Bad News for Invesco and the Market's Hottest Dividend Sector?

We've seen some reasonably solid results from players in the mortgage REIT sector recently. Amid a volatile third-quarter environment, Annaly Capital (NYSE: NLY  ) reported only amild year-over-year downtick in its interest-rate spread, as did American Capital Agency (Nasdaq: AGNC  ) , while CYS Investments (NYSE: CYS  ) notched a mild uptick.

But the results at Invesco Mortgage (NYSE: IVR  ) look less impressive. The company's interest-rate spread dropped to 2.39% in the latest quarter, down sequentially from 2.75%. Last year's third quarter saw the company earn a hearty 4.11%. That's some major shrinkage.

Here's how some other mortgage REITs fared in the latest quarter, along with the numbers from prior quarters.


Interest-Rate Spread Q3 2011

Interest-Rate Spread Q2 2011

Interest-Rate Spread Q2 2010

Invesco 2.39% 2.75% 4.11%
Annaly 2.08% 2.45% 2.11%
American Capital Agency 2.14% 2.46% 2.21%
CYS Investments 1.95% 2.23% 1.91%
Armour Residential (NYSE: ARR  ) TBA 2.36% 2.88%

Source: S&P Capital IQ.

Every company slipped sequentially,  but Invesco also took a major tumble from the year-ago period. We'll find out Armour's numbers next week, so stay tuned.

Another troubling sign: Invesco issued new shares twice in the past few months at or below book value. In late June, the company reported a book value per share of $20.63 as of May 31. The company then issued 17 million shares at $20.15 on June 20. Book value at the end of June had declined further, to $19.34.  

In August, Invesco reported a book value of $18.39 as of July 31. Then the company issued 20 million shares at about that price on Aug. 23.

The decline in book value per share is troubling when players such as Annaly and American Capital Agency have managed to increase book value over the past few quarters. Peer Chimera (NYSE: CIM  ) has seen its book value per share fall the last two quarters, from $3.59 per share to $3.35 in the latest quarter.

Invesco defended its secondary offerings by saying that it had found "high-quality assets at attractive levels," but managers face a headwind for creating value when they offer shares below book value.

Also troubling is the substantial reduction in the dividend, from $0.97 per share in Q2 to $0.80 in the latest quarter. Mortgage REITs will offer fluctuating dividends based on their quarter-to-quarter performance, but such a cut is hard to swallow. Annaly, probably the best operator in the space, has seen its dividend fluctuate between $0.62 and $0.68 per share over the past six quarters.

So with its numbers that seem worse than the what other peers are putting up, I'm wary of what Invesco's results show -- not so much for the mortgage REIT sector as a whole, but for the company itself.

Jim Royal, Ph.D., owns shares of Annaly. The Motley Fool owns shares of Chimera and Annaly. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (6) | Recommend This Article (12)

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  • Report this Comment On November 04, 2011, at 12:25 AM, chadhenage13 wrote:

    Understanding that IVR has suffered a bigger decline in interest rate spread it's worth noting that IVR's interest rate spread is larger then Annaly's was last year or this year. So while their spread has dropped they are still earning more. The comment about book value declining is a concern, however the dividend decrease isn't shocking. If given a choice I would rather have IVR's higher dividend that gets cut (and by the way still exceeds NLY) then have a more consistent lower dividend.

  • Report this Comment On November 04, 2011, at 12:33 AM, jordanalan wrote:

    Funny. Jim Royal takes one position - an entirely negative one. He ignores the FACT that IVR is producing a remarkable 22-24 percent dividend. Second, regardless of his concerns on book value declining, the stock is trading at around 15.50-16.10. The book value cited is 20 percent higher. And he also fails to consider WHY there was stock issued. To make more acquisitions in a timely fashion. Why would insiders be buying up 100,000s of shares during the same time period Dr. Royal cites WORSE numbers. Are you still short? With all due respect what exactly are you a doctor of?

  • Report this Comment On November 04, 2011, at 12:02 PM, dave22q wrote:

    IVR still out yields NLY but the decling book value is a big red flag. AGNC appears to beat NLY in yield and non-agency IVR in safety and book value performance. it got slamed by share sale announcement but I see and temporary price discount. the world seems to view NLY as best of breed but I cannot see its better by 5 points of yield nor do i expect the difference to persist.

  • Report this Comment On November 04, 2011, at 9:40 PM, maroko wrote:

    I have owned NLY for the past three years . The stock has gone down since, but the dividend I have received outweighs the loss by 3-1

  • Report this Comment On November 04, 2011, at 10:59 PM, OlympianADK wrote:

    Some good comments about IVR's interest rate spread and dividend. Regarding the book value and issuing stock to buy deeply discounted assets during August and September, if anything, it shows the quality of management at IVR, not to mention their ability to invest alongside of investors of the type Ross. Just wait 6 months, baring any major economic slump, and you will see the book value to be considerably higher than the one reported for end of September. I think IVR sells at at a considerable discount and wouldn't be surprised to see it up to $20/sh in the next 3-6 months while earning north of 20% dividend....with the short rates on hold for the next 2 years and clear signs of recovery in R.E(please look at the results of names in the space like RAS, NRF, ...but also the banks too) the mREITs should outperform the market as their discounted mortgage portfolios recover in value and with the them the book values. We should also see dividends to be supported from capital gains in these portfolios even if the spread stays wher it reported in this article. Long IVR, CIM, RAS, NRF.

  • Report this Comment On November 08, 2011, at 10:03 AM, dave22q wrote:

    seems like selective fact picking. what i see is that they all lost about .3 +/- .05 quarter to quarter. given no strong reason to believe in seasonality this appears to be the relevant point.

    they will all be down so its time to look at dividend coverage as book values. looks to me like AGNC or CYS are best.


    long AGNC, short IVR. covered my short on NLY in Oct.

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