Invesco Mortgage Reports Negative Economic Return

Invesco Mortgage Capital Inc. reported a challenging second quarter, registering a negative economic return of 4.1%. Nevertheless, the company maintained its earnings available for distribution per common share at $0.86. The debt to equity ratio increased to 5.9 times, influenced by a decline in book value. The investment portfolio is predominantly comprised of agency residential mortgage-backed securities (RMBS) and commercial mortgage-backed securities (CMBS), valued at $4.6 billion and $400 million, respectively. Despite the challenges, Invesco Mortgage Capital remains optimistic about the agency mortgage market, anticipating a steeper yield curve and reduced interest rate volatility.

Key Highlights:

• The second quarter saw a negative economic return of 4.1%.
• Debt to equity ratio rose to 5.9 times.
• The investment portfolio primarily includes $4.6 billion in agency RMBS and $400 million in agency CMBS.
• Earnings available for distribution per common share remained at $0.86.
• The company has a positive outlook for the agency mortgage market, expecting beneficial monetary policy changes.

Company Outlook:
Invesco Mortgage Capital anticipates a recovery in the agency mortgage market and believes it is well-positioned to navigate volatility. The expectation is for a further decrease in interest rate volatility and a steeper yield curve.

Challenges:

• The negative economic return of 4.1% highlights the difficulties faced in the quarter.
• An increase in economic leverage to 5.9 times is indicative of declining book value.

Opportunities:

• The agency RMBS portfolio’s yields increased slightly to 5.4%.
• The company maintains a strong liquidity position, ready to address market stresses and capitalize on investment opportunities.

Considerations:
The company did not specify guidance regarding future earnings or dividends. Taxable income is challenging to predict due to volatility in derivatives pricing. Operating loss carry-forwards enable the company to manage disparities between taxable income and dividends. Current book yields are in the high teens to low twenties for return on equity, making the raising of capital for new investments an attractive option.

Invesco Mortgage Capital’s earnings call underscored the mix of challenges and strategic optimism. The notable negative economic return was a focal point, together with the increase in the debt-to-equity ratio. However, the consistent earnings distribution and a favorable outlook for the agency mortgage market due to expected changes in monetary policy provided a silver lining. The session revealed complexities in projecting taxable income, highlighting the strategic use of operating loss carry-forwards to maintain dividends. The potential to raise capital for investments at favorable returns was also considered a viable way forward. As the mortgage market continues to shift, Invesco Mortgage Capital seems poised to leverage opportunities in this evolving landscape.

Key insights into the company’s financial health include:

• A market capitalization of $430.15 million.
• Analysts anticipate a return to profitability for the company within the year.
• The company’s high dividend yield of 18.1% showcases its ongoing commitment to shareholder value.

While significant volatility and a decline in stock price have been observed over the past five years, Invesco Mortgage Capital’s sustained dividend payments and the expected growth in net income could be pivotal for investor confidence moving forward. The impact of any projected sales decline in the current year remains a critical consideration for stakeholders.