Invesco Mortgage (IVR)

Invesco Mortgage is just a baby (tomorrow makes 1 year as a public company), but it has over $500 million in market cap at its current price near $20 a share.  The parent company, Invesco Management, holds 10% of the equity in this company, and externally provides the management of the REIT and its portfolio.

The recent announcement of a 74 cent dividend was a 4 cent cut from the 78 cent dividend paid in Q1, 2010.  That makes current yield just under 15%.

The portfolio is a mix of mortgage-related assets, with total investments just over $1.5 billion.

The company has a good investor fact sheet describing its portfolio, and I’d like to point out one section of that document to better understand how these animals work.

The lesson to be taken from this portfolio is that the shareholders’ equity in a mortgage REIT is not used in direct proportion to the assets in the portfolio.  The Agency MBS (Fannie/Freddie/Ginnie) are well over half the total portfolio, but use barely a quarter of the shareholder equity.  On the other hand, those ratios are roughly reversed in the case of residential non-Agency mortgage bonds (“private label” MBS).

As an equity investor, I obviously want to know how the management team is using my capital.  For me, then, the primary focus is the non-Agency investment.  I also want to look at the leverage used to hold much larger quantities of Agency MBS, because that’s where there might be risk that can have ugly surprises.

Bear in mind that all repo borrowing is recourse borrowing, so large losses in Agency MBS can still cost the company more than even the capital they are using to support it.  (That would be truly extreme, and, IMO, could only happen if the Government were to throw up its hands and explicitly decline to support the Agency guarantee of those MBS.)

Still, when you’re looking for where the risk might be hiding, a sudden decline of half the value of the Agency MBS would clearly be more devastating than a similar decline in the value of the private label paper.

One aspect that doesn’t show up in the Invesco Mortgage picture (unless you’ve seen his appearances on CNBC) is the effect of Wilbur Ross.  Ross is a famous “vulture” investor who buys distressed companies.  In 2006 he  sold his company to Invesco Private Equity.

In 2008, Ross and Invesco Private Equity bought the remains of one of the largest alt-A mortgage originator/servicers, American Home Mortgage (formerly the mortgage REIT AHM).

Those tens of billions of mortgages immediately put Invesco into the business of dealing with troubled mortgages, delinquencies, defaults, and foreclosures on a national scale.  It also gave Invesco Mortgage (once it was capitalized) access to a due diligence and servicing capability for non-Agency residential mortgage bonds that others don’t have.

That fact is demonstrated by the Invesco Mortgage’s approval to be in the elite club of investors accepted into the Treasury Department’s PPIP (Public-Private Investment Partnership).  This is the somewhat stunted program that buys the “toxic waste” mortgages off the balance sheets of distressed banks.

That investment, representing only 4% of the equity, and less than $30 million of the portfolio, is kind of intriguing, because the deal from the Government included noncallable financing for a number of years, unlike the repo most mREITs use to finance their positions, which needs to be rolled over constantly and suffers nightly marks and (potentially) daily margin calls.

That is, of course, supposed to be how the TARP money was to be used, but one phrase in the TARP legislation became the whole program just a week or two after President Bush signed it into law.  That phrase was the seeming afterthought that allowed the government to make direct investments in preferred or common stock.

As it turned out, instead of buying “Troubled Assets,” Secretary Paulson went in and bought horrifically low-yielding preferred stock.  When the super-senior AAA MBS from prime borrowers with less than half a percent delinquencies and zero losses were selling for less than 50 cents on the dollar and yielding 15% to 20%, the US taxpayer was treated to the spectacle of unsecured low-ranking capital investments in hundreds of banks and financial companies for a whopping 10% return, assuming full repayment.

Trust me when I say that in the market conditions just then, private capital would have required higher yields for preferred stock than it would have needed to buy those MBS.

That left the MBS to be scooped up by vulture funds, private equity groups, hedge funds, and a couple of purpose-built mREITs.  Both CIM and MFA were in there buying, along with plenty of newly-launched funds from the likes of Pimco, Blackrock, TCW and others.

Soon the really great deals had all been bought.   That left outfits like IVR, which didn’t have its money until mid-2009, sifting through the detritus to buy loans they felt they could work out using their servicing capacity, or bonds like those CIM has bought that yield high single digits but don’t carry much principal risk once the discount price is taken into account.

They also bought a fair pile of senior CMBS, a sector that runs on a much slower time line, where defaults are just now ramping up like they did for residential mortgages in 2007 and 2008.

When IVR came public on July 1, 2009, I already had the really really cheap mREITs I wanted, and I knew the underlying MBS were already recovering a lot of their extraordinary price declines.

IVR bears watchiing with some interest, but doesn’t get me excited enough to buy at these prices near the book value, especially when I see that the book value per share has been trending down.

I know nothing of their hedging strategies for the Agency book.  That is a shortcoming of the investor fact sheet that I hope they fix in coming quarters.

hh

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One Response to Invesco Mortgage (IVR)

  1. harold young says:

    I am sure glad I found you. You’re like having my own personal anylist

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