Invesco Mortgage Capital Q3 2024 Earnings Report

Invesco Mortgage Capital EPS Results

• Actual EPS: $0.68
• Consensus EPS: $0.79
• Beat/Miss: Missed by -$0.11
• One Year Ago EPS: $1.51

Invesco Mortgage Capital Revenue Results

• Actual Revenue: $73.83 million
• Expected Revenue: $12.38 million
• Beat/Miss: Beat by +$61.45 million
• YoY Revenue Growth: N/A

Invesco Mortgage Capital Announcement Details

• Quarter: Q3 2024
• Date: 11/5/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, November 6, 2024
• Conference Call Time: 9:00AM ET

Invesco Mortgage Capital (NYSE:IVR). (NYSE: IVR) is a real estate investment trust that invests primarily in mortgage-related securities. Its portfolio has historically focused on residential mortgage-backed securities issued or guaranteed by U.S. government-sponsored enterprises and government agencies, including securities backed by Fannie Mae, Freddie Mac and Ginnie Mae.

The company may also invest in other mortgage assets, including non-agency residential mortgage-backed securities, commercial mortgage-backed securities and mortgage loans. Its investment activities are designed to generate income from interest payments and the management of mortgage-related assets, while its financing and hedging strategies are intended to support portfolio operations and manage exposure to interest-rate and other market risks.

Invesco Mortgage Capital was formed in 2008 and is externally managed by Invesco Advisers, Inc., an affiliate of global investment manager Invesco Ltd. The company primarily participates in the U.S. mortgage and capital markets and operates as a mortgage real estate investment trust, subject to the applicable requirements for maintaining its REIT status.

Invesco Mortgage Capital Q3 2024 Earnings Call Transcript

Key Takeaways

• During Q3, agency mortgages outperformed Treasuries as interest rates fell, driving book value per share up 1.1% to $9.37 and yielding a 5.4% economic return including the $0.40 dividend.
• As of early Q4, rising Treasury yields and heightened volatility have pressured mortgage valuations, with estimated book value down ~5.8% since quarter‐end amid election and funding uncertainties.
• Invesco Mortgage Capital’s $5.9 billion portfolio comprises roughly 88% Agency RMBS and 12% Agency CMBS, supported by $520 million of liquidity, and operates at 6.1x economic leverage while planning to redeem Series B preferred shares to optimize its capital structure.
• The company is rotating into higher‐coupon Agency RMBS and Agency CMBS to capture prepayment protection and fixed maturities, targeting mid-to-high-teens gross ROEs on RMBS and low-double-digit ROEs on CMBS, and favoring specified pools over TBAs.
• Management expects Fed rate cuts, a steeper yield curve and lower volatility to support agency mortgage demand, but notes near‐term risks from the U.S. election, monetary policy shifts and year-end funding pressures.

Presentation

[Operator]

Welcome to the Invesco Mortgage Capital third quarter 2024 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 one on your telephone keypad. Also, 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.

[Greg Seals, Investor Relations at Invesco Mortgage Capital]

Thanks, operator, and to all of you joining us on Invesco Mortgage Capital's quarterly 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.

[Greg Seals, Investor Relations at Invesco Mortgage Capital]

Please review the disclosures on slide two of the presentation regarding these statements and measures, as well as the appendix for the appropriate reconciliations to GAAP. Finally, Invesco Mortgage Capital is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference 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 CEO, John Anzalone.

[John Anzalone, CEO at Invesco Mortgage Capital]

All right, thanks, Greg. Good morning and welcome to Invesco Mortgage Capital's third quarter earnings call. I'll provide some brief comments before turning the call over to our Chief Investment Officer, Brian Norris, to discuss our portfolio in more detail. Also joining us on the call this morning for Q&A is our President, Kevin Collins, our COO, Dave Lyle, and our recently appointed interim CFO, Mark Gregson.

[John Anzalone, CEO at Invesco Mortgage Capital]

So welcome, Mark. During the quarter, interest rates dropped sharply across the curve as investors reacted to cooling inflation and the potential for slower economic activity signaled by a weakening labor market. These factors also led to a repricing of the market's expectations of future monetary policy.

