|Shares Out. (in M):||123||P/E||7.7x||7.3x|
|Market Cap (in $M):||2,088||P/FCF||7.5x||7.5x|
|Net Debt (in $M):||17||EBIT||70||73|
IVR is a mortgage REIT that offers a very attractive risk/reward ratio which unlike most in the space trades at a decent discount to book value and has some additional upside via the new FHLB initiatives.
IVR is a very simple story-a traditional mortgage reit with approproximately 55% of the portfolio in CMBs and a 11.8% yield.
Unlike most of the MREITS that trade at about 98/99% of book, IVR trades at about 90% of book value which is currently $18.53.
IVR has continued to guard against a potential rise in interest rates by selling the 30 years and purchasing credit, including hybrids. It has added to commercial real estate loans, subordinated bonds of prime jumbo mortgage securitizations and commercial real estate loans.
A key differentiator for IVR is the establishment of a captive insurance bank. This is significant because the Federal Home Loan Bank has declared their intention to stimulate business activity through an increase in commercial loans. IVR is primed to benefit from this as their new insurance bank is a member of the Federal Home loan Bank of Indianapolis which can access funding through the regional FHLBs.
The reduction in longer term will benefit the portfolio as hedging costs will decline. Our suspicion is that agency spreads will widen as the FOMC tapers, but will be offset by a tightening of spreads on the credit sensitive names.
We believe the discount is there due to the legacy of a poor prior management team, the fact that the portfolio is a little more hybrid than most so not as understood, and the company is somewhat underfollowed.
We believe that the company will trade to book value as the market will respond to the company’s reduction in interest rate risk, benefit from a search for yield and become more recognized as the impressions from previous management begin to fade.
The risks are the traditional ones associated with MREITS as they are basically a portfolio of leveraged bonds (leverage is 6xs), subject to interest rate risks if not well hedged. Other risks include a significant deterioration in the housing market and disruptions in the REPO market.
There has been substantial insider buying.
As the stock trades to book value, investors could earn a total return of approximately 20% (11.7% appreciation plus appreciation) assuming there is no benefit from FHLM or portfolio appreciation.