Book value

Invesco Mortgage Capital is attractive at 92% of revised book value

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Invesco Mortgage Capital (NYSE:IVR) is an attractively priced mortgage REIT that has a 10.8% dividend yield well covered by earnings. Moreover, its price of $3.33 is still below its book value per share. By my calculations, the new IVR inventory book value is $3.62, down slightly from $3.65 at the end of the first quarter of 2021.

Source: Shutterstock

That means it’s trading at around 92% of its March 31 adjusted book value. Depending on how interest rates move in the second quarter, its new book value in the second quarter could actually be higher than that. Here’s how it works: if interest rates fall, the prices of its mortgage security asset values ​​rise and the value of its debts declines.

Let’s take a closer look at IVR stock.

Revised book value of Invesco Mortgage Capital

On May 27, Invesco announced that it had raised $128.625 million for 37.5 million shares. It’s effectively $3.43 per share. Additionally, there was a broker greenshoe option for an additional 5.625 million shares. Therefore, the company raised a total of $147.9 million before fundraising fees and commissions.

On page 35 of the company’s 10-Q filing, it shows the calculation of its book value per share. I have put together the table below to show this calculation and the revision which includes the new capital.

Click to enlarge

Source: Mark R. Hake, CFA

This shows that the book value per share has fallen to $3.63 per share from $3.65 after the capital increase. The money was to be used to repay his Series A preferred stock, but this does not affect the calculation of the revised book value.

But that may not be what Invesco reports for its book value as of June 30, 2021. Indeed, its mortgage-backed securities, which make up the bulk of its assets, trade based on changes in interest rates. interest.

For example, if interest rates generally rise, this drives down the price of a company’s bonds and mortgage-backed securities. This is because fixed coupon securities have to adjust to higher rates by lowering their price to offer the same higher rate, despite the lower coupon rate. This inverse relationship between rates and prices is well known and embedded in fixed income markets.

The effect of rate movements on the book value of IVR

So if interest rates continue to rise like they did last year, expect to see the net asset value (NAV) or book value per share (BVPS) of IVR stocks fall (and vice versa). versa).

The good news is that long-term interest rates generally fell in the second quarter.

07-14-21 - 10-Year Treasury Yields - ^TNX
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Source: Yahoo Finance ticker ^TNX

This can be seen in this Yahoo! Financial chart that depicts 10-year Treasury yields. After peaking at around 1.746% on March 31, their price is now around 1.3%.

So it looks like investors can expect a general gain in Invesco’s BVPS for the second quarter. If rates stay at this level, Q3 BVPS will definitely be higher.

The IVR stock price should rise accordingly, as it tends to follow the price movements of the underlying BVPS.

What to do with IVR stock

Here’s the good news: IVR pays a quarterly dividend of 9 cents per share. This means that if we divide its annualized dividend payout of 36 cents by today’s price, $3.33, the dividend yield is 10.81%.

It is a very high yield. It’s almost as if the market thinks the company won’t be able to pay the dividend. But the recent capital increase, intended to reduce the cost of its debt, should reassure investors in this regard.

In other words, even if IVR stock is now selling below its book value, at least you are getting paid well for waiting for it to rise. That will likely happen when its second-quarter results are released around August 5 or so.

As of the date of publication, Mark R. Hake did not hold a position in any of the titles mentioned in the article. The opinions expressed in this article are those of the author, subject to publishing guidelines.

Mark Hake writes about personal finance on and execute the Guide to Total Return Value which you can view here.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.