know, as you pointed out, the positive news of the vaccine is has certainly reenergized interest in our sector. So we saw some positive price action and in CBX, not cash bonds. To be clear, a little too early to forecast the magnitude and cash crunch since the news is so fresh. But just early indications, you know, this is we're seeing I'd call it they've seen the five to 15 titer, seeing the maybe 20 to 30 tighter and triple B's somewhere around 40 to 75 basis points tighter. But again, that's all, you know, based on on very limited data since the news really just had.

[Doug Harter:]

And then I guess just, you know, if those were to be you know, if those were to translate to cash prices, you know, how might that influence your your timing for the disposition of the of the remainder of the credit portfolio and rotation and the agency?

[Brian Norris:]

Yep, this is Bryan again, I'll cover that, Kevin. Feel free to chime in there. You know, our portfolio of credit assets now is just a little over three hundred million through the end of through the end of October, so, you know, our our goal is to continue to to reduce that. You know, we don't have any liquidity reasons to do that, you know, immediately. So we're going to take a measured pace and see where things shake out. Like Kevin said, it's been a little too early to really translate these recent moves into into, you know, price performance for for CMBS assets. But, you know, our goal over the next few months is to continue to to reduce those assets at the pace that we've seen over the last month or so.

[Doug Harter:]

Great, thank you. Thank you.

[Operator:]

And our next question will come from Trevor Cranston with JMP Securities. Your line is now open.

[Trevor Cranston:]

All right, thanks, you guys mentioned briefly in the prepared remarks that is the yield on new pools you bought was benefiting from very, very low CPR's and they're still pretty early in the season. Can you say to where you would expect that to yield to to shake out once, once those are sort of fully ramped and, you know, over six months old, know relative to the one 91 yield you show on time for.

[Brian Norris:]

And journalist Brian, good morning. And, yeah, we you know, the portfolio paid five CPR last month. So, you know, we had started to see that ramp up. You know, the the yield the maturities on the bonds that we're buying had been, you know, in one and a half percent range. So we would expect that that one point nine to come down. But again, that's that's assuming, you know, obviously a static portfolio. And, you know, at that, you know, the rate levels that we purchased them at. So, you know, things things obviously will be changing as we move forward here. But, you know, I would call it around one and a half percent currently on new purchase for yield immaturities.

[Trevor Cranston:]

Ok, got it. And then thinking about the earnings impact of the portfolio rotation and the agency purchases in 3Q, you know, looking at Slide six, it looks like there's been a decent increase in repo and September the that. Does that imply that a significant amount of the agency MBS purchases in 3Q occurred in September, or is there a timing difference between when the assets were bought and so.

[Brian Norris:]

Four, five, six on the financing and hedging, I'm sorry you said that the repo.

[Trevor Cranston:]

So, yeah, the increase in the repo balances from August to September, I was wondering if that also implied that a lot of the agency purchases occurred in September.

[Brian Norris:]

Oh, sure, yeah. So I believe last quarter we had updated through July and we had made a decent amount of progress through the end of July of a couple billion. So the other, you know, where you're at five and a half billion. So the other three and a half billion were purchased in August and September. I believe that a decent amount of that was in September, as August was was a little bit more quiet. But, you know, we've been pretty consistent. You know, the timing of our agency purchases tends to correlate with the timing of our credit asset sales. So as we find opportunities to sell those assets, that's when we redeploy those those proceeds into agencies.

[Trevor Cranston:]

Ok, that helps. Then last question, your last quarter we talked a little bit about you guys exploring ways to optimize the capital structure. Can you give any update on that? If you, you know, continue to evaluate things like preferred strangers or preferred projects and how you're thinking about that currently?

[John Anzalone:]

Yeah, this is John. Yeah. So, yeah, I mean, we're continuing to evaluate that. I think our our goal was to first reallocate the portfolio and get a more normalized earnings stream and, you know, have, you know, a little bit more clarity for investors in terms of where our you know, where our dividends are going to be and know. So I think we're doing well in the past there. So so we continue to evaluate either exchanges or likely or buybacks. And, you know, I think as we see value improvement, you know, obviously as value improves and hopefully commensurate with that will be an improvement in the price to book, that gives us a lot more flexibility on the capital side. The better we're trading, the more flexibility. So, yeah, so we continue to evaluate that. And that's that's going to be a focus in the next couple of quarters.

