This year has been one that most mortgage real estate investment trusts (REITs) would love to forget. The COVID-19 crisis created a disturbance in the mortgage-backed securities market that forced dividend cuts and deleveraging into an awful market.
One REIT in particular that had a near-death experience was Invesco Mortgage Capital (NYSE:IVR). Its stock is down by 84% year to date and is trading close to its 52-week low.
That said, there are some bright signs for the company that suggest it might be safe for investors to return to the stock.
Mortgage REITs vs. traditional REITs
Most REITs buy properties -- offices, malls and retail buildings, apartments, healthcare facilities, etc. -- and then rent them out to tenants. It is a relatively straightforward (and usually relatively predictable) business. Mortgage REITs, by contrast, don't buy properties: Instead, they invest in mortgage-backed securities. Invesco invested primarily in mortgage-backed securities that were guaranteed by the government, although about a quarter of its holdings were in non-agency (or non-guaranteed) securities. During March and April, these securities declined in value and it was forced to sell them into a further sinking market to pay margin calls.
Invesco dramatically shrunk its portfolio and announced that it would henceforth buy only government-backed mortgages. It also cut its dividend from $0.50 per share a quarter to $0.02 per share a quarter. As a result of all this, its book value per share fell from $16.29 as of Dec. 31 to $3.17 as of June 30. By midsummer, Invesco's stock price volatility had made it a favorite of the Robinhood crowd.
The repair is over and the rebuild is in progress
Invesco recently gave an update on where it stands, and things are looking up for the company. First, it announced a dividend increase from $0.02 to $0.05. That gives the stock a dividend yield of 7.4% at current share prices, which is getting back to the range in which mortgage REITs typically pay out. Second, it gave an update on its investment portfolio, which stands at $6 billion, up from $1.6 billion at the end of June. Agency residential mortgage-backed securities account for 91% of that, and commercial credit securities make up the rest. Cash has increased from $270 million to $408 billion. Finally, book value per share has increased to a range of $3.29 to $3.39 from $3.17 as of the end of June. The secured loans were all repaid, and the company currently has $5.2 billion in repurchase agreements against its agency mortgage-backed securities.
Invesco Mortgage is trading at a big discount to book
Given that update, here is what Invesco Mortgage looks like now. It is trading at a discount to book value (based on the mid-point of the company's estimate) of 19% -- an extreme discount, certainly compared to agency REIT peers like AGNC Investment (NASDAQ:AGNC), which is trading around a 7% discount to book.
Invesco may warrant a bit more of a discount given that 9% of its portfolio is commercial credit; we don't really have much visibility on where the company is marking that part of the book in terms of percentage of face value, nor do we know whether these loans are performing. At any rate, these loans are unencumbered, which means declines in their value would not trigger margin calls.
Is Invesco a buy here? Maybe not until we get more clarity, which will happen when the company releases its third-quarter earnings near the end of this month and we can get more information on its commercial credit book. However, it is a stock worth keeping an eye on.