Invesco Mortgage Capital Had A Solid Fourth Quarter, But Discount To Book Is Out Of Date

| About: Invesco Mortgage (IVR)


Core EPS were solid and strong enough to beat the dividend.

The portfolio is split into three major asset categories.

Repurchasing stock was important to creating value.

The book value should be taking another hit in Q1 of 2016 due to heavy hedging relative to agency MBS and credit sensitive assets suffering.

Invesco Mortgage Capital Inc. (NYSE:IVR) reported their fourth quarter results before the market opened on February 23rd, 2016. The earnings release was fairly solid and shares of IVR were up about 4% on the day near the end of trading. There were a few things I noticed in the earnings release and the 10-K, which was quickly filed, that I think merit more attention than the rest of the earnings release.

Core Earnings

Core EPS came in at $0.42, narrowly beating the dividend of $0.40. It is worth noting that narrowly beating the dividend is a fairly solid performance in this environment which will be fairly rough for most mREITs. However, it is also worth noting that many mREITs will report stronger fourth quarter results to reductions in amortization expenses because interest rates ended the fourth quarter at higher levels than the third quarter. Despite that, interest rates fell hard already in the first quarter which will push amortization expenses backup for many mREITs in the first quarter of 2016.

Portfolio Position

Shareholders should already know the rough portfolio composition, but it is critical to analysis. As of the end of the fourth quarter, the portfolio was positioned with 37% to Agency RMBS, 33% to commercial credit, and 30% to residential credit. That combination in the first quarter suggests that book values may already be taking a hit. At the end of the fourth quarter book value was $17.14. Recent prices of $10.88 indicated a 36.6% discount to last reported book value, so it is important to recognize that the credit sensitivity of the portfolio could be a headwind for book values. Establishing a solid model for non-agency mREIT portfolios is exceptionally complicated, but knowing that credit spreads have increased during the first quarter is not difficult.

Repurchasing Stock

Across the last two quarters combined the share count has declined by 7.75%. Repurchasing shares at a substantial discount is a very effective strategy to enhance total economic return (change in book value plus dividend). In what is unlikely to be a coincidence, full year total economic return was positive by $0.02 with $1.70 in dividends outweighing $1.68 in book value decline. Without repurchasing shares, book value per share would have declined further (all else equal).

On February 18th, the board authorized a repurchase authorization for up to another 15 million shares of common stock. There is no stated expiration date.

Book Value

The 10-K showed a portfolio with total agency RMBS having a fair value of $9.4 billion. The notional balance on swaps was about $11.45 billion. Since I regularly track LIBOR rates and MBS values, I would expect the net result to be fairly negative. Maturity dates varied from the second quarter of 2016 to the second quarter of 2025. The disclosures in this regard were exceptional.


Core EPS figures were strong and covered the dividend. I checked for any poor quality adjustments and did not find them. Book value is like to have taken another hit so far in the first quarter, but the 36.6% discount to last reported book value is providing a fairly substantial margin.

I've recently stated that I'm bearish on the sector because discounts to book value are too small for several mREITs. I'm not introducing a stance on IVR because they are neither clearly too high or too low. If I knew with some degree of certainty that the discount to current book (not Q4 book) was over 36%, then I would be able to establish a bullish stance despite my view on the sector as a whole. Based on the portfolio composition, I'm expecting current book value to be materially lower than the end of fourth quarter figures.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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