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What's in the Offing for Invesco Mortgage's (IVR) Q2 Earnings?

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Invesco Mortgage Capital Inc. (IVR - Free Report) is scheduled to report second-quarter 2020 results on Aug 6, after market close. The company’s quarterly earnings per share (EPS) are expected to have declined year over year.

In the last reported quarter, this mortgage real estate investment trust (mREIT), which invests in commercial mortgage-backed securities (CMBS) and mortgage loans, posted a net loss per share of $10.38. The company posted earnings per share of $1.05 in first-quarter 2019. Nonetheless, net interest income (NII) jumped 36.4% year over year to $110 million.

Amid the decline in prices for MBSs, the company received significant margin calls from its financing counterparties in March.Moreover, the meaningful interest rate spread widening in Agency and non-Agency assets wiped out approximately 70% of Invesco Mortgage’s book value per share. In fact, book value per share for first-quarter 2020 was $5.02.

Hence, the company sold MBSs and credit risk transfer securities (CRTs) during the March-end quarter for cash proceeds of $16.2 billion to repay its repurchase agreements and bring down leverage.

Let’s see how things have shaped up prior to second-quarter results.

Factors at Play

During the second quarter, the company continued to improve its liquidity position and reduce leverage on the back of asset sales. Specifically, in April and May, it sold additional MBS and CRTs worth $6.2 billion (as of the first-quarter end), generating cash proceeds of $5.9 billion.

Consequently, as of May 31, the Invesco Mortgage investment portfolio aggregated $1.6 billion with 92%, 7% and 1% investments in commercial credit investments, residential credit investments and Agency MBSs, respectively.

The company is expected to have realized significant losses on these asset sales and this is expected to have affected its book value per share for the June-end quarter. In fact, management estimates a decline in book value per common share to $2.65-$3.15 as of May 31.

Also, during the second quarter, Invesco Mortgage paid out all debt under repurchase agreements and reduced amounts due under secured loans to $837 million (as of May 7). Lower borrowing along with a decline in borrowing rates are expected to have reduced the company’s interest expenses for the quarter under review, thereby, supporting NII.

Further, Federal Reserve’s support through asset purchases and a steepening yield curve should have aided Agency RMBS. Hence, the company’s $10.1 million of Agency RMBS investments (as of May 31) is likely to have supported its interest income.

However, the company significantly downscaled the size of its investment portfolio during the April-June period ($1.6 billion of investment portfolio as of May 31 versus 8.1 billion as of Mar 31). Hence, a decline in interest-earnings assets is anticipated to have reduced its interest income. This decline will likely offset positives from lower interest expenses, thereby, hindering Invesco Mortgage’s NII.

Additionally, the decline in interest rates is anticipated to have resulted in higher prepayment activity on the company’s securities. This is expected to have resulted in higher amortization of purchase premiums, dampening asset yield and spreads as well as interest income.

Lastly, prior to the second-quarter earnings release, there is a lack of any solid catalyst for becoming overly optimistic about the company’s business activities and prospects. The Zacks Consensus Estimate for second-quarter EPS has been unrevised at 8 cents over the past month. It suggests a decline of 82.6% from the year-ago reported figure.

Here is what our quantitative model predicts:

Invesco Mortgage does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Invesco Mortgage is 0.00%.

Zacks Rank: Invesco Mortgage currently carries a Zacks Rank of 3.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

Healthcare Trust of America, Inc. (HTA - Free Report) , set to report quarterly numbers on Aug 6, currently has an Earnings ESP of +0.96% and a Zacks Rank of 3.

VEREIT Inc. (VER - Free Report) , slated to release results on Aug 6, has an Earnings ESP of +3.33% and carries a Zacks Rank of 2 (Buy) at present. 

National Storage Affiliates Trust (NSA - Free Report) , scheduled to announce earnings figures on Aug 6, has an Earnings ESP of +0.44% and a Zacks Rank of 3 currently.

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