Good morning, ladies and gentlemen. Welcome to Invesco Mortgage Capital, Incorporated Second Quarter 2015 Investor Conference Call. All participants will be in a listen-only mode until the question-and-answer session. [Operator Instructions] As a reminder this call is being recorded. Now I would like to turn the call over to Tony Semak, in Investor Relations. Mr. Semak, you may begin the call.

Thank you Kino and good morning everyone. Again we want to welcome you to the Invesco Mortgage Capital’s second quarter 2015 earnings call. I'm Tony Semak with Investor Relations and our management team and I are really delighted you joined us, as we look forward to sharing with you our prepared remarks during the next several minutes before we conclude with a question-and-answer session. Joining me today are Rich King, Chief Executive Officer; Lee Phegley, Chief Financial Officer; John Anzalone, Chief Investment Officer and Rob Kuster, Chief Operating Officer. Before we begin, I'll provide the customary forward-looking statements disclosures, and then we'll proceed to managements' remarks. Comments made in the associated conference call may include statements and information that constitute forward-looking statements within the meaning of U.S. Security 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, mortgage reform programs, 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, the impact of the restatement of our financial statements for certain periods and the adequacy of our disclosure controls and procedures and internal controls over financial reporting. In addition, words such as believe, expects, anticipates, intends, plans, estimates, projects, forecasts and future or conditional verbs such as will, may, could, should and would, as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Forward-looking statements are not guarantees and they involve risks, 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 of financial condition and results of operations in our Annual Report on Form 10-KA and quarterly reports on Form 10-Q which are available on the Securities 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. Again, want to welcome everyone and thank you so much for joining us today. And we'll now hear from our Chief Executive Officer, Rich King. Rich?

Thanks, Tony. Good morning everybody. In the second quarter we reported core earnings of $0.41 per share, and we paid a $0.45 dividend. Our book value declined $0.75 per share in the second quarter to $18.62, reflecting a decrease of about 3.9%. Combining the dividend we paid, with the decrease in book value our economic return for the quarter was minus 1.5%. Year-to-date we have made $0.91 per share core earnings, paid $0.90 in dividends and our book value is down $0.20. Our year-to-date economic return is therefore $0.70 per share, and that’s on a beginning book value of $18.82, so 3.7% is our year-to-date economic return. This ranks about the best in our peer group, and I think largely because our book value was only off about 1%, 1.1% in a difficult period. Our asset performance and our funding costs were generally in line with our expectations during the second quarter, though market conditions presented a few new challenges following a first quarter which was generally uneventful and accommodating. First, let me talk about core earnings. In the first quarter we earned $0.50 per share and I’ll remind you, on the call that followed the quarter I mentioned that we didn’t expect a repeat of the beneficial earnings impacts of our JV income, nor the slow prepay speeds we saw in the fourth quarter and the first quarter. Each unfortunately proved to be true. In the second quarter we earned less than $0.01 per share of JV income and the interest income was lower due to faster prepayments, higher amortization and in addition it’s becoming increasingly apparent that the fed is planning to raise rates in the second half of the year and we’ve been preparing for that by continuing to moderate interest rate risk, which has contributed to…

Thank you Rich. In connection with the preparation of our second quarter financial segments we examined our accounting for our investments in GSE CRTs and MBS IOs. In our previous financial reports we account for these as investment securities with changes in fair value recorded in other comprehensive income. However we’ve concluded these securities have features meeting the definition of embedded derivatives and that we should have been applying the derivative accounting guidance with changes in fair value of the derivative feature included in current income. We determined that these areas were material to previously issued 2013 and 2014 annual financial statements as well as our quarterly financial statements beginning with the first quarter of 2013 and continuing through the first quarter of 2015. Yesterday we filed restated financial statements on Form 10-K/A for the years ended December 2013 and ‘14 and on Form 10-Q/A for the three month period ending March 31, 2015. The corrections largely result in certain amounts previously recorded in other comprehensive income now being included in current income. As both OCI and net income are components of comprehensive income there is no change in previously reported equity. During the restatement period these assets were properly held at fair value on our consolidated balance sheet, so our previously reported book values are unchanged. Management believes this correction is a technical accounting issue with no meaningful effect on the company’s previously reported financial position or economic performance. We have also consulted with tax advisors and confirm that the change in accounting treatment has no impact on our taxable income or our compliance with requirements. Without minimizing the meaningfulness of the accounting errors that occurred, it's important to note that in all affected periods our equity, book value, core earnings per share, economic return and leverage measures reported were always correctly stated. And in addition to correcting the GAAP financial statements we have enhanced our financial reporting control to ensure that instruments with complex accounting treatments are identified timely and accurately – are identified timely and accurately reflected in our financial statements. Rich?

