IVR
#Thanks, <UNK>.
Good morning, everyone, and welcome to Invesco Mortgage Capital's First Quarter 2017 Earnings Call.
I will give a few brief remarks before turning the call over to <UNK>, who will discuss the portfolio in more detail.
I'm pleased to report that Invesco Mortgage Capital had a strong start to 2017 with core earnings of $0.40 per share, which is back in line with our dividend and a 2.7% increase in our book value per share.
Active sector allocation, a highly diversified portfolio and superior security selection led to a 5% economic return for the quarter.
The trajectory of core earnings is supported by a number of tailwinds at this time.
Slower prepayment speeds and favorable funding environment and our ability to reinvest cash flows into the opportunities that are producing ROEs that are clearly accretive to earnings.
In fact, we're seeing hedged ROEs in the mid-teens on 30-year Agency collateral, which is the level we haven't seen in a number of years.
Our active approach to managing IVR's asset mix has also contributed to our recent performance.
We believe this environment will continue to provide opportunities to add value.
Over the course of the last several quarters, we reduced our asset balance as we further reduced risk by investing cash flows into shorter duration 15-year in Hybrid ARM Agencies.
Those sectors have performed very well, and we are now moving back towards 30-year fixed paper, which offer extremely attractive ROEs.
We also have taken advantage of these attractive assets to get our asset balances back up.
Within credit, we benefited from both our sector calls, particularly, in seasoned CRT bonds and seasoned subordinate CMBS bonds as well as through great security selection.
This is reflected in the strong spread tightening we've seen in those sectors and also by the numerous rating agency upgrades that we've seen within the portfolio.
While spreads have tightened dramatically, we still feel very good about the fundamentals in both residential and commercial credit in favor of holding these positions with high book yielding time and it is very difficult to replace strong seasoned credits.
The result of our efforts could be seen on Slide 5, where we show our economic return relative to peers over each of the past 3 calendar years as well as over the trailing 3- and 5-year time periods.
In each instance, we compare favorably to our hybrid and Agency peers.
It is not coincidental that the volatility of our book value has also fallen dramatically over the past 5 years.
Our disciplined approach to risk management has proven effective.
We thought it was important to highlight this performance for a couple of reasons.
First, we feel that our story has been underappreciated over the past few years as our price and book discount is not consistent with the type of returns that we have produced.
Second, it is an affirmation of our ability to invest well across the most diversified opportunity set in the space and deliver investors an attractive dividend while reducing book value volatility.
I'll stop here and let <UNK> discuss the portfolio.
Yes, one thing I'd point out is, our book and this is across most of our credit assets is pretty highly seasoned.
And we spend a lot of time with the big security selection trying to pick up the best bonds.
And so our ability to replace that type of credit is, it will be pretty difficult to replace those types of bonds unlike something like Agency, which are relatively easy.
And yes ---+ and also, those bonds, a lot of the season credit on top of that are some of the highest book yielding ROEs that we have.
So again, it's very difficult to replace that.
Yes.
In terms of activity there, most of what has been done has been drawdowns on existing ones.
We'll continue to search for opportunities and deploy capital when it becomes available.
But at this point, we've been really encouraged with opportunities we saw on the CMBS side just given the implementation of risk retention and seeing underwriting standards really holding firm there.
Still some opportunities within legacy, but certainly, fair to say that most of our focus recently has been on more new issue.
Regardless of whether or not we participate in the class subject to risk retention requirements or simply plan a subordinate bond from, say, a risk retention eligible transaction, it is good to see that as the cycle progresses here that we're not seeing lending standards become more aggressive.
If anything, it's been the opposite.
Yes, I think the right answer to that in terms of the Agency book, I mean, if you look at the composition of the Agency portfolio, we're still ---+ we still have quite a few bonds in Hybrid ARMs and 50-year collateral.
So we've been more likely to ---+ as we saw ---+ and as we see attractive ROEs, more likely rather than increased leverage, we're more likely to move capital from hybrids and (inaudible), which have lower ROEs and obviously, less convexity risk and duration risk and do it that way without increasing leverage.
That will be the most likely scenario today.
