Invesco Mortgage Capital Inc. (IVR) Earnings Call Transcript & Summary

Good day. Today's virtual-only meeting is a live audio webcast. This technology enables the company to safely engage with its stockholders during these unprecedented times. Thank you very much to those who are participating in our virtual meeting online today. At this time, I will turn the meeting over to Mr. Jack Hardin, Chairperson of the Board of Directors.

Thank you. And on behalf of the Board of Directors and the management of Invesco Mortgage Capital, I wish to extend a very warm welcome to you for attending this virtual 2020 annual meeting of stockholders. As you're aware, we've changed the format of the meeting to virtual to support the health and well-being of the company's stockholders and employees and the community at large. This is the first time we've conducted an annual meeting in a virtual format. So please be patient with us as we share a new experience together. At this annual meeting, our Chief Executive Officer, John Anzalone, will make a presentation, followed by a question-and-answer session, which will be limited to 15 minutes. We will then offer 3 proposals for our stockholders' consideration, which I will describe in more detail once John has concluded his presentation. After a brief discussion of the proposals, stockholders will be given an opportunity to ask questions specifically related to the proposals before we proceed with the final online voting. Online voting will be available until the end of the meeting. A copy of the rules of procedure for this meeting were made available to you when you signed into the meeting and may be found on the website hosting this meeting. I plan to conduct this meeting in accordance with the rules of procedure and our bylaws, and I ask that each of you abide by those provisions as well. In addition to myself, other Board members of the company are attending this meeting. They are John Day, Carolyn Handlon, Jim Lientz, Dennis Lockhart, Greg McGreevey and Loren Starr. There are also members of the management team in attendance. I now would like to turn the meeting over to our CEO, John Anzalone. John?

All right. Well, thank you, and thank you, everyone, for joining us this afternoon. This presentation and related Q&A session may include forward-looking statements. These forward-looking statements are not guarantees and include certain risks, uncertainties and assumptions. Given the profound impact that the COVID-19 pandemic has had on IVR's portfolio since the third week of March, I will focus my remarks on what has happened to our target assets since the start of the pandemic, and the steps we have taken to reposition the company for the future. Slide 3 illustrates the impact on each of our main asset classes brought on by the dislocations caused by the COVID-19 pandemic and subsequent economic shutdown. Starting on the upper left, you can see how agency mortgage prices fell dramatically during mid-March as levered investors across various asset classes sold their most liquid securities, typically agency mortgage-backed securities to meet margin calls. You can also see the specified pool collateral here illustrated by collateral backed by medium loan balance loans lost nearly all of their premium compared to generic TBA pools as these pools are the ones that could be most quickly turned into cash. As of 12/31, nearly all of IVR's pools consisted of various specified pool collateral. While you can see the sharp decline in prices, you can also see that prices recovered as the Federal Reserve began buying unlimited amounts of agency mortgages. The chart on the upper right shows a similar picture, except this time in Agency CMBS. Again, these securities were impacted as liquidity dried up in the market and investors that held these bonds with leverage became for sellers due to margin calls brought on by steep and sudden price declines. Similar to agency mortgages, Agency CMBS began to recover as the Federal Reserve began buying this asset class in late March. Unlike in agency mortgages and CMBS, the non-agency markets have yet to be the beneficiary of direct government purchases. On the lower left and right, we show the declines in CMBS and credit risk transfer prices. And as you can see, the markets on these bonds have not recovered nearly to the extent seen in the agency markets. This can be explained by a couple of factors. The first is the government purchases are effective in restoring liquidity to markets, and non-agency paper is still suffering from a distinct lack of liquidity. The second factor has to do with fundamental credit risk as the long-term impacts on the collateral underlying these securities is not currently quantifiable. Slide 4 provides an update on our counterparties. Given the situation I just described, IVR was unable to meet margin calls on March 23 and certain counterparties sold securities pledged to secure financing obligations. As of April 14, we estimate that we have received or have the right to receive approximately $196 million of net cash proceeds with respect to sales for which counterparties have provided details. IVR has taken a number of steps to prudently manage its portfolio in this environment, including the sale of various assets, the reduction of balances under repurchase facilities and ongoing discussions with counterparties. Slide 5 gives the portfolio update as of April 15. At that time, the investment portfolio was approximately $2.9 billion, excluding cash. About $309 million of the investment portfolio was unencumbered, and our cash balance was approximately $756 million, of which $523 million was restricted. At that point, we have reduced our repo balances to $1.4 billion and our secured loan balance to $1.35 billion. The portfolio allocation at 4/15 can be seen in the lower left, with 81% of our assets in CMBS, 15% in residential credit and 4% in agencies. Book value at that time was estimated to be between $2.75 and $3.75 per diluted common share. Going forward, our near-term goal is to reduce the company's reliance on short-term funding by raising liquidity and closing repo lines. Once that is accomplished, we plan to reassess the rapidly changing investment environment to determine the intermediate and long-term strategy for the company. That concludes my remarks, and I'd like to yield the call back to Jack at this time.