[John Anzalone, CEO at Invesco Mortgage Capital]

Following the FOMC's initial 50 basis point reduction in its benchmark rate in September, the federal funds futures market reflected an expectation that the target rate would be reduced by an additional 50-75 basis points during the balance of 2024, with another 100-125 basis points' worth of cuts priced into 2025. Against this backdrop, agency mortgages outperformed treasuries during the third quarter.

[John Anzalone, CEO at Invesco Mortgage Capital]

Moderating interest rate volatility and the steepening of the yield curve spurred demand for agency mortgages, with lower coupons performing better than higher coupons as a sharp decline in interest rates mitigated demand for coupons trading at a premium to par. Overall, prepayment speeds remained at very low levels given limited housing activity and elevated mortgage rates.

[John Anzalone, CEO at Invesco Mortgage Capital]

But speeds increased notably on higher coupons in September, as the decline in mortgage rates over the summer led to a surge in refinancings in more recent originations. Given the decline in mortgage rates and upward pressure on prepayments, premiums on higher coupons specified pool collateral increased modestly, while implied volatility via the dollar roll market or implied financing via the dollar roll market for TBA investments remained relatively unattractive throughout the quarter.

[John Anzalone, CEO at Invesco Mortgage Capital]

Agency CMBS risk premiums moved modestly wider, increasing the relative value versus agency mortgages. The positive environment for mortgages contributed to a 1.1% increase in book value per common share to $9.37. Combined with our $0.40 common stock dividend, this resulted in an economic return of 5.4% for the quarter. As we enter the fourth quarter, uncertainty around the U.S.

[John Anzalone, CEO at Invesco Mortgage Capital]

Elections and the future path of monetary policy has caused a sharp increase in both treasury yields and interest rate volatility, which has put heavy pressure on mortgage valuations. As of last night, our estimated book value is down approximately 5.8% since 9/30. Our debt to equity ratio ended the second quarter at 6.1 times, up from 5.6 as of June 30, while our economic debt to equity ratio increased from 5.9 times to 6.1 times quarter-over-quarter.

[John Anzalone, CEO at Invesco Mortgage Capital]

As of the end of the quarter, our $5.9 billion investment portfolio primarily consisted of $5.2 billion of agency mortgages and $0.7 billion of agency CMBS, and we continue to maintain a sizable balance of unrestricted cash and unencumbered investments totaling $520 million. For the quarter, earnings available for distribution per common share was $0.68, compared to $0.86 in the second quarter.

[John Anzalone, CEO at Invesco Mortgage Capital]

This decrease primarily reflects a reduction in our effective net interest income related to changes in the size and composition of our hedging portfolio. Yesterday, we announced our intention to redeem our Series B preferred shares on December 27, which will help optimize our capital structure and reduce our dividend obligations going forward. Looking ahead, the recent disinflationary trend in economic data suggests that the Federal Reserve can continue to ease monetary policy in the coming months as the need for restrictive monetary policy declines.

[John Anzalone, CEO at Invesco Mortgage Capital]

This easing, combined with the end of the U.S. election cycle, should lead to a steeper yield curve and lower interest rate volatility, creating a favorable environment for agency mortgage investments. However, if the disinflationary trend reverses and the labor market and economic growth improve, expectations for monetary policy could shift, posing a near-term risk.

[John Anzalone, CEO at Invesco Mortgage Capital]

Additionally, short-term funding pressures into year-end could impact demand for the sector. Despite these near-term risks, we are constructive on the sector as agency mortgage performance stands to benefit from normalization of monetary policy given attractive valuations and supportive supply and demand technicals.

[John Anzalone, CEO at Invesco Mortgage Capital]

