Invesco Mortgage Capital's Management Presents At The Barclays Global Financial Services Conference - Special Call Transcript

Invesco Mortgage Capital Inc. (IVR)

Special Conference Call

September 11, 2012 8:15 am ET


John Anzalone – Chief Investment Officer

Donald Ramon – Chief Financial Officer


No identified analysts



Good morning. We’re going to get started with our next speakers. From Invesco Mortgage Capital, we have John Anzalone, and Don Ramon, the CFO here today. For those of you out there, Invesco is a mortgage REIT that invests in agency and non-agency RMBS and CMBS, and a result with the bond market rally has seen some nice book value appreciation along with a strong yield over the last year.

So with that brief introduction, I’ll hand it over to John for his comments.

John Anzalone

All right, thank you. I’ll just go through a little bit about the company, then a look at the portfolio in a little bit greater detail and then some of the dynamics we’re seeing in the market today.

On Slide 2, just starting with a quick overview of the company, IVR is managed by Invesco, a large asset manager, about $659 billion in AUM. Market cap of IVR is 2.3 billion, current dividend yield at 12.7%, and total assets just over 16 billion. And as of 8/31 – these numbers are a bit stale – book value was 18.40 per share.

On Slide 3, talk a little bit about our competitive advantage. You know, one of the advantages of being part of a large asset manager is we have a large experienced team, well established investment process. We really benefit from Invesco’s platform and take full advantage of that, and that’s led to pretty strong performance over the past few years – about 67% total return over the past three years.

Slide 4, I’ll just over this quickly, but again highlighting the performance that we’ve established over the past three years. You can see these numbers are both versus the Bloomberg Mortgage REIT Index as well as versus the S&P, and strong performance across the board – year-to-date almost 57%, one year 38%, and I mentioned three-year about 67% total returns.

Slide 5 is really here for more informational purposes. A lot of numbers on the page, so certainly not going to go through all of them, but some of the highlights – earnings per share and dividends remain competitive through some challenging times over the past few years. Asset selection and diversification and leverage are really what drives the strong ROE of the portfolio, and again the scalability of Invesco’s platform, one of the ways I think that shows through in is in the low operating cost, so that’s one of the places where aside from the people and that, just purely in operating cost perspective, we really benefit from IVZ.

So with that, I’ll just move into the portfolio. We’re a hybrid REIT so we invest both in resi and commercial asset classes. We find opportunities in both asset classes and really feel that the ability to move between sectors and go anywhere where we feel returns are good is one of the big advantages of the way we’re structured. The portfolio I mentioned was 16 billion. Current yield is about 3.58% with 6.3 times leverage, and I’ll move through each of the sectors in a little more detail over the next few slides.

On the agency side, the majority of our portfolio is in fixed rate prepaid protected pools. One of the things that’s been going obviously are you can see yields have continually declined over time as rates have gotten lower and prepayments have increased over the past couple years, but our net yield is still 130 basis points, has remained fairly stable over the past few quarters. The thing that’s really driving that is the box on the lower left – our agency prepayments have remained very stable considering how high the dollar prices in the mortgage market have gotten, so that really is a big driver of returns in terms of just keeping prepayment speeds under control. And you can see on the bottom right versus similar collateral, our speeds have been much, much slower, so that’s really been the driver of returns on the agency side. It’s been the entire key to that asset class (inaudible).

In non-agency, again, really on the credit side I think the one thing we try to stress both in non-agencies and in CMBS is just having a high quality portfolio. In the non-agency sector, we’re about 70% senior re-REMIC with the remainder a mixture of seasoned prime and Alt-A, but those are also top of the capital structure. I think we have one subprime bond that makes up that 0.4%. But anyway, again, nice prepay history here. Obviously when bonds are at a discount, our prepay speed will be faster and we’ve seen pretty good voluntary prepay. I think in terms of the prepayments you see here, they’ve been in kind of the mid-teens. Really, that’s been about half and half between recoveries and actual volunteer prepayments, so that’s been a very good story for that sector. And the one thing I’ll also highlight is just how much this sector has rallied over the past couple years. You can see it in the yields – I mean, we were at 7.25 just a year ago and now we’re at 5.37, and there’s two things going on there. One is obviously your selection, so if you’re in more senior REMICs that’s going to be lower because they just have lower spreads; but really, I mean, it’s been a pretty tremendous rally across the board in the non-agency space.

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