Book value per share or dividend coverage, which one do you actually watch

Question

I've been reading two mREIT quarterlies side by side and the shareholder letters are pulling in opposite directions on what matters.

One of them leads with book value per share every quarter. The argument is that an mREIT is basically a pile of mortgage assets funded with borrowed money, so what you own is the difference between the two, and if that difference shrinks quarter after quarter the dividend is just paying you back your own capital with extra steps.

The other leads with distributable earnings against the dividend. The argument there is that book value moves with mark to market swings that reverse, and if the spread between borrowing cost and mortgage yield covers the payment, the price the market puts on the portfolio this quarter is noise you don't have to trade on.

Both seem defensible to me and I can't tell if that's because they're both right in different conditions or because I don't understand either well enough yet. A beginner has to pick something to watch first, since watching everything means watching nothing. So I'd rather know what people here open the filing looking for before they read anything else.

dmitri_v6 · Answer

I open on the funding side first, which is neither of your two options, so I'll vote for book value as the closer of the two.

My reason is that both of your numbers are outputs. Book value per share tells you what happened to the assets. Distributable earnings tells you what the spread produced. Neither tells you whether the borrowing that funds the assets rolls over in thirty days or three years, and that determines whether a bad quarter is a paper loss or a forced sale.

Where I land with you is that book value is harder to dress up. Dividend coverage depends on which earnings definition management picked, and those definitions are not standardized across issuers. Two mREITs can both say covered and mean genuinely different things. Book value has its own estimation problems on the less liquid assets, but the direction over eight quarters is hard to argue with.

So I read the trend in book value, then check whether the dividend was funded out of spread income or out of returning capital, then go look at what the funding looks like. Three passes, in that order.

Book value per share or dividend coverage, which one do you actually watch

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