Bullish Cycle for Mortgage REITs Expected After Fed's Rate Cut - B. Riley Report
The recent decision by the Federal Reserve to cut interest rates by 50 basis points could be the catalyst for the next bullish cycle in mortgage REITs (mREITs), according to a new report from B. Riley.
Historically, rate-cutting cycles from the Fed have led to improved performance in mortgage-related stocks, with mREITs benefiting from reduced funding costs and increased earnings potential due to their sensitivity to interest rate changes.
B. Riley emphasizes that mREITs heavily rely on short-term debt financing, which allows them to refinance at lower rates as interest rates decline. This results in enhanced earnings from long-duration MBS holdings and the ability to operate with higher leverage, ultimately improving profitability.
The report highlights that current mortgage stock valuations do not reflect the expected improvement in fundamentals, with residential mREITs trading near 0.9x book value and offering a 13% forward dividend yield.
Agency mREITs like ARMOUR Residential REIT and Cherry Hill Mortgage Investment are expected to benefit the most from the rate cuts due to their reliance on fixed-rate MBS and short-term financing. Hybrid and non-agency mREITs, including Ellington Financial and New York Mortgage Trust, are also expected to see gains from improved securitization economics and higher mortgage origination volumes.
Commercial mREITs, such as Franklin BSP Realty Trust, are anticipated to benefit from improved cap rates and increased transaction volumes, despite modest spread compression.
With the Fed likely to continue cutting rates, B. Riley concludes that mREITs are well-positioned for a sustained bullish cycle.
Analysis:
The Federal Reserve's decision to cut interest rates can have a significant impact on mortgage REITs, leading to improved performance and profitability for these stocks. Investors in mREITs, especially agency mREITs like ARMOUR Residential REIT and Cherry Hill Mortgage Investment, could see substantial benefits from lower rates. Additionally, hybrid and non-agency mREITs are also expected to gain from improved economics and higher origination volumes. Overall, the market outlook for mREITs appears positive, with the potential for a sustained bullish cycle ahead.