Invesco Mortgage Capital Q4 2024: Navigating Contradictions in CMBS Allocations, Leverage Strategy, and Mortgage Outlook

These are the key contradictions discussed in Invesco Mortgage Capital's latest 2024Q4 earnings call, specifically including: Agency CMBS and Agency RMBS allocation, leverage policy, and the outlook on Agency Mortgages:



Earnings and Market Conditions:
- Invesco Mortgage Capital's book value per common share decreased by 4.8% to $8.92 per share in the fourth quarter, resulting in a negative 0.5% economic return.
- This was due to macroeconomic uncertainties, including changes in long-term treasury yields, inflation trends, and market adjustments to monetary policy expectations.

Portfolio Composition and Strategy:
- The Agency RMBS portfolio decreased by 11% quarter-over-quarter as the company sold lower coupon specified pools to manage leverage early in the fourth quarter and fund purchases in Agency CMBS.
- The focus on higher coupon Agency RMBS was to capitalize on more predictable prepayment behavior and potentially benefit from a decrease in interest rate volatility.

Capital Structure and Financing:
- The company reduced its cost of capital by funding the redemption of Series B preferred stock primarily with lower cost repurchase agreements.
- This resulted in an increase in the debt-to-equity ratio to 6.7x, indicating a more efficient capital structure.

Agency CMBS Investments:
- Invesco Mortgage Capital increased its Agency CMBS exposure to approximately 15% of its total investment portfolio, purchasing $181 million in the fourth quarter.
- The strategy focused on adding exposure when Agency CMBS offered relative value compared to Agency RMBS, aiming to benefit from prepayment protection and fixed maturities.

Hedge Position and Interest Rates:
- The company increased its hedge exposures to U.S. Treasury futures during the fourth quarter, with the notional balance rising to 30% of the total hedge notional balance.
- This change aimed to reduce exposure to swap spreads and take advantage of potential normalization of the yield curve in the future.