{"id":70709,"date":"2023-10-09T18:26:10","date_gmt":"2023-10-09T22:26:10","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/the-devastation-of-book-value-in-q3-2023\/"},"modified":"2023-10-09T18:26:25","modified_gmt":"2023-10-09T22:26:25","slug":"the-devastation-of-book-value-in-q3-2023","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=70709","title":{"rendered":"The Devastation Of Book Value In Q3 2023"},"content":{"rendered":"
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Get ready for charts, images, and tables because they are better than words.<\/em> Your continued feedback is greatly appreciated, so please leave a comment with suggestions.<\/em><\/p>\n

This one is going to be short and sweet.<\/p>\n

In the prior article, I told readers they could vote for a mortgage REIT to have our projections shared.<\/p>\n

Two of the candidates that were at the top of the list were AGNC Investment (AGNC) and Chimera Investment (CIM).<\/p>\n

I\u2019ll go over projections for both. As a reminder, the charts later in this article utilize the price-to-book for the prior quarter (Q2 2023 results). Book values changed materially. Do not put too much emphasis on it for mortgage REITs. On the other hand, book values for BDCs were pretty flat. You could use that chart and it shouldn\u2019t be off by much.<\/p>\n

AGNC Stock<\/h2>\n

I could draw this out needlessly with words, but those articles are awful. Here\u2019s the table:<\/p>\n

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\"Chart\"<\/span>
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The REIT Forum<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

We don\u2019t have reported values yet, so it a bunch of the calculations are empty. However, you can see our projections on the left, the prior quarter on the right, and the quarter-over-quarter change.<\/p>\n

That\u2019s a substantial drop in projected tangible BV. I want to emphasize that when interest rate volatility is this high, accuracy becomes more difficult. Estimates within The REIT Forum are usually pretty accurate. However, they won\u2019t be perfect. To give you a feel for historical accuracy, we\u2019re comparing estimates and results for prior quarters:<\/p>\n

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\"Chart\"<\/span>
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The REIT Forum<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

That\u2019s a pretty good record. Further, it\u2019s interesting to see how much book value declined over that period. Feels like it was just going up in flames sometimes.<\/p>\n

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\"Stock<\/span>
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Property of The REIT Forum<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

So when I\u2019m posting about how AGNC doesn\u2019t really have this significant discount to book value other investors are relying on<\/strong>, I\u2019m working with much more recent data. Retail investors will often need to rely on price-to-trailing-book values, but it\u2019s sad when analysts expect to get paid for using June 30, 2023, values.<\/p>\n

I\u2019m bearish on AGNC. $9.09 is too high. There are other choices available that are much better.<\/p>\n

In general, the agency mortgage REITs should be reporting most of the biggest losses for the sector. The biggest swing came from rates running significantly higher. They hedge for smaller movements in rates, but Q3 2023 was another nasty one.<\/p>\n

The agency mortgage REITs include AGNC, NLY, DX, TWO, ORC, ARR, CHMI, and IVR.<\/p>\n

CIM Stock<\/h2>\n

Same thing for CIM. We\u2019ve got a card to share the values:<\/p>\n

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\"Chart\"<\/span>
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The REIT Forum<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Projections are calling for book value per share to fall by about 6.7%. Of course, we don\u2019t expect to be perfectly accurate. We don\u2019t need to. As long as the estimate is in the right ballpark, we\u2019re miles ahead of the people who are using outdated information. Historically, we\u2019ve usually been much better than just the right ballpark.<\/p>\n

We already have these estimates for Q3 2023 for every mortgage REIT and BDC we cover.<\/p>\n

Why Does Book Value Keep Falling?<\/h2>\n

You know how mortgage rates kept going up? OK, there you go. Mortgage rates went up and mortgage prices went down. Mortgage REITs own mortgages and they use leverage, so that increase was bad.<\/p>\n

Does that mean mortgage REITs are doomed? Absolutely not. They can actually produce a pretty significant amount of income in the current environment (much more than a few years ago when many investors adored the sector). Despite the inversion of the yield curve, the mortgage REITs can still hedge rates with swaps. It\u2019s not a perfect hedge though and it can underperform when rates move significantly in either direction.<\/p>\n

Unfortunately, because of how mortgage REIT accounting uses amortized costs, most people don\u2019t have a clue how the interest income and expenses are actually. Quite a few analysts also struggle with REIT accounting. Now, I\u2019d rather not be relying on someone who has blinders on. If they are trying to sprint through the work, that would be even worse. But to honor their bravery (with someone else\u2019s money), I prepared this statute:<\/p>\n

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\"Blind<\/span>
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Property of The REIT Forum<\/span><\/p>\n<\/figcaption><\/figure>\n<\/p>\n

Well, this image of a statute. That\u2019s good enough, right?<\/p>\n

For common shares, the BDCs really outperformed on book value. We’re projecting gains in book value for a few. That includes MAIN, CSWC, and TSLX, along with a few others.<\/p>\n

Coming Up<\/h2>\n

I just finished our Portfolio Update today and I\u2019m feeling particularly excited about preferred shares. There are several great opportunities from preferred shares. If interest rates remain elevated, many of these shares can see big dividend increases due to their “fixed-to-floating” status.<\/p>\n

The preferred shares sit above the common shares. Their call value does not change. Their dividend rate does not change, unless they are switching to a floating rate in accordance with the prospectus. Due to the rise in interest rates, any share that starts floating (within the group we cover) would see a significant dividend increase. Dividend increases are particularly uncommon for mortgage REITs, so it\u2019s a great feature to get from a preferred share.<\/p>\n

Stock Table<\/h2>\n

We will close out the rest of the article with the tables and charts we provide for readers to help them track the sector for both common shares and preferred shares.<\/p>\n

We\u2019re including a quick table for the common shares that will be shown in our tables:<\/p>\n

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