IVR
#Good morning, and thank you for joining Invesco Mortgage Capital's fourth quarter earnings call.
With me today are <UNK> <UNK>, our CIO; Lee Phegley, our CFO; Kevin Collins, our President; and Dave <UNK>, our COO.
<UNK> will follow me and go through the portfolio section, and Lee, Kevin and Dave will join me for Q&A.
I'll begin on Slide 3, where we show an overview of our fourth quarter results.
As you can see, we had a strong end to 2017 with core earnings coming in at $0.47 per share, up $0.03 or 6% from the prior quarter, and book value up $0.01 to $18.35 per share.
This generated an economic return of 2.3% for the quarter, which brought the economic return for the year to a very strong 14.3%.
We're also very pleased with the full year total returns for our common shareholders of 34.5% in 2017.
These full year economic and total return results ranked among the very highest amongst our peer group and reflected some milestone achievements, including the Series C Preferred offering, the 2 consecutive quarterly increases in our common stock dividend, the inclusion of Invesco Mortgage Capital in the S&P SmallCap 600 Index, and 4 consecutive quarters of beating consensus core EPS expectations while reducing book value volatility.
For the fourth quarter, the increase in core earnings was attributable primarily to the full quarter impact of the Series C Preferred offering and, to a lesser extent, to a slowdown in prepayment speeds.
Slide 4 breaks down the components of the change in book value during the quarter.
While Agency mortgages were a negative contributor to book value performance, the benefit of our hedges exactly offset this drag, while the net impact of our credit risk exposure only mildly reduced book value.
I'd like to especially point out the graph at the bottom right, which shows our annualized book value volatility in relation to our peer group.
You'll notice that we continue to compare favorably with our peers by this measure.
Of course, the recent bouts of increased volatility across our financial markets will likely cause book value volatility to increase across the space, but as I'll talk about in a little bit, perhaps this is not such a bad thing.
We include Slide 5 to highlight how we've continued to compare favorably to our peers across a few key metrics we believe are amongst the best measures of management effectiveness.
As highlighted on the slide, Invesco Mortgage Capital is consistently outperforming its peer group average and ranking among the best in earning its dividend.
Whether it's economic returns, book value performance or dividend growth, IVR has delivered for shareholders.
I'll wrap up by giving some high-level comments about the current environment and the outlook for IVR.
While the fourth quarter was characterized by interest rates grinding higher and risk assets continuing their positive trajectory, the first 6 weeks of 2018 has seen a return of volatility in both the rates and risk markets.
Whereas our book value was relatively unchanged during the fourth quarter, we have seen a combination of moves that has taken our book value roughly 5% lower quarter-to-date.
This has been caused almost equally by the sharp move higher in rates and the widening in spreads in the Agency sector.
Typically, we keep a long position in duration to help offset any adverse moves in credit assets as a macro hedge overlay since the 2 normally move in opposite directions.
However, there are occasions when all assets become correlated, and this is one of those times.
Active management is crucial during times like these, and we have been actively reducing our interest rate exposure over the last several months.
While we view this decline in book value as temporary, particularly given that the widening in credit spread did not correspond with deteriorating underlying fundamentals, we also believe that these moves will lead to much greater opportunities going forward.
Hence, the silver lining in the return of book value volatility that I alluded to earlier.
The steeper yield curve, combined with wider credit spreads, is moving the ROEs on more of our target assets closer to accretive levels, so we welcome these new opportunities as they develop and look forward to highlighting how we capitalized on them on future calls.
Finally, I want to make a couple of comments about core earnings and the sustainability of the dividend, as that remains a high priority.
Our core earnings have been trending higher the past few quarters as the accretive preferred equity offering, slower prepayment speeds and good reinvestment opportunities have all been tailwinds.
We anticipate that further improvements may moderate as we progress further into 2018 as rates markets are reflecting an expectation for higher funding costs as the Fed continues to remove accommodation, which may exert pressure on net interest margins.
However, the dividend was recently increased with the expectation that it could be sustained in the near term.
And again, we believe higher interest rates will present opportunities in addition to challenges.
So it's likely that we will ---+ would also see ROEs on new investments rise in such an environment, which could mitigate interest-rate risk to some degree.
Book value volatility has increased recently for the first time in more than 4 years, but importantly, we remain deeply convicted in the strength of our credit assets and believe supportive underlying fundamentals remain paramount in the performance we ultimately deliver to our shareholders.
With that, <UNK> will now discuss the portfolio.
Yes.
I mean, we mentioned that it was down about 5% as of ---+ actually as of last night, I guess, the latest estimate.
But ---+ and really that has been ---+ most of that has occurred since the end of January.
So it's been the last couple of weeks that we've really seen agencies start to widen.
So that's kind of where we are.
