Invesco Mortgage Capital (IVR) saw heavy volume recently on news of a secondary offering of shares. IVR prices the offering of 17 million shares at $20.15 recently, a 4% discount to the price shares closed at Monday. Funds raised will be used to purchase additional mortgage backed securities and mortgage loans.
Mortgage REITs like Invesco and American Capital Agency (AGNC) make their living by leveraging up and investing in mortgage backed securities, collecting the difference, or spread, between the interest paid by the MBS and the borrowing cost. While the spread has come down from where it was last year, at 3.1% it is still strong and provides ample room to at least maintain the $3.97 in dividends paid in the past 4 quarters.
The offering in Invesco comes at a 5% discount to the book value of $21.24 reported in its May earnings release. It also pushes shares to their lowest levels since September, even as the book value has increased 6.7% over the course of the last year, from $19.90 in Q2 of 2010 to the current level. As if trading at a 5% discount to book value was not enough incentive to buy the shares, Invesco Mortgage Capital boasts an astonishingly high 19% yield, based on the last 4 quarters of dividends. A 19% dividend reinvested will double in just under 4 years, proving more than enough incentive for investors who are comfortable with the business model. As long as Invesco Mortgage Capital can continue to maintain, or raise its dividend, investors who re-invest their dividends stand to be richly rewarded. The offering is a chance to get into this high yield name at a discount to both yesterday's closing price and to book value, making shares in IVR look attractive.
Disclosure: I am long AGNC.