Book value

Invesco Mortgage Capital: Declining book value per share (NYSE:IVR)

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Investment thesis

Invesco Mortgage Capital Inc. (NYSE: RVI) has struggled to increase its book value per share over the past 2 years and this trend is very likely to continue in the future. I do it don’t expect great results in the first quarter, as in January and February, IVR saw an almost 15% drop in its book value per share due to the flattening of yields and pressure on stocks. mortgage interest rates. IVR has a huge dividend yield of 18.46%, but all the risks are too high for this attractive yield for me. I think the current share price is justified and on top of that there is a 10% short stake in IVR which also makes me cautious.

business model

Invesco Mortgage Capital operates as a mortgage real estate investment trust primarily focused on investing, funding and managing mortgage-backed securities and other mortgage-related assets. The company has a simple investment portfolio as it invests almost entirely in agency RMBS (99% of its portfolio is agency RMBS). This is a massive change from 2 years ago when the company had a wide variety of assets with a relatively large credit portfolio of 26% and also invested heavily in Agency CMBS. All of that was gone by the end of 2021 and only a tiny 1% of the credit portfolio remained.

Changes to the structure of the IVR portfolio

Presentations Q4 2019 and Q4 2021

Finances and income

Fourth Quarter Results and First Quarter Expectations

IVR published relatively poor quarterly results. This is mainly due to the Fed’s more hawkish policy stance. As a result, the yield curve flattened and IVR faced tougher external market conditions. Book value per share decreased 10.46% from Q3 2021, from $3.25 per share to $2.91. The drop is more spectacular year-on-year, -24.61%. The company also reported a net loss per share of $0.23 and a negative economic return. And in January 2022, this trend continued.

“Our book value fell another 9% in January as the widening of the agency’s mortgage spread accelerated and payments on specified pool guarantees collapsed in a rate environment. much higher mortgages – John Anzalone – CEO.” Also, in February, they experienced another 5-6% drop in their book value, so based on those numbers, I’m not expecting great results for IVR in the first quarter. The company will release its first quarter results on May 3, 2022. The recent rise in interest rates may help IVR’s second quarter results in 2022 and further expected interest rate hikes will also affect mortgage rates. In the second half of 2022, slowing prepayment rates may support IVR’s earning power.

Evaluation

The management massively issued shares to finance its operations. In just 2 short years, they nearly doubled the number of diluted weighted average stocks. You can say that all mREITs do the same thing, but the scale is different. Two of IVR’s closest peers by market capitalization also issued new shares, but Dynex Capital Inc. (DX) only increased the number of shares by around 40%, while Armor Residential REIT Inc (ARR) increased its outstanding shares by approximately 35%.

IVR shares outstanding

Looking for Alpha

IVR’s book value per share is slowly but steadily declining. Management could increase the book value of IVR after the COVID-19 crisis, but it is far from pre-pandemic levels and it now seems almost impossible to return to these levels. I’m not sure I want to own a company that destroys shareholder value over time and whose book value per share is steadily declining.

Chart
Data by YCharts

Company specific risks

The COVID-19 pandemic has created an uncertain and volatile interest rate environment and general fixed income trends have deviated significantly from historical trends. In a short time, we have seen a spike in inflation and the Fed is struggling to deal with it quickly without risking a recession. In addition, IVR has experienced historically larger spreads from benchmark rates in buyout markets for certain target assets and the availability of buyout funding has been limited.

Rising interest rates generally reduce the demand for mortgages due to the higher cost of borrowing. A reduction in the volume of mortgages originated will likely affect the volume of target assets available for IVR, which could adversely affect management’s ability to acquire assets that meet investment objectives. Rising interest rates could prevent IVR from acquiring a sufficient volume of its target assets with a return above the cost of borrowing, which will ultimately affect the bottom line and IVR may find it difficult to generate income and maintain its current dividend.

My take on IVR’s dividend

Current dividend

IVR currently has a whopping 18.46% dividend yield. The company has been paying consecutive dividends for 12 years and has no history of consecutive dividend growth due to the pandemic. IVR has seen a rapid decline in its assets and management has had no choice but to drastically reduce the dividend from $0.5 per share to $0.02 in 2020. At the moment IVR is paying out 0.09 $ per share per quarter.

Future sustainability

When I see dividend yields above 15%, it always makes me think of sustainability. In my experience, dividend yields above 15% are unsustainable over the long term nine times out of ten. The IVR has a payout rate close to 100%, sometimes well over 100%. Analyst estimates suggest there may be no dividend increase in 2022, but a possible cut in 2023. Management may be forced to cut the dividend due to the $0.09 interest income challenge current at $0.085 per share based on consensus yield.

IVR dividend distribution rate

The table is created by the author. All figures are taken from the company’s financial statements and SA earnings estimates.

Final Thoughts

IVR offers a dividend yield of over 18%, but that’s a trap in my opinion. The current share price is justified, and the company has destroyed shareholder value in recent years by issuing a ton of new common stock to fund its operations. Because of this, the book value per share has declined and I see no evidence that it will change any time soon. This is the main reason I’m neutral on IVR at the moment.