With a current dividend yield above 11% Invesco Mortgage Capital (NYSE: IVR ) is an incredibly appealing investment.
However, because mortgage REITs, like Invesco Mortgage, live and die based on the quality of its assets, every investor needs to dig into the company's extremely diverse array of assets to make a prudent decision. Luckily for you, I've done just that.
Agency mortgage-backed securities (MBS)
The quintessential mortgage REIT asset -- agency MBSes -- are pools of residential mortgage loans, packaged and stamped with a Fannie Mae or Freddie Mac guarantee against default.
These securities make up roughly 50% ($10.4 billion) of Invesco Mortgage's assets as of the first quarter of 2014.
Altogether, Invesco Mortgage's agency securities had an average yield of 2.9% and interest income of $81 million in the first quarter (down roughly $20 million year-over-year).
Not included within the agency MBS pass-throughs are agency collateralized mortgage obligations (CMO) – which have a fair value of approximately $500 million. Unlike pass-throughs, where investors own the entire pool of securities, CMOs are sliced up into investable pieces by duration and risk profile.
Invesco Mortgage uses these investments to take some extra risk, earning an average yield of 4.5%.
At the other end of the spectrum are securities packaged by private labels. These assets, unlike agencies, are not guaranteed and, therefore, come with risk of default. Invesco Mortgage has a diversified portfolio of roughly $4 billion non-agency securities -- which accounts for roughly 20% of total assets.
Prime, Alt-A, and subprime are among the more common private label securities. Prime and Alt-A have strong to fairly strong credit quality, but because of loan size, loan-to-value (LTV), borrower's debt-to-income, or a number of reasons, do not fit within Fannie Mae and Freddie Mac's guidelines.
In general, however, these loans are considered on the safer side. Subprime, on the other hand, are made up of loans with lower-to-poor credit quality and are at a much higher risk of default.
Two fairly new additions to the company's portfolio are of the less common variety: re-REMICs and GSE CRTs.
Re-securitization real estate mortgage investment conduits (re-REMICs) allow Wall Street firms to restructure soured securities in a similar way to CMOs. By picking apart the good loans from the bad -- and slicing them up accordingly -- it creates a more attractive investment.
Government sponsored entity credit risk transfers (GSE CRTs) allow GSEs like Freddie Mac to reduce it credit risk by selling unsecured and non-guaranteed debt notes to private investors.
Commercial mortgage-backed securities (CMBS)
As of the first quarter of 2014 Invesco Mortgage held approximately $2.7 billion in CMBS at fair value -- and 14% of total assets.
CMBSes, similar to CMOs, are cut into slices by risk profile. The securities also have no protection against default. CMBSes do, however, come with some nice benefits: along with the strongest yield in their securities portfolio (4.6% as of March 2014), CMBSes have protection from borrower prepayments (something not regulated with residential MBSes) which creates more consistent cash flows.
The majority of the company's CMBSes were originated prior to 2008. However, Invesco Mortgage has added recently to what they refer to as "CMBS 2.0." Also called "K-deals", these securities are issued by Freddie Mac and collaterized by multi-family apartments.
These specialized CMBSes come in slices, again, based on risk profile, however, unlike other similar investments some trenches of the loans (senior debt and interest only pieces) carry guarantees.
Along with holding residential and commercial securities Invesco Mortgage holds actual loans -- and began expanding its portfolio of loans in 2013 and 2014.
For residential, the company holds mainly prime jumbo (large loans with high-credit quality) residential mortgages originated in 2011 or later. In the first quarter Invesco held about $2 billion in loans, which had an average yield of 3.6%, and 29 years until maturity.
On the commercial side the company invests across a few different debt levels. This includes: $50 million in mezzanine (subordinate debt), $20 million in first mortgage (senior debt), and $23 million in preferred equity (a step below mezzanine).
The last word
Looking forward, Invesco Mortgage's CEO Richard King noted during the company's first quarter conference call that GSE credit risk transfers, commercial loans, and jumbo prime residential loans look the most appealing. So, investor should be on the lookout for those assets to drive the portfolio.
With that said, overall, I believe Invesco Mortgage has a diverse and intriguing assemblage of assets. And by understanding these assets investors can make a more informed decision on this high-yielding investment.
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