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Text: 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 risks described in our most recent Annual Report on Form 10-K and subsequent filings with the SEC.
I'll give some brief comments before turning the call over to our Chief Investment Officer, Brian Norris to discuss the current portfolio in more detail.
After a tumultuous start to the year brought on by the impact of the COVID-19 pandemic, the financial markets continue to recover during the third quarter.
At IVR, we have made tremendous progress in implementing our Agency MBS focused strategy and opportunistically reducing our exposure to credit assets.
For the quarter core earnings came in at $0.06 share, exceeding our recently increased dividend of $0.05.
Book value is $3.47 at quarter end, which represents an increase of about 9.5% for the quarter.
The combination of the increased dividend and our book value appreciation produced an economic return of 11% for the quarter.
The improvement in book value has continued since quarter-end, as we estimate that book value is up approximately 6% since quarter-end through last Friday.
During the quarter, we purchased $5.6 billion in specified pool agencies and invested an additional $900 million in Agency TBAs.
This brought our allocation to agency mortgages up to 93% of assets and 60% of equity.
We also reduced our credit exposure significantly selling $1.1 billion of credit assets, while repaying the remaining balance of our secured loans that were collateralized by credit.
This leaves us with a notably smaller credit portfolio that is completely unencumbered.
As you look out over the next several quarters, our outlook is quite constructive.
We have continued to make progress in reallocating the portfolio during October, as additional credit sales combined with agency investments will continue to improve our earnings power.
We remain positive on agency mortgages, as we expect demand from the Federal Reserve and commercial banks to remain strong.
While the economic outlook remains uncertain, we expect to Fed to remain supportive by continuing large-scale asset purchases and by keeping short-term interest rates low for the foreseeable future.
Post-election, we expect interest rate volatility to remain subdued, which is also supportive of agency mortgage assets.
Increased levels of prepayments remain a potential headwind, but our focus on purchasing specified pool collateral helps to mitigate that risk.
I'll stop here, and let Brian go through the portfolio.
I'll begin on Slide 4, which summarizes our Agency RMBS assets and trading activity during the third quarter.
Consistent with the strategic transition we've communicated since June, we purchased $5.6 billion of Agency RMBS specified pools during the quarter.
Strong demand for our credit assets provided opportunities for dispositions at attractive prices, freeing up capital for allocation to the agency-focused strategy.
As detailed on the chart on the top left, we were able to source attractively priced new issue collateral stories, including loan balance, low FICO, high LTV and geo pools, which consists exclusively of borrowers in slower paying states such as New York, Florida and Texas.
We also focus a significant portion of our purchases on new production pools originated and serviced exclusively by banks in order to mitigate our exposure to pay-up premiums, while benefiting from improved prepayment protection relative to non-bank originators and servicers.
While pay-ups on our specified pool holdings range from less than a 0.25 point up to 4 points, the weighted average pay-up on our portfolio was approximately 1.25 points, representing approximately $70 million of market value at quarter end.
We believe low mortgage rates and historically fast prepayment speeds should continue to keep pay-up premiums near current levels, as strong demand for prepayment protection support valuations.
All purchases in the quarter consisted of 30-year collateral with coupons ranging from 1.5% to 3%, with the majority in 2s and 2.5s, as indicated in the chart on the bottom left.
Given our expectation for continued pressure on prepayment speeds at mortgage rates fell to all time lows, we focused our purchases on lower coupon pools, which typically experienced experienced slower prepayments due to lower mortgage rates on the underlying loans and benefit from lower purchase prices which reduces the negative impact of prepayments.
In addition, these coupons have been targeted by the Federal Reserve as a part of their bond purchase program, the valuations also benefit from positive supply and demand technicals.
Our specified pools paid only 1.8% CPR during the quarter, reflective of the focus in newly issued lower coupon pools, given mortgage loans tend to pay slowly in the months immediately after after closing, before prepayments typically begin to ramp higher around month six.
This dynamic benefited the performance of our Agency RMBS pools during the quarter as the weighted average yield was an impressive 1.91%.
The prepayment protection in our specified pools and active management should lessen the impact of faster prepayment speeds due to further seasoning of our holdings in the months ahead.
In addition, we added $900 million notional in agency TBA contracts, given the attractive implied financing rates and hedged carry available in the forward market for Agency RMBS, due to the significant demand from the Federal Reserve and commercial banks for lower coupon pools.