We also remain constructive on Agency CMBS as we expect a gradual increase in new issuance to be met with adequate investor demand as the sector offers value relative to other fixed income investments, given its attractive prepayment protection and return profiles. Now I'll turn the call over to Brian to go through the portfolio.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Thanks, John, and good morning to everyone listening to the call. I'll begin on slide four, which provides an overview of the interest rate and agency mortgage markets. As shown on the chart in the upper left, U.S. Treasury yields declined across the yield curve during the third quarter as two-year yields were 111 basis points lower, while 10-year and 30-year yields declined 61 and 44 basis points, respectively. The chart on the bottom left provides Fed Funds futures market pricing since year-end.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Due to ongoing disinflation and a weakening labor market, investors priced in two more 25 basis point cuts in the Fed Funds rate for 2024 and 2025 by the end of the third quarter, compared to the end of the second quarter. By the end of October, investor expectations moderated due to a stronger-than-expected September employment report, raising concerns that monetary policy may remain tighter for longer.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Elevated monetary policy uncertainty and the strength of the economy has caused interest rate volatility to rise sharply, leading to agency mortgage underperformance in October. The chart in the upper right reflects changes in short-term funding rates since year-end. During the third quarter, funding rates declined in line with expectations for near-term monetary policy easing, but repo rates exhibited substantial volatility at quarter-end, given heavy U.S. Treasury supply and increased demand for repo.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Positively, the repo market normalized in October, although spreads have remained modestly wider given concerns regarding future treasury supply, election, and monetary policy uncertainty, and the risk of renewed funding pressures into year-end. Lastly, the bottom right chart details agency mortgage holdings by the Federal Reserve and U.S. banks. Runoff of the Fed's balance sheet continues, with agency mortgages declining by approximately $15 billion-$20 billion per month, while U.S. banks added modestly to their balance sheets.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

We expect bank demand for agency MBS to rise as monetary policy eases, and the finalization of the Basel III guidelines, likely by late 2024 or early 2025, provides banks with greater regulatory clarity. Slide five provides more detail on the agency mortgage market. In the upper left chart, we show 30-year current coupon performance versus U.S. Treasuries since year-end, highlighting the third quarter in gray. Current coupons outperformed during the quarter as interest rate volatility declined and the yield curve steepened, improving investor demand.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Since the end of the quarter, however, increased interest rate volatility and a bear-flattening yield curve led to sharp underperformance in the sector. Nominal spreads on current coupons returned to year-to-date wides and remain historically attractive as ongoing interest rate volatility is limiting demand.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Specified pools payouts improved in the third quarter due to the decline in mortgage rates, but have partially reversed as the abrupt increase in interest rates has led to less demand for prepayment protection. Lastly, as shown in the lower right chart, the dollar roll market for TBA securities became relatively unattractive again, with implied funding rates higher than SOFR most coupons. We continue to prefer specified pools over TBA, given their more predictable prepayment behavior and favorable funding yield levels.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Slide six details our Agency RMBS investments and summarizes investment portfolio changes during the quarter. Our Agency RMBS portfolio increased 12% quarter-over-quarter as we invested proceeds from ATM issuance into higher coupons. We continue to rotate a portion of our lower coupons into Agency CMBS as the relative value improved given tighter spreads and discounted Agency RMBS.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Overall, we remain focused in higher coupon agency RMBS, which should see greater benefit from a decline in interest rate volatility and are largely insulated from direct exposure to assets held by commercial banks and on the Federal Reserve's balance sheet. We focused our specified pool allocation on prepayment characteristics that are expected to perform well in both premium and discount environments, with our largest concentration in lower loan balance collateral, given more predictable prepayments.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

In addition, during the quarter, we rotated our $200 million notional TBA position into higher coupon specified pools as implied funding levels in the dollar roll market deteriorate. Although we anticipate interest rate volatility to remain moderately elevated in the near term, we believe current valuations on production coupon agency RMBS largely reflect this risk and represent attractive investment opportunities, with current gross ROEs in the mid to high teens.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Slide seven provides detail on our agency CMBS portfolio. We purchased $214 million in the third quarter, bringing our exposure to approximately 12% of our total investment portfolio. We believe agency CMBS offers many benefits, mainly through its prepayment protection and fixed maturities, which reduce our sensitivity to interest rate volatility.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Gross ROEs on our new purchases were in the low double digits ROEs, and we have been disciplined on adding exposure only when the relative value between agency CMBS and agency RMBS accurately reflects their different risks. Financing capacity has been robust, as we have been able to finance our purchases with multiple counterparties at attractive levels. We will continue to monitor the sector for opportunities to increase our allocation as they become available, recognizing the overall benefits of the portfolio as the sector diversifies risks associated with an agency RMBS portfolio.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Our agency CMO allocation is detailed alongside our remaining credit investments on slide eight. Our allocation to both agency interest-only and credit securities remained unchanged, with $73 million allocated to agency IO and $18 million allocated to credit at quarter-end. Although we anticipate limited near-term price appreciation in these investments, we believe they provide attractive yields for unlevered holdings, with returns in the high single digits.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Slide nine details our funding and hedge book at quarter-end. Repurchase agreements collateralized by agency RMBS increased from $4.3 billion-$5.2 billion, reflecting the increase in our equity base and assets, and our notional pay-fixed interest rate swaps increased as well from $3.9 billion-$4.3 billion. Given the smaller increase in our hedge notional, the ratio of our hedge notional to borrowings decreased quarter-over-quarter to 83% from 92% as we increased our position in longer duration treasury futures.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

