Invesco Mortgage (NYSE:IVR) has quietly begun to outperform some of its peers despite it having been a name that we have wanted you to avoid for quite some time. This outperformance is evidenced by its recently reported earnings, especially when we compare the results to those of other, more popular mREITs, which offer similarly sized dividend yields. In this column, we will discuss the key metrics of the company, as well as our take on the stock at present levels. The key metrics which you should examine for all mREITs are summarized below:

Table 1. Summary of Key Metrics of Invesco Mortgage Capital as of Q1 2017

Key Metrics of Interest Invesco’s Performance
Q3 2017 Book value and % change from Q3 2016 $18.34 (+0.4%)
Net interest rate spread in Q3 1.79%
Dividend (yield)* $0.41 (9.8%)
Q3 Core Income Per Share $0.44
Dividend covered?** Yes
52-week share price range $14.15-$18.02

*Based on current share price and forward annualized yield

**Determination based on estimate of core earnings covering dividend paid

Data table source: Invesco’s Q3 earnings

Invesco had a much improved quarter compared to Q2. First, we want to point out that the company surpassed our expectations on the top line significantly. We were looking for a bullish outcome of $80.5 million, while the company reported $86.2 million. This strength was more than expected. This net interest income figure was up 4% from last quarter’s $82.9 million.

Why does this matter? It shows a turnaround. We would like to see a cushion, and this occurred here in Q3 as core income rolled in at $49.1 million or $0.44 per share. This figure surpassed our estimates by $0.02 and led to a $0.03 coverage of the payout of the newly hiked dividend of $0.41 per share. Still, we are well below the payout of several years ago of $0.55. Have the key metrics improved?

The effective annualized yield on its portfolio was 3.36%, rising 4 basis points quarter-over-quarter, and the effective annualized cost of funds was 2.06%, rising 5 basis point from 2.01% last quarter. Doing the simple math, we see that the effective net interest spread narrowed a single basis point to 1.30% from 1.31% from 1.30%. This stability in the spread is a strength as it leads to more predictable income, so this result was a positive in our opinion.

Invesco reported a quarter-ending book value of $18.34, rising 0.4% from the $18.27 at the end of the first quarter. This is also up 5% from the $17.48 we began 2017 with. This rise in book value is pretty significant from our viewpoint, however the stock is still on sale here.

At the current share price of $16.86, the discount has widened slightly when we factor the rise in book value. The stock now trades at a $1.48, or an 8.0%, discount. That is still a strong discount, but contrast this with a year ago, when the stock traded at a $6.29 discount, or a deep 37% discount-to-book. The Street has been narrowing the discount.

We have had (a very surprising to us) change of heart, for lack of a better analogy. We are no longer bearish. At an 8% discount-to-book, we think the name is a buy.




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