What To Expect From Your mREIT When It Reports 4Q: Invesco Mortgage Capital Inc (IVR), American Capital Agency Corp. (AGNC)

Prepayments Speeds

At the end of the fourth quarter, Invesco Mortgage Capital reported an overall prepayment speed of 14.6% for its entire asset portfolio, compared to 14.3% at the end of the third quarter. The surge in the overall prepayment speeds was associated to accelerated prepayments on Invesco’s Non-Agency RMBS and 15-year fixed rate RMBS, partially offset by a decline in 30-year fixed rate RMBS.

Leverage

The quarter end debt to equity ratio of 6.1 times declined from 6.4 times at the end of the linked quarter. To trim down its counterparty risk, Invesco has contracts with 29 counterparties which provide it with the required short term financing. In comparison, Armour Residential has 26 counterparties to diversify its risk. The debt to equity ratio of Invesco is similar to Annaly Capital Management’s ratio of 6 times.

Conclusion

I am bullish on Invesco Mortgage Capital due to the very well-diversified nature of asset portfolio it holds under the given macroeconomic environment. The earnings season is on and Invesco Mortgage Capital happens to be the first widely followed mortgage REIT to have reported its fourth quarter performance. Investors of the aforementioned competitors can benefit from the trends visible in Invesco Mortgage Capital’s performance. While investors of Annaly Capital can expect a rise in prepayments, I believe Armour Residential cannot hide from an acceleration in prepayments. ARR has large chunks of 15-year fixed rate securities on which Invesco reported increased prepayments. Furthermore, I believe American Capital Agency, Annaly Capital Management, and Armour Residential are expected to report a drop in their net interest rate spread. However, AG Mortgage Investment Trust’s net interest spread is not expected to take a significant dip as it has a very well diversified asset portfolio consisting of the high yielding commercial MBS and non-Agency RMBS from which Invesco benefitted during the fourth quarter.

The article What To Expect From Your mREIT When It Reports 4Q originally appeared on Fool.com and is written by Adnan Khan.

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