Welcome to the Invesco Mortgage Capital first quarter 2026 earnings call. All participants will be in an only listen mode until the question-and-answer session. At that time to ask a question, press a star followed by the one on your telephone. As a reminder, this call is being recorded. Now I would like to turn the call over to Greg Seals in Investor Relations. Mr. Seals, you may begin the call.
Thanks, operator, to all of you joining us on Invesco Mortgage Capital's first 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 incorporated reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome. Thank you for joining us today.
I'll now turn the call over to IVR's CEO, Kevin Collins, for his comments. Kevin?
Good morning, and welcome to Invesco Mortgage Capital's first 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. Look, I'll begin by saying that I'm very excited to assume the role of Chief Executive Officer of Invesco Mortgage Capital, and I would like to thank and congratulate our retiring CEO, John Anzalone, for his 17-year tenure with the company. John began his service as our CIO at the time of our IPO back in 2009. He spent the past nine years as CEO leading the company through a range of market environments and its transition more recently to an agency-focused strategy.
John, please know our entire team is grateful for your leadership, and I'd also like to thank and excuse me, I'd also like to congratulate Dave on his recent appointment to President. Dave, Brian, and I have all worked very closely with John since IVR's inception, and we're really looking forward to building on our positive momentum alongside Mark, our CFO. Importantly, we all have a shared commitment to disciplined investment management, to consistent performance, strong governance, and expanded investor engagement. We believe our current team, our capital structure, and our investment portfolio are incredibly well-positioned for the future. Looking ahead, we're excited to leverage our core competencies in Agency RMBS, but also Agency CMBS to continue delivering attractive outcomes for our investors.
In addition to our team's long track record and experience managing residential and commercial agency mortgages, we benefit from the insights of the global investment manager, which inform our views on macroeconomic conditions, interest rate dynamics, policy developments, and broader market risks. Additionally, our deep counterparty relationships enhance our ability to source, to finance, and to hedge attractive investment opportunities. We believe these advantages, excuse me, these advantages really differentiate us from our peers, and our entire management team remains committed to fully leveraging the resources and capabilities of Invesco. Turning to market developments. Look, during the first quarter, we operated in a more challenging market environment following the strong recovery in Agency MBS valuations experienced in the second half of 2025.
Financial conditions tightened as you had rising geopolitical tensions, you had higher energy prices, and renewed inflation concerns drove increased interest rate volatility and pushed U.S. Treasury yields higher across the curve. Short-term yields rose more sharply than longer-dated yields, largely reflecting a pullback in expectations for near-term monetary policy easing. At the same time, inflation expectations moved higher with two-year TIPS breakevens rising to approximately 3.25% by quarter end, up from about 2.3% at the beginning of the year. All these dynamics weighed on risk assets broadly and resulted in higher coupon Agency RMBS underperformance relative to Treasuries. Although our Agency MBS and Agency CMBS investments performed, I would say quite well during the quarter, the benefit was outweighed by a couple things, increased Agency RMBS risk premiums, but also notable swap spread tightening.
Against this backdrop, book value declined by 7.9% to 8.08% at quarter end. When combined with our dividends of $0.12 per month, resulted in an economic return of -3.2% for the quarter. In the context of evolving market conditions, our economic debt-to-equity ratio increased to 7.5x turns as of quarter end from 7x turns at the beginning of the year. That largely reflects the decline in book value per share. It also reflects our more constructive outlook on Agency RMBS as we enter the second quarter.
At quarter end, our $7.3 billion investment portfolio consisted of $5.2 billion Agency RMBS, $1.2 billion Agency TBA, and $0.9 billion Agency CMBS, and we maintained a sizable balance of unrestricted cash and unencumbered investments totaling $493.1 million. Our earnings available for distribution declined modestly from $0.56 in the fourth quarter of last year to $0.55 in the first quarter. As of quarter end, we hedged 96% of our borrowing costs with interest rate swaps and U.S. Treasury futures. Entering the second quarter, Agency mortgages have performed well as the risk sentiment has improved and interest rate volatility has moderated. Near-term inflation concerns remain elevated, they've eased somewhat with two-year TIPS breakevens now below 3%, suggesting a lot of stabilization and inflation expectations.
