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Invesco Mortgage Capital Inc. Message Board

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  • oldschoolbuilder oldschoolbuilder Oct 8, 2011 5:09 PM Flag

    5 yr swap rates now at 140+ bps--up 35 bps from the bottom

    The marks this quarter may not be pretty on the surface but are also likely to be temporary in the overall scheme of things and should ultimately reverse sharply. If the underlying assets are good they will rally hard as panic subsides and the tremendous amount of liquidity that is hiding out on the sidelines returns.

    My rough estimate of BV at quarter end includes:

    +2.00 from Agency MBS
    -3.00 from Swaps
    -1.25 from Non Agency
    -1.00 from CMBS
    +0.30 from Secondary Offering

    19.34 2Q BV

    16.39 3QE BV

    Let's shave another $1.39 if you assume much more draconian current marks on the credit assets, offset by the positive impact of the recent backup in swaps--which gets you to $15 on current BV (as of today). But this figure includes some unrealistic, panic-driven prices for credit assets (back to early 2009 levels) that should ultimately reverse. At a $15 BV you are assuming a $500 mil hit on a $5 bil non agency and CMBS portfolio (made up of money good assets) and a $400 mil hit on a 4.5 yr duration swaps book that will ultimately accrete back as well.

    There are still plenty of unencumbered assets at the company to make it through the storm. If need be, IVR can reduce leverage for a while until the market stabilizes and prices for high quality assets come back to normal. This will lead to a reduced dividend on a temporary basis, but ultimately it will be restored back to normal.

    CS is their primary provider of repo financing and there are 2 dozen others in the mix. I doubt anyone will be cutting off funding here. Remember, the relationship for the banks is Invesco Ltd (a huge asset global asset manager with hundreds of billions in assets), not just IVR the $14 bil in assets MREIT. Not too concerned about the scenario you paint.

    My point is that a lot of bad news is priced in here, and while it's possible the stock could go lower if the markets stay weak you ultimately should make a lot of money in dividends and capital appreciation in IVR over the next 2-3 years.

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    • If you believe tye credit markets are going to reverse recent losses (yoi at least understand that there are losses here on these assets on a MTM basis, unlike many of the clueless in this stock and on these boards) there are MUCH better ways to play the bounce than an MBS REIT, esoecially a hybrid.

      Lets say you are right, and credit MIRACULOUSLY recovers. Interest rates will rise and the FED will begin to discuss tightening, just as your IVR has layered in a bunch of new Agency MBS at HISTORIC low rates.

      yes, the swaps will lift along with the credit stuff, but you will see a selloff in the Agency that will eat some of the gains AND a growing reluctance on the part of investors to buy ANY RATEPRODUCT AT ALL.

      If you think credit will recover, MY GOD, BUY WELLS FARGO or BAC or JPM or ANY BEATEN UP FINANCIAL..

      Forget a 20 price target on this silly little thing, you will make 300-500% in the biggest banks in America if credit is coming back.

    • Thanks, the analysis is interesting.

      I think that along with BV you should include target share price info. which is $19.25 (see below link)

      And, please notice that the historical trading range is between about $18.50 & $21.

      In addition, it is rated at 1.8 which is a buy.

      The analysts still mostly rate it at a strong buy and only two are changed to now rating it as low as a hold.

      So, while your points are good ones, I think that it is helpful to add other relevant information (charts, historical trading range, recent analysts changes, & analysts current ratings, share target price) just to be a bit more complete.

15.37-0.21(-1.35%)Aug 26 4:02 PMEDT