We have had some discussion in various comments on the website about the 2 high income target date trusts from Invesco. Additionally someone had asked me to opine on which is ‘better’–so I did some ‘homework’ over the long holiday weekend.
The Invesco High Income 2023 Target Term Trust (NYSE:IHIT) was launched in November 2016 at an initial offering price of $10/share. The initial NAV (net asset value) was $9.835. The intention of the trust is to return the $9.835 on or about on 12/1/2023.
The portfolio held by the 2023 portfolio was composed of about 86% commercial mortgage backed securities, 10% REIT corporate debt and preferred stock and 3-4% other investments. This portfolio was about 81% investment grade, 13% junk rated and 6% not rated. This data is of 8/31/2018
The initial dividend on these Trusts are not announced for 45 days after the IPO and in the case of the 2023 trust the initial dividend (and all subsequent dividends) was declared at 5 cents/share monthly–6% annually. We are not aware of any defaults within the portfolio since inception years ago.
The 2023 Trust has UNII (undistributed net investment income) of around 4 cents/share (although this amount moves around month to month) as of 8/2018.
Below you can see how the IHIT issue has traded since issuance.
The Invesco High Income 2024 Target Term Trust (NYSE:IHTA) was launched in November, 2017 at an initial offering price of $10/share. The initial NAV was $9.835 and it is intended that this amount would be returned to the investor on or about on 12/1/2024.
The 2024 portfolio was composed of 70% investment grade securities (and cash), 12% junk rated and 18% not rated with 84% commercial mortgage backed securities, 10% REIT corporate debt and preferred stock with a little over 5% in ‘other’.
The initial announced dividend on this trust was 4.67 cents/per share monthly-5.6% annually where it has remained since the IPO. The price of the trust fell substantially after the announcement of the initial and subsequent dividends.
The 2024 Trust has UNII of over 7 cents (as of 8/2018)
Below you can see how this Trust has traded since a year ago.
So we can see the facts of each of the trusts.
The 2023 Trust is higher in quality by a bit than the 2024 Trust, but the declared dividends on the 2024 have been measurably smaller than the 2023 trust and this is the likely culprit on why the 2024 trust has traded consistently below NAV. NOTE that the NAV on the 2024 Trust is 9.79 while the NAV on the 2023 Trust is 9.97. The 2024 Trust trades at a 50 cent discount to NAV while the 2023 Trust trades at a premium of 6-7 cents.
THE CURRENT YIELD ON EACH TRUST IS 6%.
So if one were to assume no defaults in either portfolio prior to ‘maturity’ the Yield to Maturity on the lower priced 2024 trust would be around 7%, while the Yield to Maturity on the 2023 trust would be around 6%.
Based on what we know today we would purchase the 2024 issue at this moment. NOTE that we currently own the 2023 trust (purchased before studying the details closely). We may switch to the 2024 when opportunity arises.
Both portfolios use 25% leverage and the cost of leverage has been rising substantially (as pointed out by Bea) and this may affect future dividends.
The 2023 is a much larger portfolio–around $240 million versus $80 million for the 2024 Trust.
As the portfolios move closer to ‘maturity’ it is likely that the dividends may be reduced as loans ‘run off’.
The 2024 portfolio is somewhat lower in quality and a year furtehr out to ‘maturity’ thus the higher Yield to Maturity may be warranted.