Welcome to the Invesco Mortgage Capital Third Quarter 2026 Earnings Call. All participants will be in a listen-only mode until the question and answer session. At that time to ask a question, press the 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, and to all of you joining us on Invesco Mortgage Capital's third 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 the statements and measures as well as the appendix for the appropriate reconciliations to cap. Finally, Invesco Mortgage Capital is not responsible for and does not edit for guaranteeing the accuracy of our earnings. Telegram sends transcripts provided by third parties. The only authorized webcasts are located on our website. Again, welcome and thank you for joining us today. I'll now turn the call over to IVR's CEO, Kevin Collins, for his comments.

Good morning and welcome to Besco Mortgage Capital's third quarter earnings call. I'll provide a few comments before turning the call over to Brian Norris, our CIO. He'll 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. Now turning to the market, during the third quarter, we operated in a very challenging environment. Economic growth remained resilient, but financial conditions tightened as investors priced in additional Fed rate hikes. Treasury yields repriced sharply higher across the curve, driven largely by expectations for tighter monetary policy, but also stronger growth and concerns around fiscal deficits and increased Treasury supply. So look, to put the magnitude of the rates move in perspective, This represented one of the most significant increases in treasury yields since the aggressive Fed tightening cycle of 2022. We saw two-year yields rise more than 70 bps, 10-year yields rise more than 80 bps, all during the quarter. Interest rate volatility also increased meaningfully during the quarter, especially in September. The move index ended the quarter at 110, up from 83 at the end of the second quarter. And moving to the Fed, the FOMC's 25 basis point rate increase at the September meeting demonstrated its commitment to price stability, and it helped keep longer-term inflation expectations fairly well anchored despite elevated energy prices. Two-year break-evens increased to 2.5% at quarter end from 2% at the end of the second quarter, and five-year break-evens increased more modestly to 2.4% from 2.3%. So collectively, these developments, they weighed on investor demand, and they contributed to and I'd say that's their state across the coupon stack. And I would call agency CVS spreads modestly wider. So against this backdrop, we generated an economic return of negative 11.6%. So that consisted of monthly dividends at 12 cents per share and a 16.1% decline in book value per share. Quarter to date, our book value is up roughly 4% and together with our and roughly 6%. At quarter end, our $8 billion investment portfolio consisted of 6.6 billion agency RMBS specified pulls, 0.7 billion agency TVA and 0.7 billion agency CMBS. I do wanna note that in September, we tactically reduced our agency CMBS allocation to what was eight and a half percent, excuse me, to eight and a half percent from 11%. And we redeployed proceeds into agency RMBS and Fred Weiding made it relatively more attractive. And regarding our leverage, our economic debt to equity ratio increased 8.3 terms from seven and a half terms. And we maintained a sizable balance of unrestricted cash and unencumbered investments exceeding 400 million. Now our EAD, it declined from 50 cents in the second quarter, 47 cents in the third quarter. So that largely reflected the impact of repositioning our swap portfolio. So as of quarter end, we hedged 99% of our borrowing costs with interest rate swaps and U.S. Treasury futures. Now regarding capital activities, we raised approximately $51 million through the ATM program during the quarter with the goal of increasing our scale, reducing expenses per share, and improving the liquidity profile of our common stock. Entering the fourth quarter, our outlook for agency RMBS and agency CMBS is constructive. despite continued uncertainty surrounding inflation, monetary policy, geopolitics, recent spread widening has certainly enhanced projected returns and the relative value of our target assets. And I also want to note that we believe the liquidity and government guarantee of agency MBS enhances its appeal as investors are increasingly focused on managing risks. Further, agency RMBS, we believe, is positioned to benefit from increased demand from the GSEs from banks and from money managers. Lower interest rate volatility and de-escalation of tensions in the Middle East could also provide additional support. So against this backdrop, we're really focused on maintaining prudent leverage, ample liquidity, and portfolio diversification. And we believe we're well positioned to navigate uncertainty and create long-term shareholder value. So now I'll turn the call over to Brian are going to go through our portfolio and our performance for the quarter in greater detail.

