Welcome to the Invesco Mortgage Capital Inc. First Quarter 2020 Investors Conference Call. [Operator Instructions] Now, I would like to turn the call over to Brandon Burke with Investor Relations. Mr. Burke, you may begin the call.

Brandon Burke - Director of Investor Relations

Thank you and welcome to Invesco Mortgage Capital's First Quarter 2020 Earnings Call. The management team and I are delighted you've joined us and we look forward to sharing with you our prepared remarks and conducting a question-and-answer session.

Before turning the call over to our CEO, John Anzalone, I wanted to provide a reminder that statements made in this conference call and the related presentation may include forward-looking statements, which reflect management's expectations about future events in our overall plans and performance. These forward-looking statements are made as of today and are not guarantees. They involve risks, uncertainties and assumptions, and there can be no assurance that actual results will not differ materially from our expectations. For a discussion of these risks and uncertainties, please see the risk described in our most recent Annual Report on Form 10-K and subsequent filings with the SEC. Invesco makes no obligation to update any forward-looking statement.

We may also discuss non-GAAP financial measures during today's call. Reconciliations of these non-GAAP financial measures may be found at the end of our earnings presentation. To view the slide presentation today, you may access our website at invescomortgagecapital.com and click on the Q1 2020 earnings presentation link under Investor Relations. Again, welcome and thank you for joining us today.

I'll now turn the call over to John Anzalone. John?

John Anzalone - Chief Executive Officer

Good morning, and welcome to Invesco Mortgage Capital's First Quarter Earnings Call. I will give some brief comments before turning the call over to our President and Head of Commercial Credit, Kevin Collins, who will provide greater detail on our current portfolio and our Chief Investment Officer, Brian Norris who will expand on our go-forward strategy. Before getting started, I'd like to acknowledge the entire team at Invesco who have put in countless hours managing through this crisis who are doing it with the added difficulty of working remotely, and there is no way that we would be in the position we are in today without their efforts. So thank you to the entire team. I'd also like to acknowledge the support of both our Board of Directors and the Senior Management at Invesco who have provided all of the resources necessary to get through this crisis.

Towards the end of the first quarter, the onset of the COVID-19 pandemic and the economic shutdown left in its wake towards unprecedented volatility and dislocation throughout the financial markets. Even with rates rallying significantly, prepay protected specified pool agency mortgage-backed securities significantly underperformed as Agency Paper was being sold for cash-settled at levels below TBA prices. The structured securities' credit margins were hit particularly hard as liquidity was severely impacted and valuations became distressed. Despite IVR's relatively strong liquidity position coming into the crisis, we sold assets as margin calls accelerated across all of our asset classes. In late March, we decided to discontinue selling our holdings into a deeply distressed market to meet margin calls. So we suspended margin payments and entered forbearance negotiations with our lenders. Ultimately, we are able to capitalize on improving market conditions to pay off our repo counterparties rather than entering into an onerous comprehensive forbearance agreement.

While we are providing information as of 03/31 on slides 3 and 4 for informational purposes, that snapshot was taken in the middle of our delevering and does not reflect the portfolio today. Slide 6 gives a picture of the portfolio as of May 31. As you can see from the pie chart, a $1.6 billion securities portfolio consists of predominantly non-Agency CMBS in residential credit positions. $540 million of that total is unencumbered. The only borrowings we have left are secured federal home loan bank advances of $837 million, which are collateralized by high-quality triple-A and double-AA-rated CMBS. As of 05/31, we estimate that our book value is between $2.65 and $3.15 per share, reflecting the continued delevering that took place post quarter-end. Currently, we are holding a credit portfolio with modest leverage that we believe has potential to drive book value upside as credit markets continue to recover.

Going forward, our strategy is to reinvest proceeds from these future credit sales into what will become an increasingly agency-focused portfolio. Currently, the outlook for agency mortgages is quite attractive with strong support from the Fed in attractive funding environment. This is in contrast to the non-agency credit market where the pandemic has revealed new risk to the strategy and the cost and stability of short-term mark-to-market funding are not attractive. We believe that we will be able to generate attractive ROEs in coming quarters as we redeploy into the industry strategy.

