Prepared remarks
Welcome to the Invesco Mortgage Capital Second Quarter 2026 Earnings Call. As a reminder, this call is being recorded. 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'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 2 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 teleconference transcripts 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 Invesco Mortgage Capital'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 a 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 long-standing 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 credit protection provided by agency guarantees. Now 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 the 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 2-year breakeven fell sharply to 2% at quarter end from 3.25% at the end of the first quarter, and these developments supported risk assets broadly and 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 0.6%. Our estimated book value quarter-to-date is down roughly 2.5%, which includes that dollar 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 $6.0 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. And 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, improved operating efficiency and 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 the sustained de-escalation of geopolitical tensions in the Middle East will likely benefit our target assets through reduced volatility and 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 the 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 and deliver more consistent cash flows to income-oriented investors and to strengthen investor engagement. To summarize, we believe our team, our capital structure and our investment portfolio are all well positioned for the future. Looking ahead, we're excited to leverage our core competencies in Agency MBS and to continue delivering attractive outcomes for our investors. So 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 5, which provides detail on interest rates over the past year. As Kevin noted in his opening remarks, the 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 Warsh'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 breakevens 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 remained ample and financing spreads over SOFR were largely unchanged in the low teens. Slide 6 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 in Agency RMBS remained 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. The dollar roll market for higher coupon agency TBAs benefited from favorable technical conditions with implied financing rates for production coupons remaining below 1-month SOFR for much of the quarter, enhancing levered return potential. These constructive supply and demand dynamics also supported the Agency CMBS sector, where issuance volumes moderated during the second quarter while robust demand from banks, money managers and mortgage REITs contributed to modestly tighter spreads. Higher mortgage rates, however, weighed on specified pool pay-ups and higher coupons as refinancing activity remains subdued and demand for prepayment protection softened accordingly. Despite this near-term pressure, we continue to view prepayment protection obtained through carefully selected specified pools, particularly in premium-priced holdings, as an attractive investment for mortgage investors and an effective tool for mitigating the convexity risk inherent in Agency mortgage portfolios. Slide 7 summarizes the changes in our portfolio over the course of the second quarter. Our portfolio increased 12.4% quarter-over-quarter as we invested proceeds from ATM issuance. Most of our net purchases occurred in specified pools focused across collateral stories in 30-year 4.5% through 6% coupons. In our view, the decline in specified pool pay-ups during the second quarter created a compelling opportunity to add exposure at more attractive valuations as we continue to prioritize income protection in the portfolio, with nearly 85% of the portfolio allocated to securities with some form of prepayment protection via specified pools and Agency CMBS. Levered gross returns on higher coupon specified pools hedged with swaps were in the mid- to high-teens with the current coupon spread to the 5- and 10-year SOFR blend ending the quarter at 143 basis points. Modest widening in July has improved those returns into the high teens as of today. Given the growth in specified pools within the portfolio, our allocation to Agency TBA and Agency CMBS declined modestly from 16.9% to 14.7% in Agency TBA and 11.9% to 11.1% in Agency CMBS. Both remain core holdings in our portfolio despite the decline in allocations, with Agency TBA continuing to provide attractive levered gross returns in the high teens as implied financing rates persist near or below 1-month repo rates and production coupons. Agency CMBS spreads tightened modestly during the quarter, largely performing in line with lower coupon Agency RMBS and continuing to provide notable stability to the portfolio. Despite limited new purchases, we continue to believe Agency CMBS offers many benefits, mainly through its inherent prepayment protection and fixed maturities, which reduce our sensitivity to interest rate volatility. Levered gross returns are in the low double digits and remain consistent with lower coupon Agency RMBS, while financing capacity has been robust as we continue to fund our positions with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation to the extent the relative value between Agency CMBS and lower coupon Agency RMBS is attractive, recognizing the overall benefits as the sector diversifies risks associated with Agency RMBS. Slide 8 details our funding book at quarter end. Repurchase agreements collateralized by our Agency RMBS and Agency CMBS investments increased from $5.3 billion to $6.2 billion as we funded most of our net purchases via repo, while the total notional of our hedges increased from $4.9 billion to $6.0 billion. Excluding the implied funding via our Agency TBA allocation, we kept our hedge ratio elevated at 97% given the increased uncertainty regarding the path of monetary policy. In addition, we continue to maintain significant liquidity with approximately $550 million of cash and unencumbered investments