Hey, thanks, Kevin, and good morning to everyone listening to the call. I'll begin on slide five, which provides detail on interest rates over the past year. As Kevin noted in his opening remarks, treasury yields rose sharply in the third quarter, as 10-year and 30-year yields rose 81 and 68 basis points respectively, to end at their highest levels in nearly 25 years. The yield curves deepened modestly in the front end, as five- and ten-year yields rose more than two-year yields, while the long end flattened, given modest support at the 30-year point of the curve. Resilient economic growth, above-target inflation, and persistent instability in the Middle East were the primary drivers of higher interest rates on the quarter. As a result, expectations for tighter monetary policy intensified, and the FOMC followed through with a 25 basis point increase in the Fed funds rate at their September 16th meeting. The increase was the committee's first since July 2023, and following the meeting, the market priced in nearly four more 25 basis point increases for the end of 2027, leading to a sharp increase in interest rate volatility in the latter half of the month. Positively, funding markets for our target assets remained stable throughout the quarter and over quarter end, as lending capacity remained ample and financing with the third quarter highlighted in gray. During the quarter, agency RMBS materially underperformed treasuries, driven primarily by the sharp increase in interest rate volatility in September. That volatility weighed on investor sentiment and triggered deleveraging from hedge funds, along with a modest amount of convexity related selling from servicers. While organic net supply remained manageable, incremental supply from banks and overseas investors added further pressure to the supply and demand backdrop. Positively, demand from the GSEs, money managers, and mortgage REITs provided some support to valuations, but not enough to offset the broader supply-driven pressure. Agency CMBS spreads were largely unchanged for most of the quarter, however, serving as a powerful diversifier to agency RMBS, given its limited exposure to interest rate volatility. The sector did not face the same selling pressure as agency RMBS, only widening modestly the last week of September as investors The dollar roll market for higher coupon agency TVAs continues to benefit from favorable technical conditions, with implied financing rates for production coupons remaining below one month SOFR for much of the quarter, enhancing muttered return potential in those coupons. Higher mortgage rates, however, weighed on specified pool payouts and higher coupons, as refinancing activity remained subdued and demand for repayment protections softened accordingly. Despite near-term pressure, we continue to view carefully selected specified pools as an effective tool for managing convexity risk in HC mortgage portfolios. With the mortgage universe largely extended and trading at a discount to par, convexity risk is more one-sided at current rate levels, and we believe this provides an attractive entry point for adding prepayment protection. Slide 7 summarizes the changes in our portfolio over the course of a relatively active third quarter. While higher interest rates and wider spreads offset net purchase activity to drive a decline in our total portfolio market value of 2.3% quarter over quarter, our highly liquid portfolio and focus on active management provided numerous opportunities to tactically adjust allocations to improve the investment profile of the company. Early in the quarter, we invested monthly cash flows and proceeds from our ATM issuances into specified pools, given their improved relative value versus HCTBA. Most of these purchases occurred in third-year 5.5% and 6% coupons at the higher rate environment reduced repayment risk in higher coupons, leading to a slight decline in our 4.5% and 5% coupon allocations. In addition, we swapped a portion of our agency PBA allocation into specified pools, further improving the convexity profile of our portfolio by reducing our sensitivity to interest rate volatility. We sold our remaining agency I.O. positions, were a strong performer in the portfolio over the last few years. When purchased, they offered attractive unlettered yields in the high single digits to low double digits. Recent demand for these low coupon IOs has been robust, given the very slow and predictable prepayment behavior over the past few years, and market yields have declined to the 6% to 7% range, reducing their attractiveness as an unlettered holding for IVR. We reinvested proceeds from these sales into 30-year 6.5% agency TBA, which benefits from a highly attractive Delaware oil market, providing an ROE well over 20%. Lastly, we rotated a portion of our agency CMBS allocations into lower coupon 2.5% and 3% specified pools, seeking to benefit from the resilience in agency CMBS valuations by reallocating into a similar risk profile for more attractively priced deep discount agency RMBS. As a result of this portfolio activity, our allocation to specified pools increased from 73% of our total investment portfolio to 83% during the quarter, notably improving the convexity profile at attractive entry points. Levered gross returns on production coupon specified pools hedged with swaps were in the high teens to 20% ROE, with the current coupon spread to the 5- and 10-year silver blend ending the quarter near 160 basis points, its widest level since March. Given the growth in specified pools within the portfolio, our allocation to agency TBA and agency CMBS declined from 14.7% to 8.3% in agency TBA and 11.1% to 8.3% in agency CMBS. Both remain core holdings in our portfolio despite the decline in allocations, with agency TBA continuing to provide attractive levered gross returns in the high teens to low 20s ROEs as implied financing rates persist near or below one-month repo rates in production coupons. Agency CMBS spreads widened modestly at the very end of the quarter, but the sector notably outperformed HCRMBS across the coupon stack, providing beneficial diversification for the total investment portfolio. Financing capacity has been robust as we continue to fund our positions with multiple counterparties at attractive levels. Despite the modest decline in our allocation,

