What Is Book Value? 2 Mortgage REIT Stocks That Were Trading Close to It Until They Weren't
A mortgage REIT is basically worth what its portfolio of mortgage securities is worth.
Book value is a straightforward financial metric calculated by subtracting a company's liabilities from its assets. For mortgage REITs like AGNC Investment (AGNC) and Annaly Capital (NLY), book value is essentially the difference between their mortgage security portfolios and the debt they have taken on. Both mREITs disclose their per-share tangible book value each quarter, which can be easily found on their financial reports.
In the second quarter, Annaly Capital's tangible book value per share was $20.15, while AGNC Investment's was $8.58. However, their stock prices subsequently dropped, nearing the second-quarter book value. This phenomenon occurred due to the increase in interest rates and bond yields, primarily driven by high inflation. When interest rates rise, bond values fall, adversely affecting mortgage REITs, as they own mortgage securities pooled into bond-like securities.
The third-quarter tangible book value per share for both mREITs showed a significant decline compared to the second quarter. Annaly's book value fell to $17.86, down 11%, while AGNC's dropped to $7.13, a decrease of 17%. These drops in book value corresponded with the sharp decline in their stock prices. While Annaly and AGNC are reputable mREITs with strong operating histories, their high dividend yields come with considerable risks, especially in the current interest rate environment.
Therefore, investors should be aware of these risks and conduct thorough research before investing in mortgage REITs.
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