Mortgage REITs: High-Yield Risk And Opportunity
Recovering from a sharp sell-off in the wake of the Silicon Valley and First Republic Bank collapses, Mortgage REITs have rebounded as turmoil across interest rate markets has calmed.
Distress in the commercial and residential real estate markets has been more isolated than the 'scary' magazine covers would suggest. Outside of urban office properties, default rates remain near pre-pandemic lows.
Dividend cuts have come as a 'ripple' rather than a 'wave.' 10 of 40 mREITs have reduced their dividends this year, but industry-wide payouts are only-down about 5% year-to-date.
The squeeze on highly-levered private market portfolios is still in the early innings, but an orderly unwind remains the base case. Public equity REITs with balance sheet firepower should eventually scoop up many debt-burdened privately-held assets.
'Boring' Is Good: Like high-yield corporate credit, mortgage REITs are highly sensitive to macroeconomic shocks, but several higher-quality mREITs appear overly discounted and poised to deliver attractive income-heavy total returns as COVID-era shocks dissipate.