at quarter end, equating to 55% of our total equity. Slide 9 provides detail on our hedge book at quarter end. The composition of our hedges remains weighted towards interest rate swaps with 79% of our hedges consisting of interest rate swaps on a notional basis and 65% on a dollar duration basis. Swap spreads widened 2 to 4 basis points during the quarter, serving as a modest tailwind for our performance. We remain comfortable focusing the majority of our hedges in interest rate swaps as we believe swap spreads are historically tight and offer an attractive hedge profile relative to Treasury futures. Slide 10 is a new addition to the presentation and provides our model-based estimates of book value sensitivity to instantaneous shocks in interest rates and mortgage spreads. Looking first at the table at the top of the slide, we reduced our duration gap from approximately a half year to a quarter year, reflecting a more cautious stance on the direction of interest rates. While this chart assumes a parallel shift in the yield curve, the more significant market development during the second quarter was a pronounced flattening of the yield curve with 2-year Treasury rates rising nearly 40 basis points while the 10-year rose 15 basis points, which was a headwind for our performance. On the bottom table, the impact of changes in mortgage OAS is largely unchanged quarter-over-quarter as our portfolio leverage remains consistent. We continue to view current leverage at levels of 9x debt to common equity as appropriate in this environment of elevated uncertainty. To conclude our prepared remarks, the management team remains committed to delivering exceptional investment performance for our shareholders. We are pleased with the performance of our Agency MBS portfolio through a challenging backdrop as the combination of higher coupon Agency RMBS and our Agency CMBS position has performed well. We are also excited about the recent growth of the company, recognizing the significant benefits this growth has for our shareholders through the efficient deployment of proceeds into attractive investments, lower expenses per share and better liquidity for our stock. Although elevated risks in the Middle East and the path of monetary policy may create near-term volatility in mortgage valuations, we continue to believe the medium- to long-term outlook for our target assets remains constructive, supported by favorable supply and demand dynamics. Additionally, our liquidity position remains ample, providing substantial cushion to withstand additional market stress, while maintaining the flexibility to capitalize on opportunities in our target assets as the investment environment improves. Thank you for your continued support for Invesco Mortgage Capital, and now we will open the line for Q&A.
Questions and answers
Our first question comes from Marissa Lobo with UBS.
On the book value move in the second quarter, could you talk to us about the attribution of that decline? How much was spread moves on lower coupons versus hedge performance versus the ATM issuance?
Sure, Marissa. It's Brian. Yes, thanks for the question. As we mentioned, our higher coupon agency mortgages performed pretty well. Agency CMBS also modestly tightened on the quarter. I think our slight book value decline can be attributed to a couple of different factors. We have a modestly positive duration gap, which, as interest rates grew on the quarter, was a slight detractor. The modest flattening of the yield curve also had a minor impact on the portfolio. As far as ATM issuance, yes, we are issuing relatively close to par, so it's a modest impact to book value as well.
Got it. And just thinking about the pace of ATM issuance, what is the remaining capacity? And what should we look for in Q3 given your current portfolio growth targets and the spread environment?
Sure. Yes, thanks for your question, Marissa. So yes, as you know, we raised roughly $118 million in Q2, all through our ATM program at levels close to book value and at a pretty steady run rate. We'll look to continue to do that to the extent that we can do so responsibly and where it makes sense. Given the low cost associated with our ATM, we think it's a clear benefit to our stockholders, supporting our continued focus on reducing our fixed cost per share and improving liquidity in our stock. So our plan is to look for windows of opportunity to do that in the weeks and quarters ahead.
Our next question comes from Trevor Cranston, Citizens JMP.
A follow-up question on the ATM. Can you give any update on capital that may have been raised in July so far? And if so, where you guys have been deploying that within the coupon stack?
Yes. We continue to look for opportunities to raise capital and deploy it. As I said, we've been doing so at levels close to book value and have generally held our portfolio composition steady relative to Q2.
Yes, Trevor, it's Brian. I would also add that we include share count in our monthly updates that will be forthcoming. As far as deployment of proceeds, it's still primarily in that higher coupon range, 30-year 5% through 6% coupons. As I mentioned earlier, specified pool valuations have become more attractive relative to TBA given softness in pay-ups. If this environment persists, that's where we would deploy most assets.
Got it. Okay. That's helpful. And then one question, looking at Slide 6 on dollar roll financing. There's been quite an improvement in financing on 6s in particular. Can you guys just talk about what you think has been driving that improvement, particularly on the 6 coupon dollar roll financing?
Yes, Trevor. There was a pretty significant squeeze on the 6 coupon at the end of the quarter. If we were to extend that chart another week or so, it had bounced back into a more reasonable range. There are strong supply and demand technicals in that coupon. That coupon tends to be one where CMO desks participate the most to create floaters and inverse IOs, so sometimes a large money manager or similar buyer can put a squeeze on that coupon. It has since bounced back to a more reasonable level. Dollar roll financing remains fairly attractive in those higher coupons, and we like the allocation that we have there. That squeeze was a bit of an unusual technical dynamic at quarter end.
