Mortgage REITs have been slammed

 

Mar 17, 2023 09:00 AM | By: Hoya Capital

Mortgage REITs have been slammed by the fallout of the ongoing regional banking crisis amid a resurgence of interest rate volatility and credit concerns, erasing their once-robust gains for 2023. Commercial mREITs' exposure to the troubled office sector has come into focus following a wave of mega-sized loan defaults from over-levered private owners. We examine these REITs' sector-by-sector exposure. For Residential mREITs, Book Values remain in decent-shape as MBS spread-widening has been more-than-offset by a decline in benchmark rates, but sharp changes in rates heighten unknown hedge-related risks. Despite paying average dividend yields in the low-teens, the majority of mREITs are still able to cover their dividends, but a half-dozen mREITs have trimmed payouts and we flag several more with looming cuts. Everything in Moderation: While most mREITs stand on relatively decent footing with enough earnings power to maintain their hearty dividend yields, sharp changes in rates in either direction can wreak havoc on mREITs that are caught over-levered or improperly hedged.