As a result, positively, our book value has improved by approximately 2% since the end of the first quarter. Looking ahead, you know, I'll note that we believe a further reduction in geopolitical tensions would likely provide additional support for risk assets. From a supply and demand perspective, Agency RMBS net issuance should remain manageable. The GSEs continue to provide steady demand, and bank participation is likely to increase, supported by recent Basel capital framework proposals that improve capital efficiency of high-quality mortgage assets. Together, these macro and market technical factors create a more constructive backdrop for Agency RMBS holdings, particularly as wider spread levels relative to the prior quarter offer more attractive entry points.
In addition, despite elevated supply, Agency CMBS continues to offer attractive risk-adjusted yields and diversification benefits, just given its stable cash flow profile and its lower sensitivity to interest rate fluctuations. Away from market developments and away from our outlook, it's I think also worth highlighting that we successfully reduced preferred equity to less than 20% of our total equity. That's reduced costs, but it's also benefited returns for common stockholders. We've also taken steps to deepen alignment with investors, including transitioning this year from quarterly to monthly dividend distributions.
On that note, wanna highlight that, you know, we have received positive feedback that our capital structure positions us competitively within the sector, and that our monthly dividend approach better aligns the cash flow needs of income investors, but it also provides important monthly touch points regarding our key financial metrics. With that, I'll now turn the call over to Brian to go through more details regarding the portfolio.
Thanks, Kevin. Good morning to everyone listening to the call. I'd like to begin by also congratulating John on his well-deserved retirement, and Kevin and Dave on their newly appointed roles. As Kevin noted, the four of us have worked closely together for nearly 20 years, including the almost 17 years since IVR's IPO in June 2009. I and the rest of the team are very excited for him as he enters the next phase of his life, and I would like to express my sincere gratitude for his immeasurable contributions to IVR over the past 17 years. These transitions clearly illustrate the advantages of the relationship with Invesco, our external manager, given the vast resources and deep bench from which our team benefits.
Kevin and Dave bring a wealth of experience, consistency, and familiarity to their new roles, and I have no doubt that they, along with Mark and I, have all the resources necessary to continue the strong momentum that IVR has enjoyed in recent years. I am extremely excited for the future of IVR as we embark on the next chapter in our company's leadership. Switching gears to financial markets on slide four, interest rate volatility moved notably higher during the first quarter, as expectations for near-term monetary policy shifted amid concerns regarding AI's impact on employment in February to the inflationary impact of the conflict in the Middle East in March.
The 10-year Treasury yield traded in a 50 basis point range, closing at a low of 3.94% on February 27th, before closing sharply higher at 4.43% on March 27th and finishing the quarter at 4.32%. As depicted in the chart on the lower left, two cuts to Fed funds were anticipated for 2026 at the beginning of the year. Those expectations were largely priced out in March amid escalating oil prices and a robust economy that showed little sign of impact from the conflict. This led to a flattening of the yield curve as two-year yields ended the quarter 32 basis points higher, while 30-year yields increased just 7 basis points.
Positively, as shown in the upper-right chart, repo markets for our assets have been remarkably stable despite broader market volatility, with financing readily available and spreads over one month SOFR remaining within a tight range. Slide five provides more detail on the agency mortgage market. The sector enjoyed a strong start to the quarter as the positive momentum from the second half of 2025 carried over into the new year, aided by low interest rate volatility, a steeper yield curve in support of supply and demand technicals. Although the GSEs had been adding to their retained portfolios throughout the second half of 2025, the announcement of a $200 billion mortgage purchase program on January 8th ignited a sharp response as investors rushed to get ahead of the program, leading to significantly higher valuations and lower mortgage rates in a matter of days.
However, the move tighter in spreads faded the rest of January and into February as further details on the program were scarce. Yet the prescribed presence of the GSE as a buyer in the market was a clear indication that the supportive supply and demand technicals were on even stronger footing in the coming months and quarters. As interest rate volatility increased in February and March, agency mortgage performance continued to wane, but the resulting underperformance was much more orderly than in previous episodes of market stress in recent years. Lower coupons fared best in this environment, outperforming treasury hedges for the quarter despite the volatility. Meanwhile, higher coupons lagged throughout the period, initially due to investor concerns on prepayment risk given the administration's focus on mortgage rates, and subsequently because of their elevated sensitivity to interest rate volatility as compared to lower coupons.