Given the current attractiveness of certain TBA contracts due to this favorable technical environment, we expect our investments in Agency TBA to grow commensurate with the growth in our overall assets, as we continue to implement our agency-focused strategy.
Turning to Slide 5, and as John mentioned, we made significant progress in reducing our credit exposure during the quarter.
Demand for our credit assets was robust, and the notable improvement in valuation drove the majority of our gain in book value.
In particular, higher quality CMBS was the beneficiary of the June launch of the TALF program, as spreads tightened dramatically in the AAA and AA rated assets we financed at the Federal Home Loan Bank through our captive insurance subsidiary.
Substantial credit dispositions at attractive valuations allowed us to pay off our secured loan at the FHLB in August, and redeploy capital into Agency RMBS investments, which further improved the earnings power of the portfolio, allowing us to increase our third quarter dividend to $0.05.
Slide 5 details the seasoning and senior capital structure positioning of our remaining credit investments as of September 30.
As shown in the chart on the left, our credit assets consist of predominantly seasoned investments with over 80% of our holdings issued prior to 2015.
In addition to the benefits of seasoning, given the improvement in property valuations over the past five years, our CMBS credit holdings also benefit from substantial credit enhancement, as detailed in the chart on the right, with over 82% of our holdings maintaining at least 10% of credit support.
In addition 69% of our remaining credit investments are rated A or higher.
We've been encouraged by the renewed investment demand for CMBS, which has led to spread tightening and contributed to book value appreciation.
The pace of spread tightening slowed over recent weeks however, as increasing concerns related to the COVID-19 pandemic combined with heavy focus on the U.S. election dampened investor demand.
We believe yesterday's positive announcements regarding the timing and efficacy of the vaccine should prove beneficial for our credit holdings, as the global economy continues to navigate the pandemic.
Regardless of near-term headlines, we believe our bonds are well positioned for long-term incremental spread tightening given the notable subordination detailed on Slide 5 and favorable supply and demand dynamics.
Slide 6 details the growth of our funding and hedge book during the third quarter as shown in the chart on the upper left.
After paying off our secured loans at the FHLB in August, all of our remaining credit holdings were held on an unlevered basis, eliminating the mark-to-market funding risk on that portion of our book.
Repurchase agreements collateralized by Agency RMBS grew to $5.2 billion as of September 30 and hedges associated with those borrowings also grew during the quarter to $4.6 billion notional of fixed-to-floating interest rate swaps.
Interest rates on our borrowings drifted lower during the quarter and that settled in near 0.2%, and we took advantage of historically low interest rates further out the yield curve to lock-in low funding cost to be a longer maturity interest rate swaps, given the potential for a steepening yield curve as the Federal Reserve keeps short-term rates anchored for the foreseeable future.
Our economic leverage, when including TBA exposure increased to 5.1 times debt-to-equity as of September 30, indicating significant progress toward the transition to the agency-focused strategy.
Given notable changes in the portfolio since quarter-end, Slide 7 summarizes the progress we made in continuing to transition the portfolio through the end of October.
Demand for our credit assets continued during the month, as we were successful in disposing of $112 million of credit exposure at attractive valuations.
These sales provided further opportunities to continue the ramp in Agency RMBS, as we purchased $1 billion of specified pools and an additional $300 million notional in Agency TBA contracts, bringing our total to $6.5 billion of pools and $1.2 billion of TBA.
Our borrowings and hedging grew commensurate with these purchases, with repurchase agreements of $6.2 billion hedged with $5.2 billion notional of interest rate swaps at month end.
As noted on Slide 7, our liquidity position remains substantial, with $351 million of unlevered credit investments in addition to $340 million of unrestricted cash, combining to represent approximately 8.5% of our investment portfolio.
The Agency RMBS market continues to be well supported by the Federal Reserve purchase program as well as significant commercial bank demand.
And our credit assets continue to recover from the impact of the COVID-19 pandemic and March's liquidity crisis.
While the prepayment environment in Agency RMBS remains challenging, we believe our careful selection of prepayment protection and active management will mitigate the negative impact of what has become a highly efficient process for mortgage loan refinancings.
Lastly, monetary policy remains very supportive.
We expect that to continue well into 2021 as the Federal Reserve communicates a desire to maintain an accommodative stance over the medium term.
And now, we will open the line for Q&A.

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q3 core earnings per share $0.06.

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