BV of $16.47 is in-line with my previous estimates. Please check out my previous notes.
Results included nearly $400 mil in negative mark to market hits on swaps that should reverse over time (that's nearly $4 per share) and nearly $200 mil in negative mark to market hits on non-agency and CMBS that should also reverse over time as these assets are MONEY GOOD (that's another $1.50+ per share).
Combined there is $5.50 per share of negative marks that should entirely come back into BV over time (4 years), slightly less if you assume the agency MBS lose some value as rates eventually rise.
Earnings power in 4Q will very likely be north of 80 cents given that all of the proceeds of the offerings are now invested and there is less of a drag from swaps as no new ones were put on in the quarter. That also means the dividend should rise in 4Q. At the current 80 cents it equates to a 21% dividend yield--but it will likely ramp higher beginning in 4Q.
The stock also trades at a 7% discount to the current GAAP BV, but at a 25% discount to historical BV. Thus there is likely 75% upside here over the next 2 years from a combination of dividends and capital appreciation.
Let's focus on the big picture and ignore market volatility (including after hours trading) for a change. The senseless pumping and bashing (you know who I'm talking about--on both sides) needs to stop as well--it is just useless noise.
Good post, I agree this stock fell off the cliff when it announced the dividend cut from .80 to .65. It has explosive growth, but was paying out dividends in excess of earnings so we saw contractions to BV. When you cut the dividend and maintain earnings then you right the ship for capital appreciation. IVR can make money on the arbitrage of their own stock by just buying back their own shares on the open market in the $14 range. After its last two SO's where they sold 23 mln on shares in June at $20 and 19.5 mln share at $18..
IVR tipped their deck by establishing the buy back program.. should mean no more SO surprises.
Olds I admire your ablility to simplify the mark to market accounting for hedging activity particularly when you clearly demonstrate that any short-term profit or loss due to M to M accounting is nulified when the contract matures. Thanks
I understand that the negative marks to pps will reverse over time but the negative mark should only be $3.36 on 115,000M shares based on the accumulated loss of (-$386.2MM) as of 9-30-11. Further from today's disclosures by managment, I note that the investment portfolio has shifted up from appproximatly 74% previously held in RMBS's (9-30-11) to the current 75.6%, 17% formaly held in Non-Agency RBS incresing to 17.4% and a previous 8% position in CMBS being reduced to 7.9% in CMBS.
The point that I want to emphsise is that IVR has shifted more of its portfolo to RMBS and away from CMBS's therefore shouldn't the negative mark be reduced with this portfoio adjustment, thus increseing book value?
You are correct, IVR's assets are also marked to market. However, the drop in swap rates was significantly greater than the rally in IVR's assets because of: 1) perceived high prepayment risk (which has not played out so far judging by pretty stable CPRs) that has limited the rally in IVR's substantially payment protected agency MBS, and 2) greater worry about credit assets in general (even though IVR's credit assets have had no change in underlying fundamentals) that has led to a decline in prices of non-agencies and CMBS.
Netting the hedges and underlying assets results in a pretty high negative mark to market of nearly $4 per share--but this is not economic and should reverse over time unless the assets and hedges are liquidated/closed out. Please see the earnings conference call presentation to get a better idea of the actual numbers involved.
The bottom line is that historical BV is near $20 and current GAAP BV is $16.47. If you believe the assets are money good and will be held to maturity this wide gap should close substantially over time, and likely ultimately disappear altogether.
If under the hedging accounting, you have to mark to market the swap value, should you also mark to market the portfolio value (whose change should be inverse to that of the swap valuation)? In that case, then your book value should not change?
Is this just an accounting issue I am missing? For me it is like two swaps hedging each other, so no book value change if hedged perfectly.
It's easy to get tongue tied over this.
The extra interest paid to the counterparty for a fixed rate over the base floating rate DOES NOT include the "loss" on the fair value of the swap. That "loss" relates to future interest payments in excess of current market rates for similar duration obligations.
The swap "loss" exists economically only if the company seejs to terminate the swap - whereby it would owe the counterparty the present value of the interest rate differential. The company would owe the counterparty a "yield maintenance" or prepayment penalty.
When hedges are economic and not speculative the intent is to hold them to maturity. In that case the "loss" disappears over time and is represented (or amortized in my original parlance) by the company expensing more interest that it would have expensed without the swap.
And yes I agree that the loss goes away when the swap expires - my point was that it was mostly gone by then anyway.
Evaluating a company whose cost of funds is elevated by addition of swap expense to its native cost of funds as if it ALSO owes the "loss" is double counting the liability. If it incurred the loss by defeasing the swap its cost of borrowing would decline and its current earnings would increase.
There is no additional fee. The agreement is to swap cash flows--floating for fixed rate. This is already reflected in the lower than otherwise net interest spread. The mark to market of the swap just reflects a point in time accounting gain or loss on this hedge--which is irrelevant from an economic standpoint if it never gets closed out prematurely.
What I understand is that a swap agreement has a fee IN ADDITIONAL to the interest expense agreed upon. For example, the current cost of fund is 3% VAR and the swap makes it 5% fixed, the additional fee up front would be let say 50 bps. That 50bps is the item in the balance sheet that goes up and down but at the end it will go to zero because the swap is gone. Let say that 50 bps worth 500 bucks for 2 accounting periods. If rate doesnt change, the 500 bucks goes down by 250 bucks per period for 2 periods because of the time decay. If rate changes against you in the current period, it may deduct 400 instead of the 250 bucks. But then the next period it can only deduct 100 to make it zero and finishes the swap. As I said, it accelerates the decay and basically shifts losses in the future to the current period, but it will not come back at the end...