Invesco mortgage capital attractive at 92% of revised book value

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

Fund IVR Real Estate Investment Fund (REIT) on a black notebook on an office table.

Source: Shutterstock

This means that it is trading at about 92% of its March 31 adjusted book value. Depending on how interest rates change in the second quarter, its new book value in the second quarter may be higher than this. Here’s how it works: if interest rates fall, the asset value of mortgage-backed securities increases and the value of debt falls.

Let’s take a closer look at IVR stocks.

Invesco Mortgage Capital revised carrying amount

On May 27, Invesco announced that raised $ 128.625 million by 37.5 million shares. In fact, this is $ 3.43 per share. In addition, the broker had a “call option” for another 5.625 million shares. As such, the company raised a total of $ 147.9 million before expenses and commissions.

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


Click to enlarge

Source: Mark R. Hayk, CFA.

This shows that book value per share fell to $ 3.63 per share from $ 3.65 after the capital increase. The money was planned to be used to pay out Series A preferred shares, but this does not affect the calculation of the revised book value.

But that may not be what Invesco is reporting its book value as of June 30, 2021. This is because mortgage-backed securities, which make up the majority of its assets, are traded based on changes in interest rates.

For example, if interest rates tend to rise, this lowers the prices of a company’s bonds and mortgage-backed securities. This is because the fixed coupon securities must adjust to higher rates reducing their price to offer the same higher rate despite the lower coupon rate. This inverse relationship between rates and prices is well known and appreciated in fixed income markets.

Impact of changes in rates on the carrying amount of IVR

So, if interest rates continue to rise like last year, expect to see a drop in the net asset value (NAV) or book value per share (BVPS) of IVR shares (and vice versa).

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

7-14-21 - Yield on 10-year Treasury bonds - ^ TNX
Click to enlarge

Source: Yahoo Finance Symbol ^ TNX

This can be seen on Yahoo! Financial chart that represents 10-Year Treasury Bond Yield… After peaking at around 1.746% on March 31, they are now valued at around 1.3%.

So it looks like investors can look forward to BVPS Invesco’s overall growth in the second quarter. If rates remain at this level, Q3 BVPS will definitely be higher.

As a result, the IVR share price should rise as it tends to follow the price movement of the underlying BVPS.

What to do with IVR promotions

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

This is a very high yield. It’s almost as if the market thought the company would not be able to pay dividends. But recent capital increases aimed at lowering the cost of debt should comfort investors in this regard.

In other words, even though IVR shares are now trading below their book value, at least you are well paid to wait for it to rise. This is likely to happen when its Q2 results are released around August 5th.

As of the date of publication, Mark R. Hayk did not hold any position in the securities mentioned in the article. The opinions expressed in this article are those of the author and are published on InvestorPlace.com. Publishing rules

Mark Hayk writes about personal finance at mrhake.medium.com and runs Overall return guide which you can view here

Message Invesco mortgage capital attractive at 92% of revised book value first appeared on InvestorPlace

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



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