I'll stop here, and let Kevin give some details on the credit portfolio.

Kevin M. Collins - President

Thanks, John and thanks to everyone on the line for your interest in Invesco Mortgage Capital. As John noted, our portfolio is now largely comprised of mortgage-backed credit investments. So that's about 92% comprised of commercial mortgage credit and about 7% that's comprised of residential credit. Look, the COVID-19 pandemic and relative decline in economic activity has made it pretty difficult for many borrowers to meet their financial obligations. So not surprisingly lodging and retail property markets have been impacted, the most just due to travel restrictions as well as a slowdown in retail activity. So looking ahead, we do expect many tenants to continue to forego rent payments or seek relief, but despite our expectations for fundamental weakness, we do believe that bonds at the top for or near the top of the capital structure offer attractive value as they have been impacted by lack of liquidity just as much as heightened concerns regarding COVID-19.

We, ultimately, believe that non-mark-to-market term financing via the Term Asset-Backed Securities Loan Facility, which is a New York Fed program known as TALF should really continue to assist in creating renewed investor interest in these bonds. Roughly 9% of our bonds are CMBS bonds. It would be eligible for TALF financing if they were purchased today. However, I do want to note that we expect a much larger portion of our portfolio to benefit indirectly as many of the investments sit just beneath these bonds in the capital structure, which makes them we think very well positioned to benefit from any future credit curve flattening. Now to quantify, I'd ask you to take a look at the chart by credit ratings and vintage on Slide 7. And as of 05/31, you'll see that about 85% of our credit investments were rated single-A or higher and about 90% of our commercial mortgage credit was rated single-A or higher and further over 75% of our CMBS portfolio was rated double-A or higher.

On Slide 7 and the chart to your right, we've also illustrated that significant subordination levels are available to help us for the expected increases in cumulative collateral losses. Nearly 90% of our CMBS benefits are for 15 or more points of subordination and positively roughly 93% have subordination levels in excess of '07 vintage cumulative collateral losses. And we think that's worth noting because not surprisingly loans originated in '07 having experienced notable losses just given that they've had and bear the global financial crisis, and they don't benefit from recently improved underwriting.

I'll now turn the presentation over to Brian to discuss our strategic outlook for the portfolio.

Brian P. Norris - Chief Investment Officer

Thanks, Kevin and good morning to everyone listening to the call. As John mentioned, the latter half of the first quarter and extending well into the second quarter proved to be a tremendously challenging environment for the company. Our team worked extremely hard towards the goal of reducing the company's reliance on short-term mark-to-market financing for our credit assets as well as overall company leverage. To that end, by early May, we successfully reduced our reliance on credit repo to zero, with current overall company leverage below 0.8 times debt-to-equity.

With over $1 billion of equity, we believe we are well positioned to reconstruct our portfolio that can offer investors compelling returns and dividend income. We have reengaged Agency RMBS repo and interest rate swap counterparties to build the necessary capacity to prudently invest proceeds from a further reduction in credit exposure as our credit assets continue to recover from the liquidity and do sell-off in the first quarter.

Given current and past Fed support and the enduring availability of Agency RMBS repo through multiple crises in the financial markets, moving forward, we anticipate the asset class will be the primary use of capital to achieve the company's longstanding goals of providing attractive dividend income and book value stability. We believe we can reliably achieve low-double-digit ROEs with a mixture of Agency RMBS specified pools in addition to a modest allocations of TBA securities. Fed intervention has fostered in attractive investment environment.

While we plan to transition from the current portfolio, which is almost exclusively credit investments to an agency-focused strategy in the coming quarters, we will continue to evaluate opportunities to achieve target returns on credit investments without reliance on short-term mark-to-market funding.

