The Quest For Yield: IVR

Nick’s (and my own) quest for yield took an interesting turn yesterday when buddy suggested I take a look at IVR.  Invesco Mortgage Capital is a USD $536M company that specializes in financing and managing residential and commercial
mortgage-backed securities and mortgage loans.   Currently, about 1/3 of the assets are backed buy one of the 3 government agencies (Ginnie, Fannie, & Freddie).  The interesting thing about IVR is that it is run like a REIT with all after cost profits being paid out to shareholders.   Leverage ratio is 3.5x and has been inching up with most of this attributed to agency backed loans.  The current dividend is approximately 74 cents translating into 14% annually.

The Positives:

  • Nice yield and the current low interest rate environment only makes IVR look even better.
  • Spreads on both agency and non-agency backed MBS are still attractive (about 4% overall) and should that way for sometime given the interest rate outlook.
  • Steadily reducing agency backed MBS exposure which will help reduce negative effect rising rates would have.

The Negatives:

  • The one big risk IVR has is the negative effect increasing interest rates would have on their agency backed portfolio.  This is because those assets are fixed rate but backed by short term repos.  In short, interest rates go up and the spread IVR gets on the agency loans contracts.
  • Dilution is coming.  10M new shares is in the process of being issued.  This represents about 33%+ of the current shares outstanding.
  • PPIP.  The portion of equity allocated to this increased to  $43MM (7.8% of equity) from $16MM (4.4% of equity) in 1Q10.  Since inception in 2009, the fund has produced an average 20% return but volatility reigns and could cause instability in IVR’s overall EPS as the PPIP investment gets bigger.
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