Thanks, Lee. I want to emphasize that the restatement has in no way changed our investment strategy, or favorable view on credit risk transfer securities or agency IOs. In fact, the CRT position has produced a double-digit IRR from a historic return perspective through Q2 and we currently expect that same return potential to continue. It’s clearly an asset class aligned with our mission to provide private capital to the U.S. mortgage market. And only about 0.06% of the reference mortgages underlying CRT are 60 plus days delinquent, remarkably well [ph] level, reflecting the strong underwriting since the mortgage crisis and increasing home values. Both agency MBS IO and CRTs offer an attractive prospective return that should improve in the event that interest rates rise. In Q2, we also continued making commercial real estate loans. We closed two loans totaling about $71 million. Importantly, our pipeline is expanding. We are becoming a known mezzanine lender, especially for large institutional quality assets, a space we believe is attractive and we're seeing the benefits of increased market presence. We've closed an additional loan this quarter so far. On page five of the deck, we present a roll-forward of our book value on the left. We've observed seasonal spread widening episodes the past few years, and this year has been no exception. Beginning in May, risk premiums increased due to the Greek crisis and the seasonal supply calendar and in anticipation of a rate increase in the second half of the year. As a result we saw some downward price volatility in the quarter. In the second quarter the non-agency and credit risk transfer sectors were modestly lower due to credit spreads and that caused a combined $0.06 of the decline in book value. Agency MBS and CMBS account for most of our…

Thanks, Rich and thanks to everyone who is joining us on the call this morning. As Rich mentioned a few moments ago, we believe that the portfolio is well positioned for this environment. The credit fundamentals are continuing to improve and interest rate uncertainty is prevalent. At quarter-end we had 62% of our equity allocated to credit assets split almost equally between residential and commercial credit. The remaining 38% is allocated to highly liquid agencies, and as I'll discuss in a minute we’ve constructed the agency portfolio to be less sensitive to prepayment risk. Overall the portfolio has continued to exhibit a limited correlation to changes in interest rates and we believe we will continue to benefit from the diversification in the portfolio. I'll go into some more detail on each sector, starting with agency mortgages on slide nine. Our allocation in agencies changed slightly during the second quarter, as we took the opportunity to reinvest portfolio cash flows in to hybrid ARMs. 30 year fixed rate pools now make up 42% of the portfolio and the collateral underlying these pools is higher coupon, up 4.28% on average and is largely made up of well-seasoned specified pool paper. Likewise our 15 year paper is also higher coupon, about 3 and 3.75 on average and well-seasoned. Hybrid ARMs, which make up 37% of our agencies have a shorter duration profile and limited extension risks. This gives us a portfolio that has a relatively short duration as well as more predictable cash flows, both of which are important when rates are volatile. We did see a modest increase in prepayments due to seasonal factors as well as the lower rate environment last quarter. Given the increase in the rates we just experienced we expect prepayment fees to moderate over the course of…

Thanks John. The underpinnings of commercial and residential real estate credit are favorable, underwriting is conservative, as evidenced by agency conforming and prime jumbo loans having very, very little serious delinquency, while favorable towards agency MBS as well. They perform actually very well in historically in fed tightening cycles. In closing we like the way we’re positioned in this environment. We’re leveraging the platform to find value, having closed the two mezzanine CRE loans in the quarter and expanding the pipeline. Our credit assets are aging nicely. They tend to roll down the yield curve and the credit curve overtime, which brings down our book value volatility. We’re very disciplined about risk management, hedging interest rate risk, managing credit and spread risk, managing liquidity and continuing to improve our funding sources. That finishes our prepared remarks and I’ll open it up for Q&A now.

Thank you, speakers. We will now begin the question-and-answer session. [Operator Instructions].

And Kino as we are waiting and allowing time for calls to queue up for questions, just as a reminder to everyone we’ll have an archive of this presentation available on our website. The telephone recording to be accessed through September 1st by dialing 866-369-3652 or for international callers 1203-369-0244. You can also view this live presentation today, you can access at our website at invescomortgagecapital.com and you can click on the second quarter 2015 earnings presentation link where you can find under Investor Relations tab at the top of our homepage. There you can select either the presentation or the webcast option for both the presentation slides and the audio. We have any questions, Kino?

Yes sir, our first question is from Dan Altscher with FBR. Your line is now open, please go ahead.

Good morning everyone. This is actually Cole Allen on for Dan Altscher. Thank you for taking my questions. I had a few quickies. I guess first off let’s start with the JV. So you told us before that obviously we’re not going to have a run rate like we did last quarter. Is this is a better picture of what it’s going to be like going forward or you expect a little bit better performance than this quarter?

