Invesco Mortgage Capital (IVR) is plummeting today, following a downgrade by FBR Capital from outperform to market perform. The new price target is $16 per share, down from $20 per share. The downgrade comes on the heels of IVR announcing a $0.65 per share dividend for the fourth quarter, down from $0.80 in Q3. The dividend is payable Jan 27 to shareholders of record on December 22.
Investors looking for an explanation for the drop in IVR need to look no further than the reported book value for the company in the last few quarters. With Invesco down over 7% today, shares are currently trading at $14.58, $1.89 below the $16.47 book value that IVR reported for Q3. The Q3 book value was down from $19.34 in Q2, and down from $21.24 at the end of Q1.
The 22% drop in book value from the end of Q1 to the end of Q3 has been largely driven by a decrease in the value of swaps, which caused a decline of $1.93 in the second quarter and another $2.53 in the third, more than offsetting gains in the value of agency RMBSs in those quarters. The fact shares are trading at such a large discount to the Q3 book value may be an indication that the market expects further book value declines going forward.
When compared to the results of larger mREITs, Invesco's book value drop is an anomaly. Annaly Capital Management (NLY) reported a book value of $15.76 for Q1, which ended March 31, 2011, and that value increased to $16.22 per share when the company reported its Q3, a gain of 2.9%. American Capital Agency Corp (AGNC) reported Q1 book value of $25.96, and grew that value to $26.90 at the end of Q3, an increase of 3.6%. Each firm was able to grow the book value, and AGNC was able to maintain its dividend level. Anally is currently trading a dime below the reported Q3 book value, and American Capital Agency is about $2 above book value.
Given the stark drop in book value for Invesco, I'm not inclined to try to catch this falling knife. While the shares may find some support going into the record date for the dividend, I'd prefer to see the quarterly results before I put money into the name. Specifically I'd like to know if the firm has at least stopped the erosion of, and hopefully started a rebound in, book value.
When I wrote about the company in June, it was the growth in book value that gave me confidence in the company. Now, with book value declining, that confidence is lost. I still prefer American Capital Agency in this space, although I'd only recommend buying new shares on offerings.
Disclosure: I am long AGNC.