The Zacks REIT and Equity Trust industry has been bearing the brunt of macroeconomic uncertainties, as Trump’s tariff plans are expected to result in higher inflation in the near term. Also, the volatile backdrop in the fixed-income markets might affect industry players.

Meanwhile, mortgage rates are likely to remain relatively high and will gradually decline through 2025. This is likely to lead to a modest increase in loan demand. Hence, companies like Annaly Capital Management (NLY Quick QuoteNLY - Free Report) , Apollo Commercial Real Estate Finance (ARI Quick QuoteARI - Free Report) and Dynex Capital, Inc. (DX Quick QuoteDX - Free Report) are well-positioned to benefit.

About the Industry

The 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 residential or commercial mortgage markets. Some invest in both markets through asset-backed securities. Agency securities are backed by the federal government, making it a safer bet 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, 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?

Relatively High Mortgage Rate to Drive Modest Loan Demand: Mortgage rates have been witnessing a slight decline lately but have been range-bound in a narrow mid-6% band. Meanwhile, uncertainty surrounding the Trump administration’s tariff policies is expected to lead to high inflation. This will continue to fuel mortgage rate volatility in the near term. Consequently, mortgage rates are expected to remain relatively high, only gradually easing through 2025. With this, the demand for originations and refinancing will likely improve modestly. This will lead to decreases in operational and financial challenges for mREIT industry players, and increase the gain on sale margin and new investment activity.

Industry Resorts to Dividend Cuts as Book Values Erode: Volatility in the fixed-income 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 MBS. Agency mortgage REITs are witnessing a slight decline in tangible book value as spreads on benchmark indices have widened due to growing convexity risks in MBS and an uncertain near-term supply-demand dynamic.

Though the central bank lowered interest rates by 100 basis points in 2024, it has kept them steady since then. 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 upcoming period.

Conservative Approach to Impede Returns: The scenario in mortgage markets, restricted 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 industry players’ growth. As companies prioritize risk and liquidity management over incremental returns, at least in the short term, robust returns are expected to remain elusive

Zacks Industry Rank Indicates Bleak Prospects

The Zacks REIT and Equity Trust industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #138, which places it in the bottom 44% 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 has moved 10.3% 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 500

The 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 risen 0.4% in the above-mentioned period compared with the broader sector’s jump of 20.2%. Notably, the S&P Index has grown 11.5% over the past year.

Price Performance

Industry's Current Valuation

Based on the trailing 12-month price-to-tangible book (P/TB), which is a commonly used multiple for valuing mREITs, the industry is trading at 0.92X compared with the S&P 500’s 12.56X. In the past five years, the industry has traded as high as 1.15X, as low as 0.63X and at the median of 0.96X.

Price-to-Tangible 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/TB 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 5.81X. This is well above the Zacks REIT and Equity Trust industry’s ratio, as the chart below shows.

Price-to-Tangible Book TTM

3 mREIT Stocks Worth Buying

Annaly: 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. Annaly 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, 2024, NLY’s investment portfolio aggregated $84.9 billion.

As of March 31, 2025, the company’s book value per share declined 3.6% year over year to $19.02.

Nonetheless, Annaly'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 area.

The inclusion of MSRs in the portfolio is also notable because these assets tend to increase in value as interest rates rise, potentially offsetting reductions in the value of agency MBS. This hedging impact may produce more consistent returns over time and enable Annaly to perform well in a scenario of interest rate change.

The company’s 2025 earnings have been revised marginally upward to $2.86 per share over the past seven days. It indicates a year-over-year rise of 5.9%. 

NLY carries a Zacks Rank of #2 (Buy) at present and has a market capitalization of $11.54 billion. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: NLY

 

Apollo Commercial: The New York-based REIT company focuses on originating, acquiring, investing in, and managing performing commercial mortgage loans, subordinate financings, and other commercial real estate-related debt investments.

The company has a total portfolio of loans worth $7.7 billion as of March 31, 2025. Moreover, 95% of lending books consist of floating-rate loans. This is a key tailwind for Apollo Commercial amid the current relatively high interest rates.

As of March 2025, the company’s book value per share declined 7.3% year over year to $12.66.

The Zacks Consensus Estimate for ARI’s 2025 earnings has been revised 2.4% upward in the past seven days to $1.00 per share. Apollo Commercial’s 2025 earnings are expected to surge 132.6% year over year. ARI has a market cap of $1.32 billion.

Apollo Commercial has a Zacks Rank of 2 at present.

Price and Consensus: ARI

Dynex Capital: This is a mortgage and consumer finance company that uses its loan production operations to create investments for its portfolio. Currently, DX's primary production operations include the origination of mortgage loans secured by multi-family properties and the origination of loans secured by manufactured homes. Dynex Capital 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.

In the first quarter, Dynex Capital purchased $895 million in Agency RMBS and $55 million in Agency CMBS, and increased TBA investments by $430 million. DX also has a liquidity of $790 million as of March 31, 2025. With a healthy balance sheet and high-quality liquid assets, Dynex Capital remains well-positioned to navigate a volatile market.

As of March 31, 2025, the company’s book value declined 4.8% year over year to $12.56.

Dynex Capital’s 2025 earnings estimates have been unchanged at $1.03 per share over the past seven days. This compares to a loss per share of 35 cents in the year-ago quarter. DX has a Zacks Rank of #2 at present and a market capitalization of $1.31 billion.

Price and Consensus: DX