I would say more like this quarter. It’s a relatively small investment. So I think a penny a quarter is actually not a bad result there.

Yeah, all right cool. And then second I guess you talked a lot about the portfolio positioning and you guys closed a commercial loan subsequent to quarter and you said you got a pretty robust commercial pipeline. Do you expect that to pick-up, I guess the commercial as a percentage of your portfolio this quarter or this just kind of like in the coming quarter, so you expect the pipeline really to ramp up?

Yeah, I mean we're really pleased about the pipeline. And it's exciting because we've been able to focus on larger quality assets and provide mez behind some high quality U.S. and Canadian balance sheet lenders. And I think as we become known partners to some of these guys we're seeing more of the types of deals that we like. And they know we're committed to the space. I think overtime it will continue to become a bigger part of our equity. And but we're very selective and very careful in the underwriting in that part of the portfolio especially, because they are large chunky investments and they are mezzanine investments. So long answer, but I think we will continue to see it grow, not necessarily this quarter.

All right, sounds good. And then a last one, can you guys give just a little bit more color on how you are seeing 3Qs fare? I know you said you expect CPRs to kind of track down the back half of the year. Are you guys seeing that this quarter so far?

Well, on CPRs, we yes we've got the first trend from July was, we saw speeds moderate a little bit. We'd expect that to continue over the next couple of months. So I mean that will be a bit of a positive.

All right, perfect. Thanks guys.

Yes.

Thank you. Our next question is from Doug Harter with Credit Suisse. Your line is now open. Please go ahead.

Doug, are you there?

Yes, can you hear me?

Yes.

Rich, how are you guys thinking about share buyback in the current environment?

We are thinking that buying our stock looks like an attractive investment and yes, as we look across the landscape and it's just -- the stock’s at such a large discount that despite some of the things that we've talked about in the past, in terms of a lot of ROI [ph] considerations, I think buying back our stock looks like one of our better investments at this point, Doug.

Great. And obviously in the past, just I think in 2013 you guys were fairly active in buying back your stock. I was wondering if you can help us kind of think about the pacing relative to the last time you guys were active.

No, I don't think I'm going to give any guidance on that at this point. But I'd say, it would be fair to say that it would be out of cash flow.

Got it, thank you.

Thank you. Our next question is from Joel Houck with Wells Fargo. Your line is now open, please go ahead.

Thank you and good morning everyone. The question is regarding the -- I think it's a new disclosure you put in there, the annualized book value volatility on page six. And the question is, is that just a fallout from the overall asset allocation and resulting hedging strategy, or is this something that you're managing to kind of, I guess show investors that there is less tolerance for quarterly volatility in book value?

No, no, it's really a long-term strategic initiative that we begin at the beginning of 2013. And really just with the notion that we definitely want to provide an attractive income and that hasn’t changed. But there is certain levels of volatility that are just too high. And especially when you have a levered balance sheet, and this chart is really to remind shareholders that we have been successful in reducing our volatility. And I think in large part, if some of the discount in stock price in the sector relates to book value volatility, that our book value volatility is now lower than most, and it’s certainly played out this year to-date. So it’s not in any way to say that we’re going to continue to decrease risk and that will continue to have a negative impact on our earnings. I think we’re happy with where we’ve gotten to in terms of risk management.

All right. Thank you very much, Rich.

Thank you. Our next question is from Trevor Cranston with JMP Securities. Your line is now open. Please go ahead.

Hi thanks. I guess on the resi credit side, you guys, looks like you didn’t add any new prime jumbo securitizations to the balance sheet this quarter. Can you just give us an update on kind of what you are seeing in the new issuance market, how are you thinking about that opportunity versus CRT and other credit investments?

Hi, Trevor. It’s John. Yes, I mean we’re just seeing that the ROEs just aren’t as high in that space right now. I think the execution levels for AAAs are at a point where it doesn’t make as much sense as say buying CRTs or other uses of cash at this point.

Okay, got it. And on the commercial side from what we’ve seen CMBS spreads seemed to have widened out a decent amount in third quarter. Can you comment on kind of if you guys think there is any -- if that’s more of kind of a technical -- that the market has been widening and if would expect that to tighten in as we maybe move into September? And can you also maybe comment on whether or not that’s had a meaningful impact on book value quarter-to-date?