[Trevor Cranston:]

Ok. Appreciate it. Thank you.

[Operator:]

And as a reminder, if you'd like to ask a question, you may press star one. Our next question will come from Jason Stewart from JonesTrading. Your line is now open.

[Jason Stewart:]

Thanks. Good morning. Can you give us an update on the way you allocate between Stackpool and TEEB and if there's a limitation on the requirement still, that's keeping you from allocating more towards TBA.

[Brian Norris:]

Good morning, Jason. It's Brian. You know, we're well past the requirement for couples, you know, we've, you know, for. Vast majority of our purchases since the beginning of July have been hopeless. So, you know, the 55 percent test is, you know, we're well beyond that. So the limitation on TEEB is not is not related to that. It's more you know, we expect it to kind of be in this 15 to 20 percent range of total assets. And it's more because of, you know, the attractiveness of TEEB. It tends to be a little bit more transitory. So we don't want to, you know. Depend too much on drop income to drive our earnings for any particular quarter.

[Jason Stewart:]

Cook, that makes sense, and then you have one commercial loan, I think is fair, valued at about 22 million. Could you give us the Paramount? I think it matures in early 2020 one, maybe February. And what your plans are, Slash's discussions there with regard to that loan?

[Kevin Collins:]

Yeah, this is Kevin, I don't have the financials with the exact amount in front of me now, but it's around 20 million it should be in our financials.

[Trevor Cranston:]

Ok. And I'm guessing that, you know, extensions are on the table as that comes up, I don't know if you could give any details on the particulars of the loan would be helpful.

[Kevin Collins:]

Yes, so that particular loan is a commercial real estate mezzanine loan that has been extended to a hotel property, you know, at this point, interest payments on the loan are current. And, you know, obviously, given the backdrop with covid-19, it's an asset that we're monitoring closely, but feel really good about the sponsorship and the long term viability of the asset.

[Trevor Cranston:]

Ok, that's incredibly helpful, thank you.

[Operator:]

And just as a reminder, if you'd like to ask a question, you may press star once again to ask a question. Star one one moment, please, to see if we get additional questions. Thank you. And I'm currently showing that our next question will be from Derek Hewett with Bank of America. Your line is now open.

[Derek Hewett:]

Good morning, everyone. Does yesterday's vaccine announcement impact that the pace of credit asset sales and then redeploying that capital into the agency focused strategy at this point?

[Brian Norris:]

Hey, good morning. Yeah, you know this, Brian, we think that, you know, Kevin mentioned we did see CMBS tighten quite a bit yesterday. We haven't seen a lot of color yet on on cash bonds and where they're trading. You know, I think that, you know. Certainly news of the vaccine is positive and we do expect to spread tightening to occur off of off of that positive news. But, you know, our case of selling will will likely continue at its at its current level or at least, you know, near near where we sold in October over the near term. You know, it kind of just depends on on what we're seeing in the market as available transaction levels. Kevin, if you had any other thoughts on that.

[John Anzalone:]

No, I mean, I think the only thing that I would add is, is that, you know, certainly creates a, you know, a more favorable backdrop and I think it opens the options that we have. So at this point, you know, we will kind of take a look and do some additional price discovery and and, you know, ultimately decide if we think, you know, there's additional room for improvement or some, you know, there's opportunities to make make dispositions. We'll certainly look to do that as well. But, yeah, really encouraged by, you know, by that news. And I think, you know, regardless of near-term headlines, we believe our bonds are, you know, well-positioned for long term incremental spread tightening, just given notable subordination and limited bond supply and increased investor demand, not just because of this news, but because we have seen a lot of investors that are looking to put capital to work. And this is a sector that, by and large, has lagged the corporate bond market, you know, price appreciation. And you have a backdrop where new issuance has slowed as loan originations have declined, declined notably. And although it may not be directly benefiting bonds that we own, the continuation of the Federal Reserve's term asset backed securities loan facility that is in place and provides nonmarket market term financing to the most senior bonds in the capital structure, we think is a positive and helps create stability in the market. And it really benefits the entire capital structure.

[Derek Hewett:]

That's it for me. Thank you.

[Operator:]

And that was our last question for today's conference.

[John Anzalone:]

Ok, well, I'd like to thank everyone for joining us and we look forward to meeting again next quarter. Thanks. This concludes today's conference. Thank you for joining today's call. Speakers, please stand by for transfer.