Investing.com – The Federal Reserve’s recent decision to cut interest rates by 50 basis points may have sparked the next bullish cycle for real estate investment trusts (mREITs), according to a new report from B. Riley.
The firm notes that Fed rate-cut cycles have historically coincided with higher performance in mortgage-related stocks, as REITs, which are highly sensitive to interest rate changes, benefit from lower financing costs and improved earnings potential.
B. Riley emphasizes that mobile REITs rely heavily on short-term debt financing, which typically matures within 30 to 90 days.
With interest rates low, B. Riley explains, mortgage-backed REITs can refinance at lower interest rates, which “enhances ownership retention of long-term mortgage-backed securities” and boosts earnings power.
The note also highlights how lower rates allow management to operate with higher leverage and widen duration gaps, further improving profitability.
“We believe that most mortgage equity valuations today do not reflect the expected improvement in fundamentals,” says B. Riley, noting that residential REITs are currently trading at about 0.9 times book value with an expected dividend yield of 13%.
REITs such as Armour Residential REIT (NYSE:ARMOUR) and Cherry Hill Mortgage (NYSE:CHM) are expected to see the biggest benefit from the Fed’s rate cuts because of their reliance on fixed-rate mortgage-backed securities and short-term financing.
Hybrid and non-agency REITs, including Ellington Financial (NYSE:) and mortgage in new york ETFs on stock exchanges (NASDAQ:) are also expected to benefit from improved securitization economics and higher mortgage origination volumes.
Meanwhile, commercial real estate investment trusts, such as Franklin BSP Realty Trust, are expected to benefit from improved capital ratios and increased transaction volumes, despite modest spread pressure.
With the Fed likely to continue cutting interest rates, REITs are well positioned for a sustained upside cycle, concludes B. Riley.