IVR
#Good morning, and thanks for joining Invesco Mortgage Capital's Third Quarter 2017 Earnings Call.
Management team and I appreciate your participation today and we look forward to sharing our prepared remarks and receiving your questions during the Q&A session that will follow.
I'll begin by providing a few highlights for the recent quarter and our outlook, if I transition the call to <UNK> <UNK>, our Chief Investment Officer, who discuss our investment portfolio more detail.
I'm joined on today's call by Lee Phegley, our CFO; <UNK> <UNK>, our President; and Dave Lyle, our CEO, who will be available to answer questions during the Q&A session.
I'm pleased to announce that IVR delivered another solid quarter, with core earnings per share of $0.44, an increase of $0.03 per share or 7.3% over the prior quarter while book value increased modestly to $18.34.
This produced an economic return of 2.6% for the quarter and brought our year-to-date economic return up to 11.8%.
This strong performance was highlighted by the mid-quarter issuance of $287.5 million of our Series C Preferred Equity.
We were successful in investing all of the preferred equity issuance proceeds in assets with accretive ROEs before the end of the third quarter, which contributed to the incremental improvement in earnings, though the full quarter benefits are yet to be realized until the fourth quarter and beyond.
Book value was up modestly during the quarter as we once again realized the value of our diversified portfolio.
While credit risk transfer bond spreads widened in response to the potential impacts on collateral from Hurricanes Harvey and Irma, this was offset by contributions from a legacy residential mortgages, commercial mortgages, as well as agencies.
I'll draw your attention to the graph on the bottom of Slide 4, which shows that our book value volatility continues to fall, which reveals an important part of our value proposition.
Importantly, our book value volatility also continues to fall at a faster rate than our peer group average over the past nearly 5 years, on a rolling 3-year basis.
On Slide 5 I'd like to point out some key performance metrics in relation to our peers.
Over this or any calendar year or annualized timeframe during the past 3 and 5 years, we have delivered economic returns that have outperformed our peer-group average.
Well just to illustrate how the volatility of our book value has fallen over the past nearly 5 years, the box in the middle of Slide 5 shows our book value performance compares.
In each period, we've outperformed and I point out the 5-year number in particular.
While our book value has been relatively flat over the past 5 years, down less than 1%, our peers on average have lost nearly 19% of their book value.
Finally, we compare dividend performance, not only did we increase the common stock dividend during the quarter, we've been successful in earning that dividend.
Our core earnings per share has been in line or above the credit dividend level during 10 of the past 12 quarters.
Before I turn the call over to <UNK>, I'll take a few minutes to discuss the factors that contributed to our increasing core earnings as well as our outlook for the next few quarters.
As I pointed out earlier, the accretive benefit from the issuance of preferred equity was a tailwind during the quarter and will continue to benefit us going forward.
We are still seeing very good investment opportunities in 30-year agencies and in select subordinated CMBS, with hedged ROEs in the low teens for each.
We believe prepayments fees will continue to slow as the housing market feels the impact of seasonal factors, and this will be supportive of returns on both agencies as well as residential credit.
There are 2 other factors which are interrelated that will combine to help support the positive trajectory of our earnings stream.
Our commercial loan book, which now stands at $300 million, is beginning to pay down.
While there are many aspects of that asset class that we like, return opportunities have diminished as new entrants have flooded the market.
Whereas we are realizing returns in the LIBOR plus 8% to 9% range during 2013 to early 2016, returns on new loans have contracted notably.
So as these loans mature, we are recycling that capital back into much higher yielding assets.
Related to that, we issued a $400 million exchangeable note in 2013 that is coming due in March of 2018.
One of the reasons we're issuing that note was to provide stable financing to the commercial loan effort.
Over the course of 2017, we have paid down almost $250 million of the note and will pay off the remaining balance prior to maturity date in March.
This also serves to positively support our earnings per share outlook as we are replacing relatively expensive fixed-rate financing with lower cost Repo.