Thank you, John. And let me just say -- take this time to express on behalf of the Board, our deep appreciation for the work that you and the management team did during these past few weeks. The hours were long, the pressure was great, and the effort was well done, and we appreciate it very much. Now if there are any questions regarding John's presentation, please submit online by clicking on the dialogue icon in the upper right-hand corner of the meeting page. Brandon Burke from the company's Investor Relations department will read out relevant questions, and the company will seek to address those questions. We'll allot 15 minutes to this question-and-answer period. Mr. Burke, are there any questions for us to address?

There is one question for our CEO, John Anzalone. John, when do you think dividends might resume? Will they be the same per quarter? Or will they be scaled upward as the price goes back up? I know it's a tough question considering the stock closed on May 4, just $0.83 above the annual payout. Just looking for your best estimate.

Okay. Thank you. Yes, the company continues to evaluate its dividend policy, and we'll work with the Board of Directors on timing and size of future dividends. Given the uncertainty, we aren't able to provide an update to payment of the first quarter dividend or outlook for future dividends today. As we have more clarity, we will look to provide our shareholders with additional information.

We have received no other questions at this time. So I'd like to turn the call back over to our Chairman of the Board.

Thank you, Brandon. We will now proceed to the proposals under consideration at this year's meeting. We have already made available to each stockholder, a copy of the 2020 annual -- a proxy statement for the 2020 annual meeting. The 2019 annual report on Form 10-K, which includes the audited financial statements for the fiscal year ended December 31, 2019, and copies of these documents are also available online in the meeting center. So resolutions were adopted by the Board of Directors providing for the meeting to be held at this time and direct you notice be given as provided in the bylaws. The Board also fixed the record date of March 5, 2020, for determining persons entitled to notice of and to vote at the meeting. Based upon the report of the inspector of elections, proper notice has been given and a quorum is present as represented by proxies received by the company and by those attending this virtual annual meeting. Accordingly, this meeting has been properly convened. After I have highlighted each of the matters to be acted upon this meeting, we will address questions, if any, directly related to the proposals. And the business of this meeting is limited to the 3 matters set forth in the notice of the meeting. The first proposal we will consider is the election of 7 directors. The Board has nominated John Day, Carolyn Handlon, Jack Hardin, James Lientz, Dennis Lockhart, and Greg McGreevey and Loren Starr, each to serve a 1-year term as the Director, which terms would expire at the next annual meeting of stockholders to be held in 2021 or when each director's successor is elected and qualified. Information concerning each director-nominee is contained in the proxy statement. No other nominations may be made at this meeting, therefore, I declare the nominations to be closed. The second proposal we will consider is an advisory, nonbinding vote, approved compensation of our named executive officers for 2019 as disclosed in the proxy statement. The third item of business is the appointment of PricewaterhouseCoopers LLP as independent auditors for the fiscal year ending December 31, 2020. We will now consider any questions directly related to these 3 proposals. As a reminder, if you have a question, please submit it by clicking on the Dialogue icon in the upper right-hand corner of the meeting center page. Mr. Burke, are there any questions for us to address regarding these proposals?

At this time, there are no questions regarding the proposals.

Thank you. There being no questions, we will proceed to voting on the proposals. Please note that if you've already voted, there's no need for you to recast your vote. Any shareholders online willing to vote and who duly signed into this virtual meeting may do so now by clicking the vote link on the website. We'll pause for a moment to allow that to take place. [Voting]

Thank you, and thank you for voting. Based on the preliminary report of Mr. Coleman of Computershare, the duly appointed inspector of elections for this annual meeting, all 3 proposals have received the required affirmative vote and have passed. A final report of the voting results will be filed on the current report on Form 8-K with the SEC within the next few days. The filing will also be available on the company's website. On behalf of the Board of Directors and management team of Invesco Mortgage Capital, I would like to again express our appreciation to the stockholders and guests who attended this meeting as well as those who have submitted their proxies and were not able to attend in person. There being no further business to come before this meeting, I hereby declare the 2020 Annual Meeting of the Stockholders of Invesco Mortgage Capital Inc. to be closed. We are adjourned. Thank you.

This concludes the meeting. Thank you again for your participation.