Mortgage REITs are “an increasingly popular but risky sector of the publicly traded real estate market,” writes Morningstar analyst Abby Woodham in a profile of REM.
“Not to be confused with equity REITs, which generate income by managing properties and collecting rent, mortgage REITs are financial firms that arbitrage the spread between the short-term interest rate and income from mortgage-backed securities,” she notes. “Mortgage REITs do not have access to deposit funding, so they rely on short-term loans like repurchase agreements.”
Rising interest rates are an important risk for the asset class.
“Mortgage REITs cut their distributions and performed poorly during past rising rate environments,” Woodham points out. “Because mortgage REITs are highly leveraged, they are very susceptible to interest-rate increases.”
Mortgage REIT Income ETF
Full disclosure: Tom Lydon’s clients own REM.