Positively, payups improved during the quarter, offsetting some of the underperformance of higher coupons relative to lower coupons, given increased investor demand for additional prepayment protection in premium dollar price bonds. We continue to believe that owning prepayment protection via carefully selected specified pools, particularly in premium-priced holdings, remains an attractive opportunity for mortgage investors and helps mitigate convexity risk inherent in agency mortgage portfolios. In addition to the GSEs, bank and overseas demand also improved in the quarter, providing additional support for the sector. While money managers and mortgage REITs were also steady contributors. The supply and demand technicals improved the economics for the dollar roll market, with most coupons enjoying attractive implied financing rates. Although this dynamic faded for conventional coupons in the latter half of the quarter, dollar rolls on production coupon Ginnie Mae TBA remained quite attractive, with implied financing rates well below one month SOFR.
Slide six details our Agency RMBS investments as of March 31st. Our portfolio increased 19% quarter-over-quarter as we invested proceeds from common stock ATM issuances. We sold our modest allocation to 6.5% coupons early in the quarter as efforts to reduce mortgage rates increased prepayment risk in our holdings. While purchases were primarily focused in 4.5% through 5.5% coupons. The decline in our 6% allocation as a result of pay downs and the overall growth in the portfolio as we had limited trading activity in the coupon during the quarter. Agency TBA securities represented the majority of our purchases on the quarter as we sought to benefit from the attractive environment in the dollar roll market, ultimately increasing our allocation to approximately 17% of the total portfolio.
Despite the increase in our TBA allocation, our total portfolio continues to benefit from significant prepayment protection, with over 80% of the portfolio allocated to securities with some form of prepayment protection via over $5 billion specified pool Agency RMBS and nearly $900 million of Agency CMBS. We continue to favor specified pools with lower loan balances given their superior predictability of future cash flows, while we remain well-diversified across collateral stories with limited changes during the quarter. Leveraged returns on Agency RMBS hedged with swaps remain attractive, with the current coupon spreads at the five and 10-year SOFR blend ending the quarter near 165 basis points, 25 basis points wider than year-end, and equating to levered gross returns in the high teens. April's outperformance has since narrowed the spread by 10 basis points, with levered returns remaining attractive in the mid to upper teens.
Slide seven provides detail on our Agency CMBS portfolio. Risk premiums tightened meaningfully in January, consistent with Agency RMBS spreads, but also proved resilient amid the sharp increase in interest rate volatility in the latter half of the quarter, only modestly widening in February and March. Our Agency CMBS position performed in line with expectations, providing stability in times of stress and outperforming Agency RMBS across the coupon stack for the quarter. Despite the lack of 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 Agency RMBS is attractive in order to provide additional stability to the portfolio, recognizing the overall benefits as the sector diversifies risks associated with Agency RMBS. Slide eight details our funding and hedge book through quarter end. Repurchase agreements collateralized by our Agency RMBS and Agency CMBS investments decreased from $5.6 billion- $5.3 billion, as most of our purchases during the quarter were in Agency TBA. While the total notion of our hedges increased from $4.9 billion- $5.1 billion. Our hedge ratio increased from 87% to 96%, primarily due to the increased allocation to Agency TBA.
The composition of our hedges remained weighted towards interest rate swaps, with 81% of our hedges consisting of interest rate swaps on a notional basis and 65% on a dollar duration basis. Swap spreads tightened during the quarter, creating a modest headwind in performance. Despite the recent tightening, we remain comfortable maintaining the majority of our hedges in interest rate swaps, as we believe swap spreads are relatively tight and offer an attractive hedge profile relative to Treasury futures. To conclude our prepared remarks, the sector experienced a more challenging environment in the first quarter as the supportive trend of moderating financial market volatility reversed amid escalating geopolitical tensions.
While higher coupon agency mortgage valuations recovered a portion of their first quarter underperformance in April, developments in the Middle East conflict will continue to drive interest rate markets in the near term, leaving the sector somewhat vulnerable to headlines and further bouts of increased volatility. Positively, the supply and demand environment for the sector is at its most supportive in a number of years, with money managers, mortgage REITs, banks, overseas investors, and the GSEs providing more than enough demand to absorb net supply, both organic and runoff from the Fed's balance sheet. This supportive environment has resulted in, and should continue to result in, reduced spread volatility from the levels experienced in recent years, producing opportunities to benefit from episodes of cheaper valuations with reduced risk of a more significant or more protracted dislocation.
