Price-to-Book Value - Using Q3 2020 Book Value

All the mortgage REITs within our batch have reported their Q3 2020 earnings, so we have trailing book values for all of them.

Remember that these are price-to-trailing-book ratios. They are not using estimates of current book value. Book values have changed during Q3 2020 and to a lesser degree during Q4 2020.

Repeated Note: There are two mortgage REITs we need to highlight here:

• AG Mortgage Investment Trust - We are using the Q3 2020 book value reported by management, which does not deduct the value of accrued dividends for preferred shares. If the preferred dividends were paid, it would reduce common book value under these calculations. This method is accepted under GAAP.
• MFA Financial reports "GAAP book value" and "economic book value". We've chosen to use the GAAP book value to remain consistent.

Unfortunately, we have to repeat those bullet points every time we publish because it regularly comes up if we don't mention it.

Book values will have changed some already during Q4 2020. We aren't including that in our public articles (except for index cards). Scott Kennedy provides frequent updates on estimated book value, ratings, and price targets through The REIT Forum.

Dividend Yields

Dividend yield often comes up in the comments, but picking based on dividend yield is stupid and regularly results in terrible performance. Don't do it.

This chart is still in the same order as the prior charts. Consequently, you know the highest price-to-book ratios (using trailing GAAP book value) for each segment will be at the top. If you see a mistake, please feel free to say something. Occasionally the data for dividend rates requires a manual update.

Earning Yields

One of the next things investors may ask about is the yield using core earnings. This chart puts together the core earnings based on the consensus analyst estimate. Beware that the consensus estimate may not always be the best estimate.

Consensus estimates aren't always the best and there are ways to increase "Core Earnings" through accounting decisions or modifying hedges. Consequently, investors should still take these values cautiously. We do not depend on the consensus estimate to make decisions.

Preferred Shares

After testing out a series on preferred shares, we decided to try merging it into the series on common shares. After all, we are still talking about positions in mortgage REITs. We don't have any desire to cover preferred shares without cumulative dividends, so any preferred shares you see in our column will have cumulative dividends. You can verify that by using Quantum Online. We've included the links in the table below.

To warn readers, it's a big table. We like to give readers a lot of data. We share our interpretation of that data as well, but we want you to know enough to make informed decisions.

To better organize the table, we needed to abbreviate column names as follows:

• Price = Recent Share Price
• BoF = Bond or FTF (Fixed-to-Floating)
• S-Yield = Stripped Yield
• Coupon = Initial Fixed-Rate Coupon
• FYoP = Floating Yield on Price
• NCD = Next Call Date (the soonest shares could be called)
• Note: For all FTF issues, the floating rate would start on NCD.
• WCC = Worst Cash to Call (lowest net cash return possible from a call)
• QO Link = Link to Quantum Online Page

There are a few things you should know at the start:

• When a share can be called on short notice, the annualized yield-to-call reaches absurd levels. Investors shouldn't put too much weight on it. On the other hand, a negative number can be a significant concern. Consequently, we decided to include it in the chart.
• We sort our spreadsheet for subscribers by risk ratings within each sector. We decided to use the same technique for this series since it communicates more information to readers. You'll notice a general correlation where lower risk correlates with a higher price and lower yield, though this link isn't absolute.

For each metric we have 2 charts. Why use two charts? Because it is much more convenient for readers who want to enlarge the charts. We simply can't fit 40+ shares into a single chart and still have it show up well on a mobile device.

Share Prices

We will start with the prices:

That chart gives you a pretty quick feel for which shares are trading at a discount to call value. Each of these preferred shares has a call value of $25.00, but that doesn't mean a share will be called. The company decides if they want to issue a call or not.

Dividend Yield

Let's move onto the stripped yield. This is the way dividend yields should be handled for preferred shares:

Stripped yields are vastly more useful than "current" yields for preferred shares. The stripped yield uses the stripped price. That's different from using the current price because it means we already adjusted for dividend accrual. This makes the process easier for investors.

We can talk about shares using "regular prices". Those are the prices an investor would actually use when entering an order.

However, we will provide the stripped yield to adjust for the dividend accrual. In the spreadsheets we host for subscribers, we include the actual ex-dividend date, or the projected ex-dividend date if the actual date isn't yet known. If you're planning to buy a share, it's always wise to check if the shares just went ex-dividend so you can adjust your targets accordingly.

Floating Rate Dividend Yields

Since many of these shares switch over to floating rates, we also want to consider what the yield would be if the floating rate was in effect and shares were still at the current price. To demonstrate that, we use the "Floating Yield On Price". If the share remains at a fixed-rate indefinitely, then the value doesn't change:

One point we need to emphasize here is that we are dealing with yields. A yield must involve the share price. We aren't simply showing the new "rate" if the share began floating, we are adjusting the new rate for the stripped price.

Conclusion

You don't have to follow us. You don't have to care about our research. If you're happy with a high dividend yield and a dwindling account value, there are plenty of authors who can cater to you. On the other hand, if you're focused on generating total returns and want to use REITs to do it, you may love our research.