Is It Time to Sell Invesco Mortgage Capital?

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Shares of Invesco Mortgage Capital (NYS: IVR) hit a 52-week high on Tuesday. Let's take a look at how it got there and see if clear skies are still in the forecast.

How it got here
Invesco, and much of the mortgage real estate investment trust sector, for that matter, has been a safe-haven investment for investors looking to avoid volatility since the recession. These companies aren't without their own set of risks, but as Invesco shows, when things are aligned perfectly for mortgage REITs, the profits and subsequent dividends are sometimes too enticing to pass up.

In Invesco's second-quarter report, released earlier this month, the company continued a sectorwide trend by reporting a lower net interest margin of 3.51%, leading to a 5% sequential decline in net income. But, to keep things in perspective, Invesco's net interest margin is still higher than many of its peers'.


The reason for that has to do with the type of loans that Invesco deals with. The highly popular Annaly Capital Management (NYS: NLY) and American Capital Agency (NAS: AGNC) deal only in agency loans. Invesco and its peers, Two Harbors Investment (NYS: TWO) and Chimera Investment (NYS: CIM) , own both agency and non-agency loans in their asset portfolio. Agency loans are basically backed by the full faith of the U.S. government; non-agency loans aren't. With more potential risk and more reward, it's not surprising to see non-agency players able to capitalize on the difference at which they borrow and the rate at which they're lending. However, it should be noted that many of these non-agency players take on far less leverage than Annaly or American Capital because of that added default possibility if the housing market deteriorates.

How it stacks up
Let's see how Invesco Capital stacks up next to its peers.

IVR Chart

IVR data by YCharts

With the exception of Chimera, most mortgage REITs have fared pretty well over the past year.

Normally I would compare the financial metrics of Invesco's peers here, but the most important factors that will determine how it stacks up are simply its leverage ratios and the Federal Reserve's stance on lending rates.

For starters, it's really easy to understand why Chimera's struggling given that it hasn't reported its financial results in a full year. The company recently released its findings, which detailed a $695 million restatement from 2008 to 2011 that reduces net interest income by $411 million.

The real comparison here is between Two Harbors and Invesco. Invesco appears willing to take a bit more risk in that it has a higher leverage ratio (6.3:1) and it holds nearly 22% of its asset portfolio in riskier non-agency assets. Two Harbors, which has a slightly higher projected dividend yield, has a lower leverage ratio at 4.3 to 1, and holds about 18% of its portfolio in non-agency assets. Both stand to suffer if the real estate market heads lower, but as long as the Federal Reserve holds to its pledge to keep lending-rate targets at record lows, then profits should keep streaming in for the sector.

What's next
Now for the $64,000 question: What's next for Invesco Capital Mortgage? That depends entirely on the health of the housing market, whether Invesco can maintain reasonable leverage ratios that allow it ample time to exit its positions should mortgage conditions deteriorate, and the opinion of the Federal Reserve regarding lending rates.

Our very own CAPS community gives the company a four-star rating (out of five), with an unbelievable 97% of members expecting it to outperform. I've personally yet to make a CAPScall on Invesco in either direction, and despite the overwhelming community optimism surrounding the stock, I'm going to opt to stay on the sidelines rather than take a bullish stance.

Invesco clearly has a lot going for it as long as lending rates remain low -- a 13% dividend is nothing to sneeze at. However, as my Foolish colleague Amanda Alix recently opined, there are also multiple reasons to believe that the perfect storm is setting up for mortgage REITs. Even if the storm turns out to be just a few sprinkles and some gusty winds, that could mean bad news for highly levered mortgage REITs and also those who own non-agency loans. That's a double-whammy for Invesco. I wouldn't call the company a sell here, but I'm not nearly as optimistic about its near-term prospects as our CAPS community is.

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The article Is It Time to Sell Invesco Mortgage Capital? originally appeared on Fool.com.

Fool contributorSean Williamshas no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool owns shares of Annaly Capital Management.Motley Fool newsletter serviceshave recommended buying shares of Annaly Capital Management. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policythat's always of interest, without charging interest.

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