Lastly, our liquidity position remains ample, providing substantial cushion to withstand additional market stress while also allowing sufficient capital to deploy into our target assets as the investment environment improves. While we view near-term risks as balanced, we believe agency mortgages are poised to perform well as geopolitical tensions moderate and their impact on the U.S. economy becomes more clear. Thank you for your continued support of Invesco Mortgage Capital, and now we will open the line for Q&A.
I think our first question comes from Ameeta Lobo Nelson with UBS. Your line is open, you may ask your question.
Thank you and good morning. On the equity issuance this quarter, can you speak a little to the timing of those raises and how you're thinking about future ATM activity?
Yeah, sure. You know, I guess I'll start by saying that we raised, nearly $134 million net of issuance cost in Q1 through our ATM. I would say that those were timed, pretty steadily, you know, across, you know, throughout the quarter. I would say that, you know, one of the things as we're thinking about future issuance is that our capital structure is now well-positioned to support IVR's long-term success. We do plan to selectively access the ATM to raise common stock when it provides a clear benefit to our shareholders. We do continue to think that ATM is the most efficient mechanism for raising capital. I guess lastly, I would emphasize that responsible growth really reduces our fixed cost per share and it improves liquidity in our stock.
It's small things that we think are beneficial for the company.
Got it. Thank you. Just on risk management, can you speak to, you know, some of the decisions that were made for the portfolio during the volatile period in March? Would you describe, you know, upcoming periods of volatility as a trading opportunity or a constraint on your risk-taking?
Hey, good morning, Ameeta Lobo Nelson. This is Brian Norris. Yeah, you know what? I think the improved environment for agency mortgages that we've seen really over the past, call it 10- 11 months, gave us more comfort that the volatility that we saw in March would pass and that mortgage valuations or spreads would be much less volatile than, for example, what we saw last April and in previous episodes. you know, we decided, you know, we were able to raise ATM throughout the first quarter, which allowed us to absorb some of that volatility as well.
You know, we did not sell assets as a result of any increased volatility, and were able to, you know, kind of invest along with, and put money to work at wider levels as that volatility occurred.
Appreciate the answers.
Thank you. Our next question comes from Jason Weaver with Jones Trading. You may ask your question.
Good morning, guys. First of all, congrats on Kevin and David Lyle on the elevation, and well, thanks to John Anzalone on his transition after a long tenure there. First of all, I was curious about the plans of a TBA position. Is this a structural hold part of the portfolio or plans more or less as a placeholder for rolling into specified cash pools over time?
Yeah. Hey, Jason, it's Brian. Good morning. Yeah, you know, I think TBAs certainly have a place in the portfolio structurally. You know, I think probably right now because they're so attractive that our allocation is a little bit heavier or at the higher end of what we'd be comfortable with. You know, naturally, I think, our inclination is to own more, you know, specified pools, as it's a bit more durable of a profile, return profile. Right now, you know, I think we're very comfortable with where TBA dollar roll markets are. You know, we think it's quite attractive. I think at least in the near term, our plan is to keep that allocation where it is.
Got it. Thank you for that.
Sorry, Jason, I would just also add, you know, I mean, Agency TBAs do offer, you know, increased liquidity for the portfolio that allow us, you know, to shift, you know, leverage as we see fit in a very efficient manner. Like I said, you know, I think structurally they do have a place in the portfolio as long as they're, you know, not too punitive from a, from a return perspective.
Thanks. That's helpful color. I see the swap book maturity termed out a bit, particularly in the five-year bucket. Was that largely a function of rolling down from those shorter duration 6.5x into the 5x and 5.5x?
Yeah. Well, I think the swap maturities were kind of rolling down the curve themselves. You know, I think, you know, moving from 6.5x Into lower coupons would actually, you know, require us to extend hedges. That was largely done, well, really through a mixture of both Treasury futures and swaps. We tend to own a bit more longer duration Treasury hedges than we do in swaps. A lot of our swaps are kind of at the front end of the curve.
