IVR - Invesco Mortgage Capital: Good For Trading But Horrific Investment

2023-08-04 03:06:06 ET

Summary

• Invesco Mortgage Capital Inc. stock has consistently declined and does not work as an investment.
• The company has cut its dividend multiple times and is facing challenges in the volatile interest rate environment.
• Book value has fallen and the stock is currently near fair value, but it may get cheaper and should be avoided.
• As an investment this is not working, but traders can do well.

We reiterate a sell recommendation on Invesco Mortgage Capital Inc. ( IVR ) which just reported earnings . The stock just perennially moves lower. Take a look at the last year alone:

One could argue there has been a recent rally, which is true, and as traders, our firm often takes advantage of little swings. But as investors, a buy and hold here has been devastating. It simply does not work as an investment. There are just so many better income options out there. We still bless trading it, but that requires added guidance from an expert trading team or requires experience and diligence to time entries and exits. Money can be made, but frankly, when looking for income, this one just does not fit the bill. We maintain a sell rating. Now, this comes as we see the stock having cut its dividend time and again, most recently months ago. The very volatile interest rate environment has not helped matters. Despite our position, we know many of our followers are invested, so let us review the key metrics as of Q2 2023.

Invesco Mortgage Capital key metrics in Q2 2023

*Based on dividend paid in the quarter

**Determination based on distributable earnings report; however, caution should be exercised in interpreting distributable earnings measures across companies in the sector. It is also not a measure that should be a complete substitute for net income.

Invesco Mortgage Capital sees spread compression in Q2 2023

Nearly the entire investment portfolio was invested in Agency RMBS in Q2. Q2 was more favorable overall for Agency RMBS than previous quarters , although the pace of interest rate increases hurt book value. With the volatile action, the net interest rate spreads have been all over the map, but the largest issue continues to be yield curve inversion. Spreads fell as the cost of funds have been closing in on the yields on interest earning assets. It is a mess.

Invesco Mortgage Capital Book value falls

Book value fell once again, but in the release management addressed this:

[H]igher interest rates and a faster than expected pace of sales from the FDIC negatively impacted our book value, due in part to a decline in premiums on our specified pool investments. Against this backdrop, our book value per common share ended the quarter at $11.98, representing a decline of 5.0%

We think the company will remain cautious the next few months, and should be, as there may be more rate hikes. However, management sees possible gains ahead, despite our bearishness:

We believe the conclusion of the Federal Reserve's tightening cycle will result in a reduction of interest rate volatility and, when combined with compelling valuations and favorable funding conditions, will support an attractive investment environment for Agency RMBS in the second half of 2023.

With that all said, the stock is getting attractive relative to book value, but we cannot bless a buy. You want to buy when there is a significant discount-to-book

Invesco Mortgage Capital book value relative to price

Book value is a huge driver of the share price of mREITs, in addition to the dividend and its coverage. We were pleased that earnings available for distribution of $1.45 more than covered dividend payments. So, that is a benefit for share prices.

Right now, shares are near fair value, a touch under book. The stock is at $11.31 a share, so this is a 5.5% discount to the last known book value. The thing is, the stock can get cheaper. Generally, when that discount is about 15-20% to book, we tend to buy for a trade. Right now, the macro is just tough and this portfolio, while shifting to Agency RMBS, is having trouble delivering. We think you avoid the stock.

Final thoughts

We think you need to wait for Invesco Mortgage Capital Inc. stock to come down to more than a 5% discount-to-book in our opinion. While we generally start to get interesting at a 5% discount, the problem here is that performance is weak, and the spread has narrowed, hurting income. Simultaneously we have seen dividend cuts and book value erosion. This can be traded, but it does not work as an investment.

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