Invesco Mortgage Capital (IVR) announced its third-quarter performance on Oct. 30, 2012. The impact of the third round of quantitative easing (QE3) conducted by the Fed was evident, as it was when most of Invesco's peers reported their performances for the third quarter of the current year.
The following table gives a clear picture of the performance in the third quarter.
Click to enlarge image.
The company generated interest income of $140.5 million during the third quarter of the current year, against $139 million during the third quarter of the previous year. The moderate improvement in interest income was a result of an 8.7% sequential increase in interest earning assets, despite a decline in asset yield. The asset yield that the company earned on its interest yielding assets during the second quarter was 3.57%, against 3.31% during the third quarter of the current year. This is clearly a consequence of the prolonged ultra-low interest rates and the impact of QE3 being conducted by the Fed to stimulate the sluggish U.S. economy.
The cost of funds, or the interest expense that the company paid on its interest bearing liabilities during the third quarter, surged 6% sequentially to $60.3 million, despite a two-basis-point moderate decline in the cost of funds. The cost of funds declined from 6.69% to 1.67%, from the second quarter to the third quarter of the current year.
The interest income of $80.2 million that the company earned dropped 3% compared to the linked quarter, while the net interest margin declined 24 basis points over the same time period. Income from other sources surged 130% sequentially, while operating expense surged 3% compared to the previous quarter. This significant jump in other income led the third-quarter bottom line of $86.8 million to surge 9% compared to the previous quarter.
During the third quarter, the company lowered its leverage, which is advisable in times of ultra-low interest rates and a flattening yield curve, which is threatening the interest incomes of many of the mortgage REITs that invest in fixed rate agency mortgage-backed securities. The leverage ratio dropped, from 6.3 times at the end of the second quarter to 5.8 times at the end of the third quarter of the current year.
The stock offers a dividend yield of 12.13%, which is backed well by a 16% operating cash flow yield. This reflects the fact that the company has enough financial muscle to continue dividend distribution in future.
In conclusion, Invesco remains one of the very few mortgage REITs that have been able to post a surge in their bottom lines at the end of the third quarter of the current year as compared to the linked quarter. Going forward, we believe the company's interest income will not take a hit as big as Annaly Capital (NLY) and other mortgage REITs that invest exclusively in agency fixed-rate securities. The reason for that is that Invesco has part of its portfolio invested in non-agency securities. We also believe that the company's ability to pay dividends will not be significantly affected by the third round of quantitative easing. Therefore, we recommend our income oriented investors to hold the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.