Lastly, our external manager at Invesco remains committed to the voting the necessary resources to the company. Invesco enjoys a long history of managing the Agency RMBS asset class and many of our team members have supported the trading and management of the Agency RMBS allocation in IVR since the IPO in June 2009. Combined, our team members have over 80 years of experience managing the asset class through multiple market cycles and crisis with over 23 billion of Agency RMBS assets under management as of 12/31/2019.

That ends our prepared remarks and now, we will open the line for Q&A.

Question & Answers

Operator

[Operator Instructions] Our first question will come from Eric Hagen from KBW. Your line is now open.

Eric Hagen - KBW - Analyst

Hey, thanks. Good morning guys. Hope you're doing well. On the asset sales to wind down the FHLB line, which assets do you think you might sell in order to accomplish that? Would they come from more of the triple-A, double-A category or something the positions that are lower rated than that. And then, on the CMBS portfolio stuff that's remaining, what's the level of unrealized losses that are sitting in that portfolio and what's the unlevered yield in the CMBS portfolio?

John Anzalone - Chief Executive Officer

Yeah. Hi. I will start with the home loan. So the bonds underlying the home loan advances are double-AA and triple-A predominantly. So those are the ones that would be sold to pay down that line. And again, as we anticipate the top of the capital structure improving as the TALF bid starts to get underway, we expect that to be relatively soon and I'll let Kevin to answer the second part.

Kevin M. Collins - President

Yeah, Eric, so just to give you a sense for where we are getting things trade today and putting in context of what we currently own our portfolio, I guess I'd start at the top of the capital structure for us, which is I believe about 30% of our portfolio that's currently in triple-A CMBS and those are - excuse me, said differently, 38% [Phonetic] of our CMBS portfolio is triple-A. Those are largely triple-A rated positions. So in terms of where they're trading, again it's very dependent on transaction, but I'd call it around 160 basis points double-A-rated paper anywhere from 250 basis points to as wide as 400 basis points in single-A paper around 440 basis points - excuse me, 450 basis points on this product level and BBB, it looks more or like 800 basis points to anywhere - 1,300 basis points over in terms of current yields.

Eric Hagen - KBW - Analyst

Great. That's helpful color and maybe I can press you on the unrealized losses that are sitting in the portfolio today. We can see where it was at the end of the quarter. But based on the sales that have taken place since then, yeah, just what the market is on the overall portfolio and how much of that is in unrealized loss position. And then I'll just - and then, I'll just ask my second question to you. I mean, how much leverage do you think you might run in the Agency RMBS portfolio as you transition back to that strategies?

Kevin M. Collins - President

Yes. I don't have those specific numbers in front of me. What I can tell you is to kind of go back to what I walked you through. If you think of the junior triple-A rated positions, what is largely junior AAAs? As I mentioned, about 9% are [Indecipherable]. Those would be more senior positions, but at 05/31, those were around 250 basis point on a spread level. That looks more like a 160 basis points today for the double-AA positions at 05/31. That was 400 basis points. It looks more like 250 basis points for single-A rated; 650 basis points at 05/31, it looks more or like 450 basis points today and 05/31 for triple-B. 1,300, it's more or like 800 basis points. So, yeah, that should provide some context in terms of what we've seen in the way of improvement. Just continue to see slowly increasing demand in the CMBS sector. Since TALF has come online, that certainly helped and penalize as the economy begins to slowly restart here. It seems to be a new entrants into the space or crossover investors. So I think that's [Indecipherable].

Brian P. Norris - Chief Investment Officer

Yeah. Eric, I'll take the leverage question. We anticipate - the transition from our current portfolio to predominantly agency-only portfolio will likely take one or two quarters. So it's going to take us a while to kind of build up to this number, but it's likely to be in the 7 to 8 times debt-to-equity on agency investments.

Eric Hagen - KBW - Analyst

Got it. All right. Thank you very much.

Operator

And our next question will come from Doug Harter with Credit Suisse. Your line is now open.