In addition, the sharp decline in interest rates led to further repositioning of the swap book as the interest rate sensitivity of our assets decreased, warranting a similar decrease in the weighted average maturity of our hedges. Reflecting this change, the weighted average maturity of our swaps declined from 7.5 years at the end of the second quarter to 5.4 years, resulting in an increase in the weighted average coupon on our pay-fixed swaps from 1.22% to 1.37%.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Economic leverage ended the quarter at 6.1 times debt to total equity, up from 5.9 times at the end of June, while our debt to common equity declined from nearly 9.5 times to 9.1 times at quarter-end. The increase in our total equity leverage and decline in common equity leverage highlights the positive impact of our improving capital structure.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Subsequent to quarter-end, we announced our intention to call our Series B preferred equity in late December, which will further improve our capital structure as we enter 2025. To conclude our prepared remarks, despite strong results in the third quarter, financial markets have been quite volatile in recent weeks as investors become increasingly concerned about the outcome of the election and its impact on near-term fiscal policy, while also continuing to debate the path and magnitude of monetary policy easing.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

The sharp decline in interest rates reversed notably in October, increasing interest rate volatility and negatively impacting agency RMBS valuations. We believe IVR is well positioned to navigate current mortgage market volatility, given our moderate leverage and robust liquidity, as well as our increased allocation to agency CMBS.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

We continue to selectively capitalize on historically attractive Agency RMBS spreads and believe the sector is poised to perform well as the currently volatile election cycle passes. Our liquidity position provides substantial cushion for further potential market stress while also providing capital to deploy into our target assets as the investment environment improves.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

In addition, we believe further easing of monetary policy will lead to a steeper yield curve and decline in interest rate volatility, both of which provide a supportive backdrop for agency mortgages as they improve demand from commercial banks, overseas investors, money managers, and REITs. Thank you for your continued support for Invesco Mortgage Capital, and now we will open the line for Q&A.

[Operator]

We will now begin the question and answer session. If you would like to ask a question, please press star one. You will be prompted to record your name. To withdraw your question, you may press star two. Again, press star one to ask a question, and one moment, please, for our first question. Looks like our first question comes from Jason Weaver with JonesTrading. You may ask your question.

[Jason Weaver, Managing Director, Head Specialty Finance, and Real Estate Research at JonesTrading]

Hi, good morning. Thanks for taking my question. I want to bridge to your comments about the addition of the Agency CMBS. I appreciate the fact that that might dampen book value volatility, but does that change your approach to how you set leverage targets there? I.e., could you support higher leverage going forward?

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Hey, Jason, it's Brian. Yeah, thanks for the question. Yeah, I think to the extent that our exposure to rate vol declines, that that would allow us to increase leverage. I think clearly the month of October has been pretty challenging, but they put us in a pretty good position where spreads are attractive. And as that volatility declines, it gives us more room to be able to add in the future.

[John Anzalone, CEO at Invesco Mortgage Capital]

Yeah, I'll point out also, John, that Agency CMBS has basically the same borrowing cost and haircuts as agency mortgages, so that doesn't impact leverage from that perspective either.

[Jason Weaver, Managing Director, Head Specialty Finance, and Real Estate Research at JonesTrading]

Got it. Thank you. That's helpful. And then I was curious about any sort of prospective change in position in quarter to date, noting that you've raised quite a bit on your ATM in the third quarter.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Yeah, quarter to date, nothing too significant changes-wise. I think, like I said, October was pretty volatile, and we came into it with a strong liquidity position and moderate leverage. And so our ability to kind of withstand that volatility allowed us to not have to make significant changes since quarter-end.

