Welcome to the Invesco Mortgage Capital Inc. Fourth Quarter 2024 Earnings Call. All participants will be in a listen-only mode until the question and answer session. As a reminder, this call is being recorded. Now I would like to turn the call over to Greg Seals in Investor Relations. Mr. Seals, you may begin the call.

Thanks, operator, and to all of you joining us on Invesco Mortgage Capital Inc.'s quarterly earnings call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address today. The press release and presentation are available on our website, invescomortgagecapital.com. This information can be found by going to the investor relations section of the website. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slide two of the presentation regarding these statements and measures as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital Inc. is not responsible for and does not edit or guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome. Thank you for joining us today. I'll now turn the call over to IVR's CEO, John Anzalone.

Good morning, and welcome to Invesco Mortgage Capital Inc.'s fourth quarter earnings call. I'll provide some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning for Q&A are our President, Kevin Collins, our COO, Dave Weil, and our CFO, Mark Griggson. Long-term treasury yields ended the quarter sharply higher as the disinflationary trend stalled. Market participants dealt with fresh uncertainty regarding the impacts of future monetary, fiscal, and trade policies. Expectations for future inflation reflected in TIPS breakevens rose over the course of the quarter with the two-year breakeven ending the year at 2.54%, up from 1.77% in September. This trend has continued into this year as the two-year breakeven is now comfortably above 3%. These uncertainties combined with the robust labor market led to a recalibration of the market's expectations for future monetary policy. All in all, 100 basis points of reductions in the federal funds target rate over the course of the third and fourth quarters. Futures market expectations as of year-end 2024 reflected only one to two additional cuts in the target rate through the end of 2025. This compares to an expectation of ten cuts through the end of 2025 priced in as recently as mid-September. Against this macroeconomic backdrop, agency RMBS underperformed treasury during the fourth quarter. Underperformance during the quarter primarily took place in lower coupons as a sharp move higher in interest rates limited demand for discount securities. Although the industry volatility moved higher during the quarter, supply and demand technicals for higher coupon agency mortgages were supported as supply was limited while bank and overseas demand improved. Canadian fees largely remained at low levels given limited housing activity and elevated mortgage rates.…

Thanks, John, and good morning to everyone listening to the call. I'll begin on slide four, which provides an overview of the interest rates and agency mortgage markets. As shown on the chart in the upper left, during the fourth quarter, US treasury yields rose across the yield curve, with two-year and longer maturities increasing between 60 and 85 basis points. Most of the increase occurred in the first half of the quarter, driven by market expectations of a Republican sweep in the November elections. The chart on the bottom left provides Fed funds futures market pricing since the beginning of 2024. The number of cuts to the Fed funds target rate in 2024 was much less than projected at the beginning of the year, as economic growth, employment, and inflation data proved to be more resilient than anticipated. The market is now pricing in only one or two cuts in 2025 along with a much higher terminal rate over the next few years. The chart in the upper right reflects changes in the short-term funding rates over the past year. During the fourth quarter, funding rates declined in line with monetary policy easing, but repo rates exhibited some volatility at year-end. Positively, the repo market has normalized since year-end, with one-month agency MBS repo spreads declining modestly from SOFR plus 20 to SOFR plus 15 basis points. Lastly, the bottom right chart details the agency MBS holdings by the Federal Reserve and US banks. Runoff of the Fed's balance sheet continues, with agency RMBS declining by approximately $15 to $20 billion per month. Quantitative tightening is expected to persist at the current pace in the near term, potentially ending in the second half of 2025. US banks added nearly $50 billion to their portfolios in the second half of…

Thank you. We will now begin the question and answer session. You will be prompted to record your name. To withdraw your question, you may press star two. Again, please press star one to ask a question. Our first question comes from Doug Harter with UBS. Your line is open.

Thanks. Hoping you could talk about how you are viewing, you know, kind of the risk-reward trade-off of agency RMBS and agency CMBS, especially in light of the current dividend level.

Yeah. Hey, Doug. It's Brian. Yeah. We are, you know, if you go back to slide seven, you can see, you know, when spreads are on agency CMBS, are in the kind of high fifty sixty area. That tends to be relatively attractive versus where mortgages were. So we did add most of our agency CMBS exposure kinda at the beginning of the fourth quarter. But as spreads tightened from there, it became a bit less attractive, particularly as agency mortgages were underperforming during that time. You know, that difference has certainly compressed here in the first quarter. Agency CMBS spreads are just a touch wider, while agency mortgages have performed pretty well. So, you know, I think the benefits that agency CMBS provides to our portfolio are still supportive. But given that volatility has declined pretty notably here so far in the first quarter, you know, the lean is certainly towards agency RMBS at the current time.

Great. And, you know, I guess with that blend and kinda where, you know, all spreads are. You know, can you just talk about your comfort in the current dividend level?

