Book value at a discount does not automatically mean cheap
An agency mREIT trading at 0.87x book gets called cheap in almost every screen I see, and the discount is real, but the question it does not answer is whether the book value itself is stable. If the portfolio is marked at par on assets that reprice slowly and the repo book rolls every 30 to 90 days into a steeper funding curve, the 13 percent discount to stated book might close not because the price rises but because the denominator falls. Take a position with $100,000 in book value per share terms: at 0.87x you pay $87,000, which feels like a $13,000 margin of safety. If rising short rates compress the net interest margin and management cuts the dividend, the market re-rates the multiple down further and book itself erodes on the next mark. You can end up at 0.87x a smaller number. The discount to book tells you where the price is relative to reported assets. It says nothing about the direction those assets are moving, or what the hedge book is costing to roll each quarter, or whether the current dividend is covered by distributable earnings rather than return of capital. What I would want to see alongside the price-to-book is the hedge notional as a percentage of the portfolio, the average repo maturity, and two or three quarters of dividend coverage ratios, because those three together tell you whether the book value figure you are discounting off is a floor or a ceiling. Is the discount you are looking at on an agency book or a credit book, because the stability question lands differently depending on which assets are being marked?
