Invesco Mortgage Capital Is Attractive at 92% of Revised Book Value

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

IVR stock Real estate investment trust (REIT) on a black notebook on an office desk.
Source: Shutterstock

That means it is trading at about 92% of its adjusted March 31 book value. Depending on how interest rates change during Q2, its new Q2 book value may actually be higher than this. Here is how that works: If interest rates fall, the prices of its mortgage security asset values increase and its debt values fall.

Let’s take a closer look at IVR stock.

Invesco Mortgage Capital’s Revised Book Value

On May 27, Invesco announced it had raised $128.625 million for 37.5 million shares. That’s effectively $3.43 per share. Additionally, there was a broker “greenshoe option” for another 5.625 million shares. Therefore, the company raised a total of $147.9 million before capital raise expenses 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 that includes the new capital.

7-14-21 - IVR stock - Revised BVPS
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 raise. The money was going to be used to pay down its Series A Preferred Stock, but that does not affect the calculation of the revised book value.

But this may not be what Invesco reports for its book value for June 30, 2021. That is because its mortgage securities, which make up the bulk of its assets, trade based on the movement of interest rates.

For example, if interest rates generally rise, that lowers the prices of a company’s bonds and mortgage securities. That’s 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 priced into fixed-income markets.

The Effect of Rate Moves on IVR’s Book Value

So, if interest rates keep rising as they did last year, expect to see the net asset value (NAV) or book value per share (BVPS) of IVR stock fall (and vice versa.)

The good news is that long-term interest rates generally have been falling during Q2.

7-14-21 - 10 year Treasury yields - ^TNX
Click to Enlarge
Source: Yahoo Finance symbol ^TNX

This can be seen in this Yahoo! Finance chart that represents 10 year Treasury yields. After peaking at about 1.746% on March 31, they are now priced at about 1.3%.

So it looks like investors can expect a general gain in Invesco’s BVPS for Q2. If rates stay at this level, the Q3 BVPS will definitely be higher.

The price of IVR stock should rise as a result, as it tends to follow the price moves of the underlying BVPS.

What To Do With IVR Stock

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

That 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 raise, meant to lower its debt costs, should give investors some comfort in this regard.

In other words, even though IVR stock is now selling below its book value, at least you are being paid well to wait for it to rise. That is likely to occur when its Q2 results come out around Aug. 5 or so.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.


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