We continue to believe agency CMBS offers many benefits, mainly through its inherent pre-trainment protection and fixed maturities, which reduce our sensitivity to interest rate volatility.

We will continue to monitor the sector for tactical opportunities to adjust our allocations to the extent the relative value between agency CMBS and lower coupon agency RMBS shifts, recognizing the overall benefits as the sector diversifies risks associated with agency RMBS. Slide 8 details our funding book at quarter end. Repurchase agreements collateralized by our HRMBS and agency CMBS investments increased from $6.2 to $6.8 billion, largely reflecting our rotation from agency TBA to specified pools, while the total notional of our hedges increased from $6.1 billion to $6.8 billion. Excluding the implied funding via our agency TBA allocation, Our hedge ratio remains elevated at 99% given the increased uncertainty regarding the path of monetary policy. In addition, we continue to maintain significant liquidity with approximately $401 million of cash and unencumbered investments at quarter end, equating to 44% of our total equity. Slide 9 provides detail on our hedge book at quarter end. The composition of our hedges remain weighted towards interest rate swaps. 76% OF OUR HEDGES CONSISTING OF INTEREST RATE SWAPS ON A NOTIONAL BASIS AND 67% ON THE DOLLAR DURATION BASIS. SWAP SPREADS WIDENED DURING THE QUARTER SERVING AS A MODEST TAILWIND FOR OUR PERFORMANCE. WE REMAIN COMFORTABLE FOCUSING THE MAJORITY OF OUR HEDGES IN INTEREST RATE SWAPS AS SWAP SPREADS ARE HISTORICALLY TIGHT AND OFFER AN ATTRACTIVE HEDGE PROFILE RELATIVE TO TREASURY FUTURES. AS SHOWN IN THE TABLE AT THE BOTTOM OF THE SLIDE, WE ADJUSTED THE MATURITY PROFILE OF OUR HEDGEBOOK DURING THE QUARTER reducing the notional amount of hedges with maturities less than three years from $1.9 billion to $1.2 billion and rotating that exposure into longer maturities across the maturity spectrum. The extension of hedge maturities was the result of the sharp rise in interest rates as we adjusted our hedges to account for the new interest rate environment given the extension in our H2RMBS portfolio. As Kevin noted, this had a negative impact on our EAD for the quarter as the majority of our shorter hedges were added to the portfolio in a much lower interest rate environment and had lower coupon rates than current market swaps. Importantly, the lower EAD had no impact on our economic return given the substantial market value gains to those lower coupon swaps. Slide 10 provides our model-based estimates of book value sensitivity to instantaneous shocks in interest rates and mortgage spreads. Looking first at the table at the top of the slide, We modestly reduced our duration gap quarter over quarter, reflecting a more cautious stance on the direction of interest rates. On the bottom table, the increased sensitivity to changes in mortgage spreads reflects our higher leverage quarter over quarter. We believe the current environment is conducive to higher leverage, as valuations have been well supported at wider levels and our liquidity remains ample. Importantly, we did not execute any net sales during the quarter, maintaining our exposure to the more attractive valuations moving forward. and allowing the company to capitalize on further normalization and valuations. To conclude our prepared remarks, the management team remains committed to delivering exceptional investment performance for our shareholders. While the volatility of the third quarter certainly presented a challenging backdrop, we were pleased with how well the markets functioned throughout, allowing us to reposition the portfolio to capitalize on more attractive opportunities. Although persistent geopolitical risk and the uncertain path of near-term monetary policy may create some volatility in mortgage valuations, we continue to believe the medium to long-term outlook for our target assets remains constructive, underpinned by attractive valuations and supportive supply and demand technicals. Additionally, our liquidity position remains ample, providing substantial cushion to withstand additional market stress while maintaining the flexibility to capitalize on opportunities Thank you for your continued support of Invesco Mortgage Capital. Now we will open the line for Q&A.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1. You will be prompted to record your name. To withdraw your question, you may press star 2. Again, just press star 1 to ask a question. And one moment, please, for our first question. Our first question comes from Marissa Lobo with UBS. You may ask your question.