[Jason Weaver, Managing Director, Head Specialty Finance, and Real Estate Research at JonesTrading]

Okay. That's helpful. Thank you.

[Operator]

Thank you. Again, if you'd like to ask a question, press star one. Our next question comes from Trevor Cranston with Citizens JMP. You may ask your question.

[Trevor Cranston, Director in Mortgage Finance Equity Research at Citizens JMP]

Hey, thanks. You guys have historically mostly used swaps for hedging purposes, and those have kind of underperformed relative to using treasury hedges over the last several months. I was just curious if you guys have any kind of general thoughts about swaps versus treasuries, why swap spreads have become so negative, and if there's any sort of change in your thinking in terms of using either as hedge instruments going forward. Thanks.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Yeah. Hey, Trevor, it's Brian. Yeah, no, we certainly started in the third quarter to using Treasury futures more prominently. You're right. I mean, swap spreads have been moving tighter for quite a while now, and I think the move from LIBOR to SOFR kind of removed the credit component of swap spreads, and it's mostly more just about Treasury supply at this point.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

And the expectation is that Treasury supply has been robust, and it's likely to continue to be robust. So we're a bit concerned that swap spreads won't be mean reverting, and so this tightening that we've seen could be relatively persistent. And so our idea is to increase our exposure, our hedge book in Treasury futures that will help mitigate our exposure to swap spreads.

[Trevor Cranston, Director in Mortgage Finance Equity Research at Citizens JMP]

Okay. Got it. That's helpful. Thank you.

[Operator]

Thank you. Our next question comes from Jason Stewart with Janney. Your line is open. You may ask your question.

[Jason Stewart, Director and Equity Research Analyst at Janney]

Hi, thanks. Good morning. Just a quick clarification on the down 5.8-11.5, is that including a dividend accrual?

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Correct. Yes. Yeah, that includes. I'm sorry. Well, it excludes the impact of the dividend.

[Jason Stewart, Director and Equity Research Analyst at Janney]

Excludes the dividend. Okay.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Yeah.

[Jason Stewart, Director and Equity Research Analyst at Janney]

Then obviously some big moves this morning with 10s sort of approaching 450. I was just wondering what your macro take was on where you think 10s as a benchmark for mortgages are headed in terms of the news we got overnight and maybe how that coincides with your view of rate vol?

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Yeah, certainly pretty fresh moves so far this morning. I think the move in treasury rates was largely expected based on the outcome of the election, and so that's not a surprise from that perspective. I think actually implied vol has come down, so that's been a positive for agency mortgages, at least here initially.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

I haven't looked in the last 30 minutes or so, so clearly there have been, on the day after the election, some pretty big swings in markets historically. But I do think that it's a question of implied volatility versus realized volatility. I think, like I said, I think implied has come down now that we're kind of past this event, so that's a positive. As far as where treasury yields kind of end up, that's a tough question.

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

I think the expectation is kind of in that 4.5%-4.75% range here in the near term, so we could continue to see some pressure higher. But the steeper curve and lower implied vol should both be relatively positive, particularly for higher coupon agency mortgages.

[Jason Stewart, Director and Equity Research Analyst at Janney]

Yeah. Okay. That's helpful color. And then on the short end of the curve, I mean, the forwards have taken out about one rate cut so far. Is the House view or your view and sort of the way you construct the portfolio take forwards at their word, or do you feel like when you look at underlying inflation trends that the Fed might be offsides on some of these moves and we'll see more forwards come out? And I guess net to that is how important is 350 versus a 4% Fed funds rate if the curve remains steep to the strategy and the structure of the portfolio?

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Yeah. I think to your point, the overall level may be less important as opposed to the steepness of the curve and what it means for volatility going forward. Clearly, we prefer a steeper curve and lower vol. Yeah, our House view has been in that five to six cut range between now and the end of 2025. So I think based on last night again, I think that probably moves to the lower end of that range. But I think clearly there's been a lot of talk about tariffs and tax cuts, and so we'll have to just kind of see how that plays out here over the near term before we kind of settle in on a specific number.

[Jason Stewart, Director and Equity Research Analyst at Janney]

Okay. Thanks for the color.

[Operator]

Thank you. Our next question comes from Eric Hagen with BTIG. Your line is open. You may ask your question.

