Debt financing through mortgages is the most common way people and businesses buy their homes and commercial properties. Mortgage REITs (mREITs) allow investors to help finance mortgages and benefit from the interest paid. Many investors use mREITs as part of an income-generating portfolio. mREITs have a high dividend yield—11.52% at the end of 2023, compared with 3.92% for equity REITs. mREITs paid more than $6 billion in dividends through the third quarter of 2023.
Residential mREITs typically don’t originate mortgages but are investors in mortgage-backed securities (RMBS), holding mortgages originated by other institutions. Commercial mREITs engage in a wide range of activities that can include originating, funding, servicing, and restructuring loans secured by commercial real estate, as well as investing in commercial mortgage-backed securities (CMBS).
The majority of residential mREIT holdings are agency-backed—guaranteed by the U.S. federal government. mREITs typically manage and mitigate risk associated with their short-term borrowings through conventional, widely used hedging strategies, including interest rate swaps, swaptions, interest rate collars, caps or floors, and other financial futures contracts. mREITs also manage risk in other ways, such as adjusting the average maturities on their assets, as well as their borrowings and selling assets during periods of interest rate volatility to raise cash or reduce borrowings.
According to a Chatham Partners study, of the 83% of financial advisors who recommend REITs to their clients, 50% primarily utilize listed mREITs in their clients’ portfolios. Returns for mREITs strongly rebounded in 2023 and finished the year up 15.35%, outpacing equity REITs by almost 400 basis points. With interest rates stabilizing, CMBS delinquencies also began to stabilize at the end of 2023.
- 1m: mREITs help finance one million homes in the U.S.
- 50%: of financial advisors who recommend REITs utilize listed mREITs in their clients’ portfolios
- 4.5%: The Trepp Commercial Mortgage-Backed Security delinquency rate was 4.51% in December, down from its pandemic high of 10.32%
- 6.7%: The 30-year fixed rate mortgage averaged 6.69% in January 2023, up more than 4 percentage point from the pandemic low at the end of 2020
Sector Spotlight
FTSE NAREIT Mortgage REITs
-Constituents: 33
-One-Year Return: -4.37%
-Three-Year Return: -1.28%
-Five-Year Return: -3.24%
-Dividend Yield: 12.27%
-Market Cap: $52.10 billion
-Dividends Paid (2023Q3): $1.96 billion
-NOI (2023Q3): N/A
Below is a list of Nareit member companies from the office sector.