Thank you. Good morning. I just wanted to start with the dividend. At the current level, you know, it's paying out roughly 20% of book value. Can you give us an update on how you're thinking about the appropriate dividend level from here?

Yeah, sure, Marissa. Thanks for your question, and thanks for joining the call today. You know, I guess I'd start by saying the current ROEs, as was mentioned, for our target assets are So we're going to be discussing the dividend with the board at our upcoming meeting, really with an emphasis around market conditions and available investment opportunities in relation to our current payout .

Got it. Thank you. And just looking at the portfolio, you know, you noted TBA financing is attractive relative to repo. How are you weighing that against the convexity benefits of specified pools when comparing returns?

Danny Marissa, it's Brian. Yeah, I mean, I think, like I said, you know, agencies, agency TBA ROEs are certainly attractive given where applied financing rates are. But, you know, that can also, you know, not be as durable as the benefits that we see in specified pools. And so, you know, I think, you know, at about 8%, you know, we're very comfortable with our allocation to TBA at this level. But, you know, I noted, you know, convexity benefits of specified pools right now, are a bit more one-sided. You know, I think extension risk has largely played out in the market. You know, certainly as of the end of September, you know, we've seen a pretty decent rally in rates since then. So some of that has reversed. But we're still, you know, very comfortable owning the majority of our allocation and specified pools just given the kind of the not only, you know, convexity benefits, Thank you.

Appreciate the answers.

Thank you. Our next question comes from Doug Harder with BTIG. You may ask your question.

Thanks, and good morning. Looking at slide 14 and slide 13, can you just talk about how you're thinking about the risk risk positioning, you know, both in leverage and in cash encumbered and kind of what, you know, what are levels that you're kind of willing to kind of comfortably hold to the extent that we have, you know, kind of other pockets of volatility and, you know, say October's, you know, book value recovery would reverse.

Yeah. Hey, Doug, it's fine. Yeah. You know, we're certainly comfortable with the current level. We obviously monitor on a daily basis and run against various risk models and metrics to determine the appropriate amount. Leverage has come down since the end of the quarter, just given the improvement in book value and mortgage spreads as well. We're certainly comfortable. We did let it drift higher over the course of the quarter, given that underperformance. and so you know we're comfortable at higher levels but again you know we think valuations are pretty attractive and supply and demand technicals are very supportive as well so that all kind of blends into our view on where we're comfortable with leverage.

Got it and you know I guess you know going the other way like how comfortable would you be to kind of Are you looking to take up leverage to take advantage of the current opportunity, or do you feel like you have the right risk positioning on?

Yeah, I think probably the latter. I don't know that. If we did see mortgage spreads kind of reverse from here, the recent tightening that we've and go wider and take our leverage a little bit higher. You know, that's not something that we would be uncomfortable with, but it's not something that we're necessarily looking to do, you know, by adding assets at this point.

Got it. Makes sense. Thank you.

Thank you. Our next question comes from Trevor Cranston with Citizens JMP. You may ask your question.

Okay. Thanks. You mentioned in the prepared remarks the potential for normalization of MBS valuations. Can you talk about what you guys see as the most likely driver of that normalization, if that's reduced interest rate volatility or if you see some other factors potentially driving improved valuations?

Thanks. Sure, Trevor. Hey, it's Brian. Good morning. Certainly, interest rate volatility. As that continues to normalize, we should see mortgage spreads normalize along with that. Interest rate volatility has certainly been the closest tie or the biggest driver of mortgage spreads over the last number of years. So that's the number one thing that we would look to see. Now, what brings down interest rate volatility, I think, is up for a little bit more debate. I think it certainly is a clearer path of monetary policy, near-term monetary policy, and it's also maybe some conclusion or at least some progress on the Middle East front would benefit that as well. So I think recent stresses in credit markets Thank you. And this question comes from Jason Weaver with Jones Trading. You may ask your question. Good morning, guys.