[Eric Hagen, Managing Director and BTIG Mortgage and Specialty Finance Analyst at BTIG]

Hey, thanks. Good morning. Maybe a couple of follow-ups here. I mean, does retiring the preferred stock change the way that you think about your overall debt to equity leverage, and does the range for your leverage that you might explore change because of that at different spread levels?

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Yeah. I think our overall debt to the common, it doesn't change our view on that, but the total debt to equity will move higher as the capital structure kind of normalizes.

[Eric Hagen, Managing Director and BTIG Mortgage and Specialty Finance Analyst at BTIG]

Okay. Is there a target range for your leverage that you envision running with over the near term?

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

Yeah. Debt to common, we've been pretty comfortable around that nine area. I think we'll continue to kind of monitor how the market evolves here over the near term, but I think nine has generally been a pretty kind of conservative/moderate comfortable level where it gives us a lot of liquidity, and it allows us to maybe pick that up a notch higher if we see that vol come down.

[Eric Hagen, Managing Director and BTIG Mortgage and Specialty Finance Analyst at BTIG]

Yep. Okay. Another follow-up on the kind of spread conversation. I mean, do you basically see more risk that spreads would widen at this point in a rate rally or a sell-off? And as the yield curve steepens, I mean, how much appetite do you have to maybe extend your duration gap? I mean, are there any constraints that you see to extending your duration gap?

[Brian Norris, Chief Investment Officer at Invesco Mortgage Capital]

As far as duration goes, we intend to keep that pretty close to zero. Mortgages have been trading pretty long versus rates over, well, really since the curve has been inverted. And so what that means is they tend to outperform as rates rally and underperform as rates sell off. And I think, at least in the near term, we don't expect that to change too dramatically, but like I said, it is dependent upon where implied volatility kind of moves from here. So sorry, I'm trying to remember what the first question was.

[Eric Hagen, Managing Director and BTIG Mortgage and Specialty Finance Analyst at BTIG]

No, I think you got it. I mean, it was just gauging the sensitivity to spreads in a rally or a sell-off. Thanks for the comments. Appreciate it.

[Eric Hagen, Managing Director and BTIG Mortgage and Specialty Finance Analyst at BTIG]

Oh, right. Yep. Sure.

[Operator]

Thank you again. If you'd like to ask a question, just press star one. Our next question comes from Doug Harter with UBS. You may ask your question. Your line is open.

[Doug Harter, Equity Research Analyst at UBS]

Thanks. Wondering if you could just touch on how you're thinking about the dividend and especially kind of in light of kind of the more challenging start to FY24?

[John Anzalone, CEO at Invesco Mortgage Capital]

Yeah. Hey, Doug, it's John. Yeah. So as always, our board recommends a dividend or determines a dividend based on recommendations. So that said, what we're generally looking at is where available ROEs on our target assets are. I mean, that's the biggest driver of where we set dividend policy. So we'll kind of see where that goes.

[John Anzalone, CEO at Invesco Mortgage Capital]

I mean, we have a month and a half until we have to make that decision. So a lot can happen between now and then, and then we balance that with, do you want to stay competitive within the space and in line with investor expectations? So it's kind of the things we look at. So yeah, I mean, that's kind of where we're at right now. It's a little early for that, though.

[Doug Harter, Equity Research Analyst at UBS]

Understood. I get that the markets are moving around a fair bit, but appreciate that answer, John.

[Operator]

Thank you. At this time, I'm showing no further questions.

[John Anzalone, CEO at Invesco Mortgage Capital]

Okay. Thanks, everybody, for joining us, and we look forward to speaking to you next time. Thanks.

[Operator]

Thank you. That does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.

Participants

Executives

• John Anzalone, CEO
• Greg Seals, Investor Relations
• Brian Norris, Chief Investment Officer

Analysts

• Trevor Cranston, Director in Mortgage Finance Equity Research at Citizens JMP
• Eric Hagen, Managing Director and BTIG Mortgage and Specialty Finance Analyst at BTIG
• Jason Stewart, Director and Equity Research Analyst at Janney
• Jason Weaver, Managing Director, Head Specialty Finance, and Real Estate Research at JonesTrading
• Doug Harter, Equity Research Analyst at UBS