Our next question comes from Doug Harter with BTIG.
Hoping you could talk a little bit about your expectations for the shape of the yield curve and the direction of rates under Chair Warsh, and how you think you're positioned and what you're watching for in case you might need to change any of your hedging strategy?
Doug, it's Brian. Certainly, we've seen two very different market reactions to the two Fed meetings under Chair Warsh. I referenced what happened in June, and just a couple of days ago we saw a pretty significant steepening move as the press conference was more dovish than some expected. Our house view is that the Fed will be on hold for the foreseeable future, but renewed geopolitical risks over the last few weeks do make that outlook a bit cloudier than otherwise. There's certainly a chance of a hike in the latter half of 2026, but our base case is policy on hold for now. Regarding volatility and risk positioning, we expect front-end volatility to be higher, which can be a headwind for agency mortgages. That likely contributes to modest widening, which we've observed over the past month to month-and-a-half. Current coupon spread to the 5- and 10-year SOFR blend was 143 basis points at quarter end and is more like 150 basis points now, so we've seen about seven basis points of widening since quarter end. I think that's largely a reflection of increased potential volatility, both from reduced or less explicit forward guidance and from renewed Middle East risks. If risks escalate, we've seen spreads widen into the 160s at the widest moments earlier this year, and that could be a guide to potential extremes. Given this environment, we've kept our hedge ratio elevated at 97% at quarter end.
Our next question comes from Jason Weaver with JonesTrading.
Just one for me. It looks like net economic investment spread is vulnerable to additional swap roll-off ahead over the next several quarters. How do you see the EAD run rate evolving from there just on that factor? And also when the Board set dividend policy, approximately how far out are they looking?
Yes, thanks for your question. This is something we're mindful of as we think about our hedge portfolio. We evaluate the dividend each quarter in the context of earnings available for distribution because that's where a lot of people's thinking goes. We're evaluating that each quarter based on current earnings as well as expected earnings, our portfolio composition and market opportunities. At present, we believe our dividend is competitive and is in line with long-term levered Agency MBS returns, and it is well covered by the current EAD. As the hedge portfolio changes, that will have an impact, but conceptually we think of the dividend as supported by the long-term earnings power of the portfolio.
Our next question comes from Jason Stewart with Compass Point.
Following up on Doug's question about curve shape, if you're in a camp where the Fed is on hold, you can make the argument that you'll see a steeper curve and more upside potential in mortgage rates. If we follow that logic, one, do you disagree? And two, how do you think about premium at risk on specified pools in that environment? Do they still offer compelling value? You touched a bit on the convexity profile, but maybe dig a bit more into which subsectors are a focal point, which ones you're avoiding, and how you're thinking about overall premium at risk?
Yes, Jason, the first answer is that we would agree that if the Fed is on hold, we would expect some steepening of the yield curve. On specified pools, our weighted average pay-ups at quarter end was about 28, which equates to roughly $50 million of market value. If pay-ups all went to zero, that's roughly the magnitude of impact. That said, we view some softening in specified pool pay-ups as a compelling opportunity to add because we believe generic collateral valuations could continue to deteriorate for a number of reasons. Loan balances have continued to increase, which makes them more susceptible to refinance activity, and improving technology in the refinancing process accelerates that dynamic. This makes specified pool selection more important, and that's our area of expertise. We continue to prioritize lower loan balances that are less susceptible to refinancing and collateral stories such as first-time homebuyer pools, and we seek diversification across geography, LTV and FICO buckets as a relative value exercise. These are the kinds of subsectors we favor, and we think careful selection in specified pools can mitigate premium at risk in a higher-rate or steeper-curve scenario.
Okay. I guess first-time homebuyer would be in this bucket, but are there any new specified pool stories being developed that are interesting?
As far as new themes added to the portfolio yet, no. We're continuing to look, but nothing I'd point to right off the bat other than emphasizing that first-time homebuyer characteristics often appear in high LTV buckets, which we've found attractive lately.
Our last question comes from Marissa Lobo with UBS.
I just had a quick follow-up on how you're thinking about using swaps versus Treasuries for hedging in this rate environment?
Marissa, yes, we're still very comfortable with the majority of our hedge book being in interest rate swaps. That has been in the 75% to 80% range on a notional basis. We saw a modest improvement in swap spreads during the second quarter, but year-to-date they remain relatively tight. We still feel like swaps present an attractive entry point for our hedge book given our view of the hedge profile relative to Treasury futures.
Thank you. At this time, I'll turn the call back over to the speakers.
Thanks to everyone that joined our call this morning. We appreciate your interest in Invesco Mortgage Capital and look forward to connecting in the quarters ahead.
Thank you. And that does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.