What a difference a year makes. Last year at this time, Invesco Mortgage Capital (NYSE:IVR) was in a fight for its life, as the early days of the COVID-19 pandemic and related lockdowns created massive distress in the mortgage-backed securities market. The company cut its dividend from $0.50 per share to $0.02 as it entered forbearance with its banks in order to do an orderly liquidation of its portfolio. Since then, the company has raised its dividend four times in a row. So after all that, is Invesco Mortgage Capital the dividend stock for you?
Last year was brutal for mortgage REITs
Last year was pretty much awful for the entire real estate investment trust (REIT) sector, but the mortgage REITs were hit even harder than the rest. Mortgage REITs are a bit different than the typical REIT in that their assets are generally loans and mortgage-backed securities, not properties. This means periods of financial stress impact them more than the typical REIT.
In the early days of COVID-19, the mortgage-backed securities market went through a period of illiquidity before the federal government stepped in and started supporting the market. Mortgage REITs like Invesco Mortgage Capital owned mortgage-backed securities that were purchased with borrowed money. The loans were secured by the mortgage-backed securities themselves, similar to the way your broker treats a margined stock. As the value of the asset falls, the bank or broker demands more cash to be posted as collateral.
Invesco enters forbearance
Unfortunately for most of these mortgage REITs, the market for mortgage-backed securities (especially in March and April) went no-bid as sellers overwhelmed buyers. This created a death spiral in many of these securities. Invesco ended up reaching an agreement with its creditor banks that allowed it to sell what it could and repay the loans.
Invesco entered the COVID-19 crisis with a portfolio of mortgage-backed securities that included government-guaranteed and non-government-guaranteed mortgage-backed securities. After the dust settled, Invesco Mortgage Capital jettisoned almost all of its non-government-guaranteed securities and held 98% of its portfolio in guaranteed securities.
Invesco has limited credit risk now
By focusing entirely on government-guaranteed securities, Invesco Mortgage Capital has swapped out its credit risk for more interest rate risk. Interest rate volatility is kryptonite for mortgage-backed securities investors. Invesco saw an 11% increase in book value per share going into the end of 2020; however, interest rate volatility in February (where the 10-year bond yield rose rapidly) had limited growth in book value to 5% for the quarter through late February.
With Invesco Mortgage holding primarily government-guaranteed mortgage backed securities, the company will trade similar to agency REITs Annaly Capital Management and AGNC Investment. These companies did not escape the COVID-19 crisis unscathed, however they did not experience distress the way Invesco Mortgage Capital did.
It’s hard to get excited at this valuation
At recent prices, Invesco Mortgage is trading with a dividend yield of 9.1%, and a 4% discount to book value as of the investor conference call. This is roughly in line with AGNC and Annaly Capital. Yet while AGNC and Annaly have more or less recouped the losses from the COVID-19 crisis, Invesco Mortgage Capital has not. The chances of that happening is nil. The decrease in book value was not simply “mark-to-market,” where the company can benefit from recovery in asset prices. Invesco sold its stuff at the bottom, so the pre-COVID-19 chart is completely irrelevant. Invesco is now a garden-variety agency mortgage REIT, and probably isn’t cheap enough to make it worth buying in lieu of AGNC or Annaly.