Douglas Harter - Credit Suisse - Analyst

Thanks. Can you just talk about how you're thinking of the capital structure? Preferreds are very big part of your total equity base and kind of what your thoughts are on that?

John Anzalone - Chief Executive Officer

Yeah. Thanks. We are looking at opportunities obviously to raise capital. That makes sense for shareholders. And over time, we are looking to get preferred to common ratio back in line. So I think post this call, post the filing of our Q, we're going to start evaluating the best path forward in terms of capital structure. But yeah, I mean we realized that the preferred to common ratio is clearly not where it was, and we would prefer to get it back to more in line with historical averages.

Douglas Harter - Credit Suisse - Analyst

Okay. And is there anything on - around kind of the REIT [Phonetic] rules and whole pool test that would kind of cause you to need to accelerate the transition back to Agency or do you have flexibility around that?

John Anzalone - Chief Executive Officer

Yeah. There is some flexibility around timing. So we have a number of quarters to get back into hopeful compliance, but given the leverage on Agency, it wouldn't take that long to get back up to 55% whole pools, but we do anticipate getting there relatively quickly.

Douglas Harter - Credit Suisse - Analyst

Great. Thank you.

Operator

And our next question will come from Trevor Cranston from JMP Securities. Your line is now open.

Trevor Cranston - JMP Securities - Analyst

All right. Thank you. A follow-up question on the FHLB financing, which remains in place. Can you say if when you choose to pay that off, are there any sort of frictional costs associated with that in terms of make-whole payments or termination fees?

John Anzalone - Chief Executive Officer

No. So we are free to prepay those kind of as we sell assets. So there's no penalties or anything like that.

Trevor Cranston - JMP Securities - Analyst

Okay. Got you. And then, another follow-up on the question about unrealized losses, it sounds like - it sounded like you're suggesting that spreads have tightened pretty meaningfully in June. Is there any chance you can sort of estimate what that means in terms of your book value estimate relative to where it was at May 31?

John Anzalone - Chief Executive Officer

Yeah. I mean book value since 05/31 is up - I would say, up modestly. We have seen some valuation increases. So I mean it's up a bit.

Trevor Cranston - JMP Securities - Analyst

Okay. And then, it sounded like there were some sort of extraordinary costs that might have been in the G&A line in the first quarter relative to everything that happened in March. Can you say kind of where you expect the G&A level to run going forward?

John Anzalone - Chief Executive Officer

Yeah. Dave, do you have a [Indecipherable]?

David Lyle - Chief Operating Officer

Yeah. Trevor, we don't expect it to change dramatically. We - there are some additional costs incurred in association with kind of navigating the COVID-19 crisis that you will see come through in Q1 and Q2. But beyond that, we don't expect a - really a dramatic change in G&A from historical levels within a reasonable band.

Richard Lee Phegley, Jr. - Chief Financial Officer

With the exception of the management fee. This is Lee Phegley. The management fee will be coming down, which is based on the NAV of the portfolio. Dave is correct. There were some costs associated with the advisory work that you'll see this quarter and in the second quarter, but those were not material numbers, but you will see the management fee come down.

Trevor Cranston - JMP Securities - Analyst

Okay. Got it. And then just to clarify, when you mentioned the low-double digit ROEs on the agency strategy, was that a gross ROE estimate or is that net of expenses and everything?

Richard Lee Phegley, Jr. - Chief Financial Officer

That was gross.

Trevor Cranston - JMP Securities - Analyst

Okay. I appreciate it. Thank you.

Operator

Our next question will come from Jason Stewart with JonesTrading. Your line is now open.

Jason Stewart - JonesTrading - Analyst

Hey, good morning. All my questions have been answered. Thanks a lot.

Operator

And I'm currently showing that with our last question for today, I'd like to now turn it back over.

John Anzalone - Chief Executive Officer

Okay. Well, again, I'd like to thank everybody for your interest in Invesco Mortgage Capital. And we look forward to talking to you next quarter. Thank you.

Operator

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Q1 2020

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