The mortgage real estate investment trust sector is diversifying as margin compression and bank apprehension changes market dynamics, according to reports from Kroll Bond Ratings and Fitch Ratings.
According to Kroll, mREITs have grown substantially in recent years due in large part to the federal support of mortgage-backed securities and investment demand for yield-paying securities. But as margins have compressed, residential mREITs have had to change to maintain dividends.
Meanwhile, commercial mREITs have begun to fill the voice in commercial real estate lending left by large banks that were adverse to the risk, according to Fitch.
Kroll noted that 19 new mREITS emerged in the five years between 2008 and 2013, while mortgage portfolios spiked by over 250%. Traditionally, many residential mREITs maintained largely agency-based mortgage portfolios. But with recent margin compression, the portfolio composition is changing.
The Kroll report notes that Annaly Capital Management, the largest residential mREIT, is diversifying away from its agency-only mortgage business model by luring a team of investors from GE Capital Real Estate group. The Kroll report said that this move shows the shift away from the single-focus investment models.
On the commercial side, mREITs are profiting off of their own shifting market. These mREITs have ascended to a more important role in CRE lending.
Altogether, 13 companies comprise the commercial mREIT sector, Fitch said. Many of these have floating-rate holdings, such as higher risk CRE loans, which would allow them to profit from rising interest rates.
Additionally, larger banks have exited more risky portions of the CRE lending landscape, such as construction, acquisition and land development, while overall CRE lending volumes rose, Fitch said. This is in part because Fed stress tests now account for CRE losses following the financial crisis.
Consequently, commercial mREITs stand to become big competitors to banks as investors look to cash in on CRE lending. Fitch pointed to the initial public offering of commercial mREIT LoanCore Realty Trust as its case in point demonstrating the increased importance of this sector of the overall mREIT industry.
