3 mREIT Stocks to Keep on Your Radar Amid Volatile Industry Trends

The Zacks REIT and Equity Trust industry is facing volatility in mortgage rates due to macroeconomic uncertainty. With rates likely to remain relatively higher, the industry players will continue to face earnings pressure in the near term. However, despite ongoing affordability challenges in the housing market, purchase originations and refinancing activities are witnessing an improving trend. With this, companies like Annaly Capital Management NLY, Dynex Capital, Inc. DX and Ellington Financial LLC EFC are well-poised to navigate industry challenges.About the IndustryThe Zacks REIT and Equity Trust industry comprises mortgage REITs, also known as mREITs. Industry participants invest in and originate mortgages and mortgage-backed securities (MBS), and provide mortgage credit for homeowners and businesses. Typically, these companies focus on either the residential or commercial mortgage markets. Some invest in both markets through asset-backed securities. Agency securities are backed by the federal government, making them safer bets and limiting credit risks. Such REITs raise funds in the debt and equity markets through common and preferred equity, repurchase agreements, structured financing, convertible and long-term debt, and other credit facilities. The net interest margin (NIM), the spread between interest income on mortgage assets and securities held, as well as funding costs, is a key revenue metric for mREITs.What's Shaping the Future of the mREIT Industry?Industry Resorts to Dividend Cuts as Book Values Erode: Volatility in the mortgage markets, relatively high interest rates and the widening of the spread between the 30-year Agency MBS and 10-year treasury rate are affecting valuations of Agency mortgage-backed securities. As such, agency mortgage REITs are witnessing slight tangible book value decreases as spreads on benchmark indices have widened, but have been more stable than the volatility in 2023. Though the central bank lowered interest rates by 100 basis points in 2024, it has kept them steady since then, given uncertainty related to tariffs and their impact on the economy and inflation. This will increase earnings pressure for highly leveraged mREITs. This scenario compels industry players to reduce the dividend to a level that can be covered by earnings. This may result in capital outflows from the industry, resulting in greater book value declines for companies in the near term.Conservative Approach to Impede Returns: The scenario in mortgage markets, uncertain financial conditions and resultant lower fixed-income fund flows have strained credit-risky assets. Given this, mREITs are likely to be selective in their investments, resulting in lower portfolio growth. Also, numerous industry players have resorted to a higher hedge ratio to reduce interest rate risks. While such moves may seem prudent in the ongoing uncertain times, they will impede growth. As companies prioritize risk and liquidity management over incremental returns, at least in the short term, robust returns are expected to remain elusive.Relatively Lower Mortgage Rate to Aid Loan Demand: Despite interest rate cuts by the Federal Reserve in 2024, mortgage rates are not witnessing a significant decline but are relatively lower than last year. As such, purchase applications and refinancing activities are showing signs of improvement, indicating some latent demand in the market. With improving demand for originations and refinancing, operational and financial challenges for mREIT industry players will decline, increasing the gain on sale margin and investment activities.Zacks Industry Rank Indicates Bleak ProspectsThe Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #162, which places it in the bottom 34% of 246 Zacks industries.The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.The industry’s positioning in the bottom 50% of the Zacks-ranked industries is an outcome of the negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group's earnings growth potential. The industry’s current-year earnings estimate moved 6.5% down over the last year.Before we present a few stocks that you may want to consider for your portfolio, let us take a look at the industry’s recent stock-market performance and valuation picture.Industry Lags Sector & S&P 500The Zacks REIT and Equity Trust industry has underperformed the broader Zacks Finance sector and the S&P 500 composite in the past year.The industry has gained 2.7% in the above-mentioned period compared with the broader sector’s rise of 18.7%. Further, the S&P Index has grown 12.5% over the past year.Price PerformanceIndustry's Current ValuationBased on the trailing 12-month price-to-book (P/BV), which is a commonly used multiple for valuing mREITs, the industry is trading at 1.00X compared with the S&P 500’s 8.42X. In the past five years, the industry has traded as high as 1.06X, as low as 0.70X and at the median of 0.90X.Price-to-Book TTM As finance stocks typically have a low P/BV ratio, comparing REIT and Equity Trust with the S&P 500 might not make sense to