There has been A LOT of talk about book value here since the last earnings report. Here is my take on why I really don't see too much of a problem right now...
As voting eluded to, book value is one of the most over relied upon measures of a stocks value. For instance (and this is just an extreme example to prove me point), a company could have $3 billion of computers on their books that are being depreciated. A year into their useful life, only a fraction of that value is expensed and reduces the asset value. Meanwhile, those computers are essentially worthless now because of all the new computers that are available. This inflates book value.
Likewise, a piece of land on a Company's books is kept at its cost. 30 years down the road, that land value could have tripled, but the books do not reflect it. I can't wait for IFRS integration and fair value accounting!!
All I'm saying is be careful when trying to make assumptions based on book value. Voting also provided a good explanation as to why book value is important to most REITs. I wouldn't be too concerned about a price/book of 1.16. Take a look at some other stocks in the industry:
RSO: 1.04 NLY: 1.03 AGNC: 1.18 HTC: 1.15
And these are after PPS at these company's took some pretty good knocks. We're right in line with the industry. Historically, these P/B ratios are VERY low! That reflects the level of risk that the market has priced into these stocks. Eventually, if the value of some of these MBS's start to rise, our book value will start to increase as we continue to buy and sell them. Right now, with MBS's taking a hit, most of the industry's book value got tagged this quarter. Its temporary... and buying securities at these prices is definitely a good thing. Its like May when my trading accounts took a hit... after July, I made back what I lost in May and then some!
The follow-on offerings, IMHO are crucial to CIM's long-term success. These REITs will likely not see another buying opportunity like this for a very long time. Obviously, PPS is going to take a short-term pinch and we might stay in the $3.70-$5 for a few years as the company builds up its assets and waits for better opportunities to sell them. But as long as the company continues to support its dividend yield until the market turns around, we're earning 18% a year here!! As voting mentioned, its is frustrating to see them just buy and hold these securities, but if they continue paying $.68/share a year, why should we care? This stock isn't a short term play if you're looking for PPS appreciation, its a long-term hold to collect your dividends and 10 years down the road, we could be worth $10 a share with a 7-8% yield (which is much more in line with these REIT's typical yield). At that point, your dividends have paid for your stock, plus a ton more, and the stock has nearly tripled for you.
For now, I'm happy when the company is buying as many of these dirt cheap securities as they can, and they're showing their ability to continue to support the dividend while holding more and more securities. VERY encouraging.
Great minyanville article but not as relevant to CIM because they do so much private label. the Fed didn't buy ANY private label. In fact the result of Fed intervention and the uncertainty generated by this months GSE reform debate may be to make private label more attractive boosting demand for CIM's fresh re-REMIC'ed AAA.
CIM's re-REMICs generate newly minted AAA, given that AAA rating recently in today's rating environment with good credit enhancement and much much much less risk of political intervention in the underlying mortgages. Investors expecting mild deflation or disinflation love those AAA assets without the prepayment risks of GSE blanket refinance wave.
But I do dispute the contention that CIM BV is "fine." Their portfolio disclosure is very sparse, and they don't break prepaymnemt speeds out between private label and GSE. Ther's something foul in Denmark, MFA didn't lose nearly the amount of BV as CIM did and MFA was severely affected by the GSE buyouts. This doesn't add up. Markit ABX indices didn't decline during 2Q like CIM's BV did. I smell a rat and without more disclosure I can't determine whether BV will get even worse so I will exit on the divvy run up.
With all due respect, I think it is very misguided to become too fixated on the market value/book value of CIM's portfolio on a quarter-to-quarter basis. If anything, the minyanville article highlights potential liquidity risk, which given CIM's new funding model is probably the least important of any of CIM's risks. They are keeping leverage low, that much they have demonstrated by continually raising capital in the open market despite an already low leverage level. I sincerely believe they learned their lesson in '08 in letting market liquidity hold their beautiful minds hostage. This paper is solidly underwritten, conservative LTV's, and if anything, low liquidity (which necessarily implicates short term book value) helps their business model. They are in it to collect on the wide spread, not to leverage up on a narrow one.
Your examples don't apply to a mortgage REIT. Essentially all of a mortgage REIT's assets are carried at fair market value, not cost or depreciated cost. At 3/31, CIM showed about $ 6.1 billion in total assets, and about $ 5.5 billion of this was carried at current market value. So for a mortgage REIT, book value is a pretty good approximation of fair value for the assets. In valuing the stock, you have to add some value for the business itself, so a bit of a premium over book is OK at times, but you can't ignore book value.