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Mortgage REITs Buckle Down In Tough Credit

A new report finds that tighter lending standards have hurt U.S. mortgage real estate investment trust (REITs) funding profiles and growth prospects. Mortgage REITs have indeed felt increased ratings pressure in the last several weeks, according to Manhattan-based Fitch Ratings.

Unlike equity REITs that own and operate commercial properties, mortgage REITs are companies that invest in some combination of real estate loans and debt securities to generate net interest income, the dollar amount of interest earned on assets less the dollar amount of interest paid on liabilities. Their niche focus makes them more vulnerable to wild swings in financing costs.

As a result, Fitch Ratings managing director Steven Marks says that many mortgage REITs have been hit with margin calls in recent weeks. “Despite the use of longer-term, match-funded collateralized debt obligation financing by mortgage REITs and other finance companies, [many] continue to utilize short-term, floating-rate financing,” says Marks, who believes that an abundance of shorter-term debt has left many mortgage REITs exposed to margin calls. A margin call occurs when a lender becomes concerned that a borrower may have trouble fulfilling their debt obligations due to challenging business conditions. Lenders will often "call in" their loans under such circumstances.

Mortgage REITs as a segment have posted the steepest declines in recent months. According to Washington, D.C.-based National Association of Real Estate Investment Trusts (NAREIT), total returns for the mortgage REIT segment fell by an astounding 40.08% year to date through the end of last Friday. That drop far exceeded NAREIT’s equity REIT index, which posted a 4.56% decline during that period.

Over the past 12 months, Fitch has downgraded the Issuer Default Ratings (IDRs) of both public and private mortgage REITs on 26 separate occasions. IDRs are a benchmark measure of the probability that an issuer will default on its outstanding credit commitments. Fitch has also placed 14 mortgage REIT IDRs on “rating watch negative” and revised the ratings outlook of one listed mortgage REIT to “negative” from “stable."

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