Thanks for taking the question.

First of all, given the discount to book, it seems like the appeal of issuance is a bit more muted here, but have you discussed internally pursuing anything in repurchase? It seems like the ROE is kind of comparable to new investment, but is there a discount level at which it becomes much more urgent? Yeah. Good morning, Jason. Thanks for joining our call. I'll start with the ATM front and issuance and then kind of circle back to repurchases. As you probably noted, we raised approximately $50 million of capital in Q3. We haven't raised any capital in Q4. I think as we're thinking about things as it pertains to buybacks, we do have a common stock repurchase program in place. And if our shares trade at a meaningful discount to book value for what I would consider a sustained period of time, Thank you for that. Yeah. and then it looks like spec payups fell a bit while rates rose. I think you have about 50 million at risk there, if my math works out. With mortgage rates still north of seven now, where do you see the floor on payups in your internal modeling?

Yeah, hey Jason, it's Brian. Yeah, I think, yeah, so I mean, most of the universe is in discount price areas. So I think, you know, we're, probably very close to that floor. It's really hard to say. I mean, obviously, you know, during particular times of stress, those payoffs can, you know, decline notably, but typically will bounce back, you know, quickly after that. So, you know, I think to directly answer your question, I think, you know, extension risk is largely out of the market. And so, you know, I think, you know, payoffs are, about as low as they would likely go in this environment.

Okay. That's great color. I appreciate it.

Thank you. And this question comes from Jason Stewart with CompassPoint. You may ask your question.

Thanks. Good morning. Going back to the dividend, when you have that discussion with the board, what factors are most important. Is it incremental returns? Is it how much credit you think the stock is getting for the dividend? It's obviously quite low. Other investment opportunities like repurchase. If you could just walk through maybe the thought process and how you consider those different factors or if I missed one, add to it.

Yeah, good morning, Jason. Yeah, thanks for your question. I'll list through those and then kind of circle back to ultimately how we think about the dividend big picture. So just in terms of have changed quite meaningfully recently and are still somewhat kind of settling into new ranges. So we'll kind of see how that takes hold. The second I would say is obviously current earnings. Third is portfolio composition. And as I mentioned, I believe in my response to Marissa's question, we're going to think about available investment opportunities in relation to our current payout on book value because Ultimately, we want to be mindful of changes in the market and mindful of all the things that I just kind of walked through and how some of those may have changed to ensure that our dividend is supported by the portfolio earnings power. And then obviously, think about it from the lens of providing stability and making sure that the dividends compete.

Got it. Okay. That's helpful. And then on the MBS front, I mean, it seems like we've got a little bit of a mixed picture from the GOCs in terms of buying activity in September. How much does that factor into your decision on leverage and overall comfort with the portfolio in current spreads?

Hey, Jason. It's Brian. Yeah. Yeah. It's a bit of a mixed bag here. I think, you know, clearly Fannie's been, you know, more active year to date on the securities front. I think by my calculations, the combined entities still have about 135 billion of capacity under their caps. So that's pretty substantial. I mean, they've only added about 45 billion year to date. So it certainly gives us more comfort on leverage at modestly higher levels. I think in September, Fannie in particular served as a bit of a backstop adding a fair amount and over the third quarter I believe the two entities added about 15 billion to their retained portfolios and so that's you know that's a notable number and it yeah I think with mortgage spreads kind of in that 160 area which is you know where we were in March that kind of seems to be the level that the market shakes out in stress environments so I think you know from that perspective Got it.

Okay. Thanks a lot.

Thank you. At this time, I'm showing no further questions. I'll turn the call back over to the speakers.

Yeah, just there's no other questions. Just want to thank everyone for their interest in Invesco Mortgage Capital. We are appreciative of you joining this morning's call and look forward to engaging in the weeks ahead.

Thank you and this concludes today's conference. We thank you for your participation and at this time you may disconnect your lines.