Yeah, Doug. It's John. Hi. Yeah. I mean, obviously, you know, our board recommends it. Or we recommend our dividend report or approves it. That'll happen over the next month. You know, I mean, we look at a number of factors, you know, first and foremost is, you know, where our current and near-term to medium-term projected ROEs are on investments. So, I mean, that's the, you know, that's the first thing. We would also look at where average, you know, sort of ROEs have been more historically over a longer time frame. And then also look at, you know, sort of the competitive environment where dividend yields are for that. So, I mean, those are all things we're gonna be taking a look at as we move over the course of the next month. Well, to Brian's point, I think, you know, we're we are pretty selective where we add agency CMBS. So we're not, you know, adding it much much lower than than where we're seeing agency RMBS. I mean, it's obviously the ROEs are a little bit lower because they don't have a convexity risk, so they should be a little bit lower. But that's that's kinda how we look at it.

Great. I appreciate the answers.

Thank you. Our next question comes from Trevor Cranston with Citizens JMP. Your line is open.

Hey. Thanks. On the changes you made to the hedge book this quarter, do you foresee making any incremental changes to the mix of the hedge position going forward? Thanks.

Thanks, Trevor. It's Brian. Yeah. Certainly, there are trade-offs between the two. Given that swap spreads are currently negative, you know, the hedging with them is a bit cheaper, so ROEs are better when you hedge with swaps. But certainly, you know, volatility that we've seen in swap spreads over the past year or two adds more volatility to that hedging as well. So, you know, like I said, at the end of 2024, we were at 30% treasury futures. I think, you know, that's probably the high end given the current environment of where we'd like to be. You know, we have seen swap spreads widen so far in 2025. You know, it's, you know, swap spreads did tighten a lot in 2024 just given the expectation that treasury issuance would be substantial as we move forward here. You know, but there's some uncertainty there. I think a lot of things that have happened so far in 2025 is just that the new administration is maybe a little bit slower to roll out some of the things that were once feared. So you've seen volatility come down, swap spreads have widened a bit. So, you know, it's there are trade-offs. Like I said, I think we would target probably 20 to 30% of treasury futures in the current environment. So, you know, we're right in that range currently. So, you know, as we move forward, I think, you know, we'll still be monitoring swap spreads, obviously, but again, where they are now, I think we're pretty comfortable with where we are.

Okay. Got it. Appreciate the call. Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star one. Our next question comes from Jason Stewart with Janney. Your line is open.

Hey. Good morning. Thanks. I wanted to dig in a little bit more to your cautious outlook on agency mortgage and maybe if you could talk a little bit more about whether that's a rate-driven outlook or if there's a component of GSE reform baked into that cautious outlook. And maybe on the latter, if you do have a view on what's priced into the basis, in terms of GSE reform risk, that'd be helpful.

Hey. Thanks, Jason. It's Brian. Yeah. I'll tackle GSE reform right off the bat here. You know, I think the market has not reacted at all to the headlines so far that we've seen on that topic. Mortgage spreads have tightened so that, you know, to the extent that there's any concern out there, it doesn't seem to be reflected. You know, I think that's notable because, you know, the market is essentially saying that, you know, the only thing that would really materially impact agency mortgage spreads would be, you know, a loss of the implicit or explicit guarantee on mortgages. And that remains an extremely remote scenario at this point. So, you know, I think spreads have responded accordingly by not pricing in any real concern about that at this current time. Our cautiousness is, you know, I mean, like I said, volatility has come down quite a bit in 2025. Mortgage spreads have tightened. So, you know, I think there's still a fair amount of monetary and fiscal policy uncertainty out there. Trade policy uncertainty. So, yeah, I think we're just, you know, with leverage, you know, our debt-to-equity ratio is right around nine. You know, I think we're comfortable in that situation. Spreads are attractive still. We can still earn attractive ROEs, like I said, in the mid to high teens at that level. So I think, you know, we're kind of, you know, we're not overly cautious. We still think mortgages will perform well through the year, but just given where we are right now. Yeah. I think, you know, mortgages have had a pretty good start to the year. So it's just a matter of whether volatility will continue to trend lower or if it kind of pauses and goes the other way.

Got it. Okay. That's helpful. And then you referenced on the refunding of the Series B, you know, moving that to repo. I mean, I guess the question is a big picture question. Is the right way to look at how are you looking at preferred today as a part of the capital structure? Is it more permanent capital in your mind? Should we be looking at that as leverage to preferred plus common? You know, has that shifted the way that you look at the capital structure? Has that shifted over the last year?

Oh, hey. It's John. Yeah. No. I don't think it's shifted. I mean, we're still, I think, you know, if you look at us historically, you know, our portfolio mix was very different when we had when we put on the preferred. I think we had, you know, there was a time we had loans involved. We had securitizations, different asset classes. Made a little bit more sense having preferred, and then, you know, post-COVID, you know, it just became too much percentage of our capital structure. So I think, you know, we're still targeting, you know, we'd like to get back to the, you know, 20% ish range. You know, I think most of our peers are in, you know, around that range or about less even. At this point, we're still targeting that. You know, so that'll be a combination of, you know, either grow through ATM or equity issuance or and or continuing to chip away at repurchasing the preferred Series C's.

Okay. Alright. Thanks, John. Thanks, Brian.

Thanks.

Thank you. At this time, we have no further questions. Speakers, I'll hand the call back to you.

Great. Thank you very much, operator, and thank you everybody for joining the call today. Have a great day.

Thank you. That concludes today's conference. Thank you for participating. You may disconnect at this time.