many investors. A comparison of the group’s P/BV ratio with that of the broader sector ensures that the group is trading at a solid discount. The Zacks Finance sector’s trailing 12-month P/BV came in at 4.26X. This is above the Zacks REIT and Equity Trust industry’s ratio, as the chart below shows.Price-to-Book TTM3 mREIT Stocks to Keep an Eye onAnnaly: The company's investment strategy is driven by the prudent selection of assets and effective capital allocation to achieve stable returns. Its investment strategy involves traditional Agency MBSs, which provide downside protection and investments in more non-agency and credit-focused asset classes that enhance returns.Also, a scaled MSR platform will continue to benefit from a low prepayment environment. The company is focusing on improving its capabilities by acquiring newly originated MSRs from its partner network, which will continue to provide a strong advantage in expanding its MSR business. As of March 31, 2025, its investment portfolio aggregated $84.9 billion.NLY’s diversified investment strategy will likely be a key contributor to long-term growth and stability. By diversifying its investments across the mortgage market, the company is better positioned to capitalize on opportunities as they occur in multiple areas while limiting the risks associated with overexposure to any particular location.The company’s 2025 earnings have been unchanged at $2.87 per share over the past month. It indicates a year-over-year rise of 6.3%. NLY currently has a Zacks Rank of #3 (Hold) and a market capitalization of $11.6 billion. Price and Consensus: NLY Dynex Capital: This is a mortgage and consumer finance company that uses its loan production operations to create investments for its portfolio. Currently, the company's primary production operations include the origination of mortgage loans secured by multi-family properties and the origination of loans secured by manufactured homes. The company has recently expanded its production activities to include commercial real estate loans and plans to expand into other financial products going forward. DX uses certain derivative instruments ("interest rate hedges") to hedge exposure to interest rate risks arising from its investment and financing portfolio. The company's interest income continues to increase, driven by its purchases of higher-coupon investments in the past year. Also, expected Fed rate cuts later this year will support its interest income.The company’s 2025 earnings estimates have been unchanged at $1.97 per share over the past month. It indicates a year-over-year jump of 662.9%. DX has a Zacks Rank of #3 at present and a market capitalization of $1.37 billion.Price and Consensus: DX Ellington Financial: The company invests in a diverse array of financial assets. These include residential and commercial mortgage loans and mortgage-backed securities, consumer loans, and asset-backed securities. The assets are supported by consumer loans, collateralized loan obligations, non-mortgage and mortgage-related derivatives, equity investments in loan origination companies, and other strategic investments.EFC is well-positioned to weather volatility in the mortgage market, supported by its diversified exposure across residential and commercial mortgage loan portfolios and strong momentum in its securitization platform. The company’s loan originations, especially in commercial mortgage bridge loans, proprietary reverse mortgages and closed-end second lien loans, continue to contribute to stable growth and income.To navigate market uncertainty, Ellington Financial is actively leveraging dynamic hedging strategies, maintaining a broad and balanced portfolio, securing multiple sources of financing, and operating with low leverage. These measures reflect a disciplined approach to risk management and a commitment to preserving book value while adapting to shifting market conditions.The company’s 2025 earnings estimates have been unchanged at $1.65 per share over the past month, indicating year-over-year growth of 13%. EFC has a Zacks Rank of #2 (Buy) at present and a market capitalization of $1.25 billion. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Price and Consensus: EFC5 Stocks Set to DoubleEach was handpicked by a Zacks expert as the favorite stock to gain +100% or more in the months ahead. They includeStock #1: A Disruptive Force with Notable Growth and ResilienceStock #2: Bullish Signs Signaling to Buy the DipStock #3: One of the Most Compelling Investments in the MarketStock #4: Leader In a Red-Hot Industry Poised for GrowthStock #5: Modern Omni-Channel Platform Coiled to SpringMost of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor. While not all picks can be winners, previous recommendations have soared +171%, +209% and +232%.Download Atomic Opportunity: Nuclear Energy's Comeback free today.Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Ellington Financial Inc. (EFC): Free Stock Analysis Report Annaly Capital Management Inc (NLY): Free Stock Analysis Report Dynex Capital, Inc. (DX): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks