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On Wednesday, November 2, Invesco Mortgage Capital (NYSE:IVR) reported its results for the third quarter of 2011. IVR is a Mortgage Real Estate Investment Trusts (mREIT). mREITs acquire, finance and manage portfolios of mortgage-backed securities (MBSs) and mortgage loans. The company reported net income of $82.2 million, or $0.79 per share, for the quarter. This compares with $74.4 million, or $0.99 per share, for the second quarter of 2011 and $26.2 million, or $1.01 per share, for the same quarter a year earlier. See the 2011 chart for IVR, below:

(Click chart to enlarge)



On one hand, IVR announced double-digit profit growth for the fifth straight quarter. On the other hand, these third-quarter numbers represent a 20.2% reduction in per share profit from the prior quarter, and a 21.78% reduction in profit compared with the same quarter last year. This significant difference represents why it is essential that mREIT investors pay closer attention to per-share metrics than to total portfolio metrics.

REITs must distribute at least 90% of their taxable income in order to eliminate the need to pay income tax at the corporate level. Because these REITs must give away so much income, they cannot grow through retaining and re-deploying earnings. As a result, many REITs often choose to have secondary offerings in order to raise capital and increase market valuation. Such actions can be either dilutive or accretive to actual share value, depending on how productive the REIT is at using the acquired funds.

Mortgage REITs are probably the type of REIT that most frequently offers shares through a secondary. Mortgage REITs have become of interest to an expanding group of investors over the last few years for multiple reasons, but primarily due to the lofty yields that many mREITS offer and also due to the perceived limited risk within agency REITs.

IVR is a hybrid mREIT. Other hybrid or non-agency mREITs include Chimera Investment Management (CIM) and MFA Financial (MFA). Three large and well-known agency mREITs are Annaly Capital (NLY), American Capital Agency Corp (AGNC) and Hatteras Financial (HTS). Even the largest of mREITs do frequently issue shares through secondary offerings. For example, the two largest mREITS, NLY and AGNC, each had three secondary offerings within the first seven months of 2011

See NLY’s three secondary offerings within the first six months of 2011:


See AGNC’s three secondary offerings within the first six months of 2011:

AGNC also completed another secondary offering for 37 million shares, or about $1 billion, this week.

IVR has also been a habitual secondary issuer, essentially quadrupling its share count over the last five quarters. See the time-line below:

In October of 2010, IVR completed a 12 million share secondary offering, valued at $20.75 per share.

In December of 2010, IVR completed an 8.7 million share secondary offering, valued at $23.47 per share.

In March of 2011, IVR completed a secondary offering for 19 million shares, valued at $22.17 per share.

In June of 2011, IVR completed a 17 million share secondary offering, valued at a price of $20.15 per share.

In August of 2011, during the third quarter, IVR completed a secondary offering for 20 million shares, valued at $19.26 per share.

Due to these significant secondaries, IVR’s share-count has essentially quadrupled. Therefore, even though IVR made over 3.17 times as much income in the third quarter of 2011 as it did in the third quarter of 2010 ($82.2 million versus $26.2 million) and 10.4% more than it did in the second quarter of 2011, the per share performance has not kept pace with the share expansion rate. Moreover, IVR now trades at about $15.50 per share, which is substantially below the price of these secondary offerings.

The company also reported its book value per share, at the end of the third quarter of 2011, was $16.47 compared with $19.34 per share at the end of the second quarter. This represents a 14.83% decline in book value in one quarter, which was at least partially caused by the sizable secondary that IVR held during the quarter, and potentially by the sizable secondary that IVR had at the end of the prior quarter.

After five secondary offerings in the last 13 months, paying attention to net income levels will only yield so much information. Per share results are essential when comparing a mortgage REIT’s present performance to its prior performance.

Disclosure: I am long NLY, CIM.

Disclaimer: This article is intended to be informative, and should not be construed as personalized advice, as it does not take into account your specific situation or objectives.

Source: Invesco Mortgage Capital's Quarterly Results And Recent Secondaries Underscore Importance Of Per-Share Comparisons For mREITs