The rising rate of inflation has been a drag on the US stock market for much of 2022. The Fed’s recent moves to curb inflation by raising interest rates several times may have prevented inflation from rising much worse. But as Fed Chairman Jerome Powell noted in his speech the other day, high inflation remains a major persistent problem, and the Fed will continue to raise interest rates until inflation comes down significantly.
Powell’s morning speech rattled the markets and all three indexes sold off the rest of the day. The Dow and S&P 500 each lost more than 3%, while the Nasdaq fell just under 4%. Surprisingly, the REIT sector, which has had a volatile run throughout 2022, has fared somewhat better than the overall market.
Annaly Capital Management Inc. (NYSE: NLY ), the largest housing REIT, lost 2.09%, but Orchid Island Capital Corp. (NYSE: ORC ), which has lost 42% of its value over the past year, actually gained 0.70%.
Arbor Realty Trust Inc. (NYSE: ABR ), which has fallen nearly 17% over the same period, lost 1.75% but also rose 2.04% after hours. AGNC Investment Corp. (NASDAQ: AGNC ) fell 1.28% on the day, but rose 1.46% after the closing bell.
ARMOR Residential REIT Inc. (NYSE: ARR ) lost 0.54% but also gained 1.37% after hours. Both AGNC and ARR suffered significant losses last year.
Housing REITs borrow money to buy pools of discounted loans, called mortgage-backed securities (MBS). When they take out a new mortgage, the difference between the price they pay and what they get in loan payments is how they make their money. But when interest rates rise, the amount they pay for loans rises and so the spread narrows. In addition, higher interest rates make variable rate loans that provide more default risk.
Since, by law, these REITs must pay shareholders 90% of their taxable income, if that income falls, so will the dividends they pay. And mortgage REITs’ high dividend yields are basically the most attractive reason for investors to buy these stocks.
For example, Annaly’s current annual dividend yield of 13.4% makes it a favorite among housing REITs. But NLY’s volatile share price isn’t for everyone. The stock has traded in a range between $8.94 and $5.45 over the past 52 weeks. Investors who bought NLY near the top of the range are down about 25% at the current price of $6.56. Even with dividends taken into account, this is still a significant loss. If NLY has to cut its dividend, it could see more downside going forward.
But one has to wonder if most of the negative interest rate news has already been factored into those mortgage REIT stock prices, hence the muted response to Powell’s speech on Friday. The stock market often looks six months or more into the future. Historically, many of these stocks have tanked during previous rate hikes, only to be bought lower by investors when they felt the worst was over, even if dividends were cut or held steady for a few years.
Buying mortgage REITs at this time is a risk that is certainly not suitable for all investors. And the problem is that the very investors who need the income the most, such as retirees, are the ones who should be the most risk averse. But for more adventurous investors, it’s worth watching housing REITs to see if they do bottom out.
Highlights of today’s real estate investment news
The private debt investment platform Percent is launching a new corporate debt offering for Tiger, an international VC-backed software company, with an APY of 15-17%. The platform’s recent 1H update shows an average historical return of 12.38%.
The CalTier Multi-Family Portfolio Fund recently completed a new investment in a portfolio of four apartment buildings consisting of 185 units. The CalTier Multi-Family Portfolio Fund is one of the few non-traded real estate funds available to non-accredited investors and has a minimum investment of $500. Year to date, the fund has produced an annual cash return of 7.02%.
Find more real estate investment news and deals at Benzinga Alternative Investments
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