As far as our broader outlook, we remain positive on the fundamentals that underpin our residential and commercial credit books.
Our credit portfolio is well seasoned, and as such, has benefit from the impressive property price increases across both residential and commercial collateral, because spreads have continued to tighten, we have been extremely selective in adding to our existing credit book.
Agency mortgages have also been well supported despite the fact that the Fed has begun to taper its portfolio.
The slow pace of this reduction has been more than offset by increased demand from commercial banks.
While we believe that agencies will come under some pressure as the Fed taper picks up steam later in 2018 and '19.
In the near term, we believe agency spreads will remain well supported.
To wrap up, we believe IVR's diversified portfolio is well-positioned for the current environment and that the positive trajectory of our core earnings stream should continue to be well supported while we ---+ while creating the potential for further common stock dividend improvement.
With that, let me call ---+ turn the call over to <UNK> who will review the portfolio.
Yes.
Yes, I would say in terms of preferred ---+ and we just did a preferred, and I think, for where we are in our ---+ where our capital structure is now, we're pretty comfortable with the amount of preferred we have on right now.
And exploring other longer-term financing options like converge and things like that, and we're always looking at that.
For now, because we've been buying back the existing note over time and, kind of, in pieces as we can buy it back, and it's been a slow process and rolling it into Repo has made the most sense, but we're all always looking to improve our capital structure.
Okay.
Yes, I'll ---+ <UNK> <UNK>, who runs our commercial effort is ---+ and is our President, is online, I'll let him handle the CMBS portion of that.
Sure.
To address that, our focus has predominantly been in the BBB and B-piece portion of the capital stack.
We've been ---+ positively, we've been able to go in and add loans that were originated several years ago.
So since that time, property prices have appreciated, and as a result, we believe we're benefiting from what is essentially a decline in LTV ratios, but at the same time, we are also adding exposures to new originated loans as well, again, in BBB and BB space predominantly.
Yes, I guess, what I would say on that note, as it pertains to commercial real estate credit is the fact that, at the top of the capital structure, we've seen notable tightening, so there's certainly no disagreeing to that.
Where we have seen a little bit more of the lag has been at the bottom of the capital structure.
So there, we're still finding good value and are looking for bonds that we want to hold on a longer basis and we think are still generating a really nice ROE.
I would say that, on the commercial real estate mezzanine loan side, we're seeing underrating ---+ underwriting quality, by and large, holding fairly well, and that's been a positive, but one thing I would note is that yield premiums have contracted as the space has just seen a growing number of entrants.
That's how we'll keep looking for opportunities on both sides.
Yes, <UNK>, I'd say, you mentioned RMBS earlier, I think on the RMBS side, as far as the spread outlook, we're not necessarily expecting significant spread tightening from these levels.
I think, to your point, most of the tightening is behind us, that's not to say that we couldn't continue to, kind of, grind tighter at a slower pace here for the foreseeable future.
But given that much of our book was put on at cheaper levels and it's generating a book ROE, that's quite attractive.
We're happy to continue to hold those assets without the expectation of kind of continue price appreciation.
Yes, <UNK>, do you want to take that one.
Yes, sorry about that, we ---+ yes, I think, generally speaking, we've seen financing levels for credit have been pretty steady, and we haven't seen a lot of changes within that.
We have not done any sort of term facilities lately, but then we're always looking at those so when they make sense, really for the kind of assets we've owned, Repo has been the best option at least in the current environment in terms of where our financing rates are.
Yes, I think, book value estimates as of last night were very flat to maybe up just a tiny bit since quarter end.
So, I guess, <UNK>'s mentioned, agencies have lagged a bit and, I think, CRT has come back from ---+ has retraced a lot of the widening that we saw at the end of the last quarter and, I think, CMBS and legacy RMBS have been, I would say, relatively flat to may be a little bit tighter.
But generally speaking, I think, we're flat to up just a hair.
Okay, operator.
Since there are no further questions, we will wrap up the call.
Okay.
Well thanks, everyone, for joining us.