Right, so I will take second question first. So book value year-to-date we see down maybe a couple of percent, I am sorry quarter-to-date and really we’ve seen kind of weakness across most credit spreads. I think if you look across any credit spreads or even away from structural securities it’s been a pretty weak quarter. I think in CMBS as well as CRT it’s been a bit of question of large issuance calendar has weighed on the sector. And we had these episodes in the summer also where it’s bit of a seasonal impact also from our perspective, and we’ve seen, if you look at generic, say CMBS spreads we see lower A and BBB type spreads are probably out 40 to 50 basis points generically. We’ve seen a lot better performance in that. I think I referred to it briefly in my remarks but we own -- in lower rated tranches we tend to own pretty well seasoned bonds and those have held up a lot better and really benefited from improving CRE prices. So we have seen little bit of book value weakness because of that, but really I think our positioning has been really good through this. And then to the second part or I guess third part of your question, with regards what we think will happen, I mean I think once we get past this issuance calendar we should see spreads start to moderate. So I think once we get into later this quarter, get past fed, and Rich mentioned we want to have some dry powder and I think that’s kind of the thing we are kind of looking forward to see an environment where we think spreads are moderating. But overall we think fundamentals look good, so we expect…

Okay, great. Thanks guys.

Thank you. Our next question is from Mike Widner with KBW. Your line is now open. Please go ahead.

Good morning, guys. Let me ask you a quick one on the agency hybrid ARMs that you said you are adding to this quarter. Just a couple of things on those, specifically what kind of ARMs are you buying, are they 10/1 new issue kind of seasoned and then related to that where do you see the yields on the net spreads on the incremental purchases you are making there these days?

Right, so in the hybrids focusing mostly on 7/1s, maybe a little bit of 5/1 as well, but predominantly 7/1s. The yields on those, I mean we said they are obviously lower yield. But obviously less complexity risk and less extension risk. We are probably in the – yeah, probably 2% in terms of asset yield on those.

And those are new issue you are buying?

Yes.

And you added some hedges this quarter, I mean mostly it looks like coming on replacing run offs but…

Right.

Doing anything different or thinking about anything different with the hedge book for those?

No, not really. Maybe we look at our hedge book holistically it’s solid [ph], we think about in terms of hybrids. But strategy has been pretty much the same.

Yeah. Another sort of small one on the -- you guys have a fair amount of variable rate assets in the portfolio. But on the CMBS specifically the post 2010 stuff, that's all fixed rate, is that right?

Yes.

Yeah, and then I guess just last question, little bit bigger picture. I mean if I heard you right on your opening comments and response to some of the questions you sort of said that I think your words were 2Q is probably a better indication of run rate earnings than 1Q, and so given core earnings sort of $0.41, is there an implication there about the dividend or how do you think about the dividend with respect to core earnings power or fed tightening et cetera.

Yeah, thanks Mike. Our policy is to pay out taxable income. Tax accounting is different than GAAP accounting obviously. Having said that and the core is probably as close to the approximation that taxable is as we can give. So but the dividend is also declared by the Board, and no determination has been made for the rest of the year. So it would be premature from me to comment on the dividend. I think it's fair to say that $0.41 is more reflective than $0.50 and we are paying $0.45, I mean you can make your own conclusions from that.

Yeah, fair enough. And I guess just related to that and I didn't see it here, maybe you have it in the Q and I haven't found it. But is there any undistributed, any additional that you have to distribute any carryover from last year, anything like that?

No.

Okay, great. Well, thank you guys. Appreciate the comments as always.

Yeah.

Thank you. Our next question is from David Walrod with Ladenburg. Please go ahead.

Good morning. You've gone through most of my question. Just had a quick one on the FHLB, your funding from that source quarter-over-quarter was flat. Can you give us an update on how we can expect you to access those funds?

We don't have any plans at this point to increase that funding. We do have additional capacity there that we can use at some point in the future.

You had been growing it pretty aggressively, has something changed in that regard?

No, not really. I mean we were -- we have to manage that like we do anything else, to kind of the investment company guidelines and REIT [ph] rules and so forth. So right now we like where we are with that.

Okay, thank you.

Thank you. Our next question is from Brock Vandervliet with Nomura Securities. Please go ahead.

Thanks. Most of my questions have been answered. But could you just confirm the book value performance quarter-to-date? You touched on that in the earlier question.

We just estimate it down about 2% -- cents at the end of the second quarter and again that's -- it's spread widening, not anything to do with interest rates.

Got it, okay. Thank you, that's helpful. And in terms of earnings power, just say asking the question a different way maybe, do you expect any sort of claw back in net interest spreads here assuming that the prepay amortization settles back down in the back half?

Yes, we would expect that -- we would see our net interest margin increased up from slower prepayments. And I was just saying that there are other factors that we also see on the other side of that like higher yielding, legacy assets and run off mode.

Got it. Okay, thank you. That's helpful.

Yes.

Thank you. At this time, speakers there are no questions in the queue. [Operator Instructions].

Kino, if we're -- we have no additional questioners we just want to thank everyone for joining us today and appreciate your participation. We're always happy to answer questions that may come up afterwards. So reach out to us anytime. We thank you very much.