Invesco Mortgage Capital's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Invesco Mortgage Capital Inc. (IVR)

Q2 2012 Earnings Conference Call

August 2, 2012 08:30 ET

Executives

Richard King – Chief Executive Officer

John Anzalone, Chief Investment Officer

Don Ramon – Chief Financial Officer

Analysts

Bose George – KBW

Douglas Harter – Credit Suisse

Trevor Cranston – JMP Securities

Jason Weaver – Sterne Agee

Vic Agarwal – Wells Fargo

Jason Weaver – Sterne Agee

Presentation

Unidentified Company Speaker

This presentation, and comments made in the associated conference call today may include forward-looking statements.

Forward-looking statements include information concerning future results of operations, our ability to maintain or improve book value, the stability of earnings and dividends, our ability to provide a competitive dividend, our views on the economy, current prices of mortgage-backed securities, the positioning of our portfolio to meet current or future economic conditions, our ability to continue performance trends, our portfolio prepayment fees, and the credit quality of our assets.

In addition, words such as beliefs, expects, anticipates, intends, plans, estimates, projects, forecast and future or conditional verbs such as will, may, could, should, and would, as well as any other statements that necessarily depend on future events are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations.

We caution investors not to rely unduly on any forward-looking statements and urge you to carefully consider the risks identified under the captions Risk Factors, Forward-Looking Statements, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K and quarterly reports on Form 10-Q, which are available on the Securities and Exchange Commission’s website at www.sec.gov.

All written or oral forward-looking statements that we make or that are attributable to us are expressly qualified by this cautionary notice. We expressly disclaim any obligation to update the information in any public disclosure to any forward-looking statements later it turns out to be inaccurate.

Operator

Good morning, ladies and gentlemen. Welcome to Invesco Mortgage Capital Inc.’s Investor Conference Call, August 2, 2012. All participants will be on a listen-only mode until the question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to turn the call over to the speakers for today, Richard King, Chief Executive Officer; John Anzalone, Chief Investment Officer and Don Ramon, Chief Financial Officer. Mr. King, you may begin.

Richard King – Chief Executive Officer

Thanks, operator. Good morning everybody and welcome to Invesco Mortgage Capital’s second quarter earnings call.

We’re pleased to announce earnings of $0.68 and a book value of $18.40. In our first quarter earnings call in May, we emphasized important areas of focus for us in the second quarter. And those were most importantly maintaining a stable book value and providing our shareholders with a competitive dividend. We accomplished each of these goals in the second quarter, primarily by maintaining low agency prepayments, continuing to add duration into the rate rally, and maintaining a high-quality credit portfolio. As a result, we also continued to strengthen the balance sheet.

Despite the recent weakness in the U.S. economy, we are decisively upbeat about IVR’s prospects in coming quarters. The housing market is showing signs of life and that’s benefiting the non-agency market. Operation Twist was extended and we believe the Fed is moving ever closer to QE3 shall be needed. Continued central bank intervention and risk aversion will likely keep rates low and may send them even lower. As we have seen in an unusual investment environment like this, fixed income investors are starved for yields. It’s leading them to seek out high-quality cash flows backed by collateral, collateral that is de-linked from all the ongoing uncertainty regarding the European debt crisis.

Investors searching for income are definitely attracted to government guaranteed debt that yields more than U.S. treasuries. We believe IVR’s mortgage investments are well-positioned to benefit in this environment. We have seen a rallying credit that gained strength after the Greek elections and the Twist extension. There has been increasing rate commission on the part of investors that lower yields are here for a while and that they should consider transitioning away from treasuries, because the yield compression and credit assets is likely to continue. For that reason and the hopeful signs that have emerged in housing markets, we expect non-agency RMBS will perform well even as the economy continues to struggle and foreign markets remain under pressure.

Agency mortgages have continued to rally as well due to only modestly higher prepayments and we do expect this trend to continue. The conviction behind our strategy is strong. The money raised from our successful preferred offering was invested within days in high-quality bonds as we found some attractive relative value opportunities in credit.

At this point in time on the margin we prefer credit from a relative value standpoint. At the same time, we continue to believe agency mortgages will benefit from the muted prepayment environment and the positive supply demand dynamic. Most importantly we see this environment continuing to benefit IVR’s book value and our ability to maintain an attractive and competitive dividend.

On July 19, IVR successfully issued $135 million of $25 par preferred stock. I’m also happy to report we’ll be closing on an additional $5 million today from the Greenshoe. We were able to procure a very attractive 7.75% coupon on the shares. We’ve raised the capital because as I mentioned earlier we see a great opportunity to buy credit assets. The timing was good on the preferred issuance because that market has seen multiple billions in redemptions and the demand for paper is strong.

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