Got it. Thanks for that. One more, if I may. Do you have an updated book value quarter to date?
We're up about 2% since the end of the quarter.
All right. Thank you for that color. I appreciate it, guys.
Thank you again. If you'd like to ask a question, just press star one. Our next question comes from Doug Harter with BTIG. Your line is open. You may ask your question.
Thanks. you know, just following up on the risk reward, you know, how are you thinking about, you know, what is the range that we're likely to be in for spreads and, you know, how to think about the risks that we either break out on either side of, on the high end or the low end of that range?
Yeah. Hey, Doug. And welcome back. Yeah, I think, you know, mortgage spreads, particularly relative to swaps, again, are quite attractive. You know, they're maybe not quite as attractive as they were in previous years when volatility was much higher. In the current environment, they're attractive and, you know, we could see a little bit of further spread tightening. You know, I think that could come from actually wider swap spreads, as opposed to necessarily tighter mortgage spreads versus treasuries. Because, you know, I think, you know, from a mortgage to treasury basis, you know, valuations are, you know, call it fair to slightly tight.
You know, there's not a lot of spread compression in that basis, but in the mortgage to swap basis, I think that there is some room for compression there.
Great. Appreciate that.
Thank you. Again, if you'd like to ask a question, just press star one. Our next question comes from Trevor Cranston. Your line is open you may ask your question.
Hey, thanks. Can you guys talk about how, you know, the GSE sort of performing as a backstop buyer of MBS impacts, you know, your thinking on leverage and if having sort of a lower level of downside risk necessarily equates to being willing to run at a, you know, a higher level of leverage level going forward? Thanks.
Yeah, sure, Trevor. Hey, it's Brian. Good morning. You know, the GSEs, I think, you know, particularly in March, we did see Fannie Mae kind of come in and act as that backstop. They added, I believe, $18 billion in March alone. The GSEs did add about, you know, $35 billion to their rate retention portfolios in the first quarter. You know, they still have about $117 billion left under their current caps.
We do think that, you know, while they are much more opportunistic than, say, the Fed, during times of quantitative easing, you know, and they are, you know, being a bit more selective on coupons and actual specified pool stories, they are certainly, at least in March, they did, you know, help absorb a lot of that volatility. You're right, that reduces spread volatility. That does give us more comfort. Like I said, you know, we did let leverage drift higher in March without selling assets because we did feel more comfortable in this environment, and we will continue to be that way. Again, you know, I think the outperformance in April has brought leverage back down to closer to where we were at the beginning of the year.
You know, I think that's probably a more normal long-term run rate for us, as we feel, you know, very comfortable from a liquidity and risk perspective there.
Got it. Okay. On the, on the hedge portfolio, you know, you just mentioned that a lot of the sort of longer tenor hedges are in, are in the Treasury bucket, currently. Can you talk about how you think about the balance between, you know, swap spreads being more negative the further up the curve you go and potentially, you know, using longer-dated swaps to capture some of the negative swap spreads versus, you know, the liquidity of using Treasury hedges on that part of the curve?
Yeah, sure, Trevor. Yeah, definitely, you know, swap spreads, particularly, you know, in the 30-year portion of the curve are quite negative, you know, near -80. Whereas in the front end, like, fives and 10s are more like 30 to 45 on the negative side. You're right, certainly more attractive from a negative spread perspective. You also get a lot of spread duration out there. You know, modest changes will add a lot more volatility to the portfolio in that, in that regard.
You know, I think, you know, we're much more comfortable, you know, just given that that spread versus swaps across the curve are still very attractive, we're much more comfortable kind of, you know, reducing that swap spread volatility by hedging with swaps at the front end of the curves, call it in the, you know, between zero and 10 years as opposed to going out as far as 30 years. We do own some 30-year swaps. You know, to the extent that, you know, we hedge out there, it's mostly in Treasury futures.
Makes sense. Thank you.
Thank you. At this time, I'll turn the call back over to the speakers.
With no other questions, I just want to note that we appreciate everyone on the call's interest in Invesco Mortgage Capital, and we look forward to future engagement.
Thank you. That does conclude today's conference. We thank you for your participation. At this time, you may disconnect your line.