Invesco Mortgage Capital 2026 Q2 Earnings Call

Thanks, operator, and to all of you joining us on Invesco Mortgage Capital's second quarter 2026 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 is not responsible for and does not edit or guarantee the accuracy of our earnings. Teleconference transcripts are provided by third parties. The only authorized webcasts are located on our website. Again, welcome and thank you for joining us today.

I'll now turn the call over to IVR's CEO, Kevin Collins, for his comments.

Good morning and welcome to Invesco Mortgage Capital's second quarter earnings call. I'll provide a few 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 is our President, David Lyle, and our CFO, Mark Gregson. Before I speak to market developments and our performance for the quarter, I would like to emphasize that our management team remains focused on disciplined investment management, prudent risk-taking, and delivering attractive risk-adjusted returns for our shareholders. We believe our platform is differentiated by deep expertise in agency mortgage markets, strong risk management, and access to extensive resources, market insights, and the global perspectives of Invesco.

These advantages, combined with the longstanding counterparty relationships that enhance our ability to source, to finance, and to hedge investments, position us well to navigate challenging market environments and capitalize on attractive opportunities. Importantly, our portfolio remains concentrated in Agency RMBS along with a meaningful allocation to Agency CMBS. These sectors continue to offer compelling risk-adjusted value supported by attractive carry, strong liquidity, and the credit protection provided by agency guarantees. Turning to market developments, the second quarter was characterized by improving financial conditions, despite some periodic bouts of volatility driven by geopolitical developments in the Middle East and by shifting expectations for monetary policy.

Resilient economic growth, strong labor markets, and elevated inflation contributed to a bear flattening of the U.S. Treasury yield curve as short-term interest rates rose more than longer-dated yields amid growing expectations that the FOMC's next policy move would be a hike rather than a cut. Although the second quarter was characterized by higher interest rates and more restrictive monetary policy expectations, it's important to note that interest rate volatility declined notably from March levels, while inflation expectations moderated despite ongoing uncertainty surrounding energy prices. The two-year break even fell sharply to 2% at quarter end from 3.25% at the end of the first quarter. These developments supported risk assets broadly, and they contributed to higher coupon Agency RMBS outperformance relative to U.S. Treasuries. Our Agency RMBS and TBA investments performed well, driven by attractive carry and contracting risk premiums, and our Agency CMBS continued to provide notable stability supported by attractive relative valuations and predictable cash flows.

Against this backdrop, we generated an economic return of 3.8%, consisting of monthly dividends of $0.12 per share and a modest decline in book value per share of six-tenths of a %. We're estimating book value quarter to date is down roughly 2.5%, which backs out our accrued dividend given recent mortgage underperformance. At quarter end, our economic debt-to-equity ratio remained unchanged and our $8.2 billion investment portfolio consisted of $6 billion of Agency RMBS, $1.2 billion of Agency TBA, and $0.9 billion of Agency CMBS. We also maintained a sizable balance of unrestricted cash and unencumbered investments totaling $548.3 million.

Our earnings available for distribution declined from $0.55 in the first quarter to $0.50 in the second quarter. As of quarter end, we hedged 97% of our borrowing costs with interest rate swaps and U.S. Treasury futures. Regarding capital activities, we raised approximately $118 million during the quarter and more than $250 million year to date, enabling us to meaningfully expand our investment portfolio and capitalize on attractive opportunities across the Agency mortgage market. We're encouraged by the growth of the company, which has enhanced our scale, it's improved operating efficiency, and it's reduced expenses on a per-share basis. In addition, we believe our larger equity base and our increased market capitalization will improve the liquidity profile of our common stock, which should ultimately broaden our appeal to investors and support long-term shareholder value.

As we continue to grow, we believe these benefits, combined with our disciplined investment approach, position us to generate attractive returns and create value for shareholders over time. Entering the third quarter, we remain constructive yet measured in our outlook for Agency RMBS and Agency CMBS as attractive valuations and supportive market fundamentals are balanced against ongoing uncertainty surrounding monetary policy, as well as inflation and geopolitical developments. Despite these uncertainties, we believe valuations for our target assets remain compelling as interest rate volatility and inflation expectations have moderated from their first quarter peaks. Supply and demand dynamics remain favorable as constrained net supply continues to be absorbed by broad-based investor demand. Additionally, we believe a sustained de-escalation of geopolitical tensions in the Middle East will likely benefit our target assets through reduced volatility, but also through improved risk sentiment.

Agency CMBS is also well-positioned, supported by its attractive risk-adjusted yields, its relatively low sensitivity to interest rate fluctuations, and its diversification benefits. Taken together, these macroeconomic and market technical factors create a supportive backdrop for our investment strategy as we enter the second half of 2026. Further, we believe our capital structure and our financing profile provide us with flexibility needed to pursue opportunities while navigating continued uncertainty surrounding monetary policy, economic growth, and geopolitical developments. Away from market developments and our outlook, we remain committed to providing our investors with monthly financial summaries and paying monthly dividends to enhance transparency, deliver more consistent cash flows to income-oriented investors, and to strengthen investor engagement. To summarize, we believe our team, our capital structure, our investment portfolio, we're all well positioned for the future.

Looking ahead, we're excited to leverage our core competencies in Agency MBS and to continue delivering attractive outcome for our investors. Now I'll turn the call over to Brian to go through our portfolio and our performance for the quarter in greater detail.

Thanks, Kevin, and good morning to everyone listening to the call. I'll begin on slide five, which provides detail on interest rates over the past year. As Kevin noted in his opening remarks, the U.S. Treasury yield curve bear flattened in the second quarter as expectations for near-term monetary policy shifted from easing to tightening. Approximately one-third of the flattening occurred in the last two weeks of the quarter in response to new Federal Reserve Chairman Kevin's first FOMC meeting, as the ensuing statement and press conference were more hawkish than initially anticipated. The Chairman sought to cement a tough stance on inflation, emphasizing the price stability portion of the Fed's mandate over that of employment. Financial markets responded accordingly, pricing in tighter near-term monetary policy and lower future inflation expectations as inflation break-evens declined quarter-over-quarter.

Conversely, Treasury yields ended the quarter near their highest levels since early 2025, resulting in 30-year mortgage rates near 6.5% at quarter end and further limiting housing activity as affordability remains challenged. Positively, interest rate volatility recovered from the sharp Iran conflict-driven increase in March, supporting agency mortgage valuations. Lastly, funding markets remained stable throughout the quarter as lending capacity for our target assets remains ample and financing spreads over SOFR largely unchanged in the low teens. Slide six provides more detail on the Agency MBS markets over the past year, with the second quarter highlighted in gray. Despite the bear flattening move in Treasury yields, both Agency RMBS and CMBS spreads tightened over the quarter, consistent with the improved tone in financial conditions and risk sentiment.

Although the entire 30-year coupon stack outperformed Treasury hedges during the quarter, the outperformance was more pronounced in higher coupons, which were primarily supported by the decline in volatility and constructive supply and demand dynamics. Net supply and Agency RMBS remain muted, with year-to-date issuance of just $81 billion through June. On the demand front, investor interest remained broad-based, with overseas investors, banks, money managers, and mortgage REITs all increasing their allocations during the quarter. Demand from Fannie Mae and Freddie Mac continued to underwhelm initial expectations, however, as their combined retained portfolios were little changed during the second quarter. The two entities still have over $100 billion of additional capacity under their portfolio caps, providing some comfort for investors, with the expectation that the GSEs could provide support if valuations were to soften materially.