Mortgage REIT yields have surged sharply after the 10-year Treasury yield recently touched a 24-year high at nearly 5.3%.
That benchmark spike has driven down stock prices across the mortgage REIT sector, pushing dividend yields to eye-catching levels for income-focused investors.
Leading residential mortgage REITs AGNC Investment (AGNC) and Annaly Capital Management (NLY) both currently yield more than 16%, which sounds attractive on the surface.
Despite those headline yields, many investors are looking past AGNC and Annaly in favor of commercial mortgage REIT Ladder Capital (LADR), which currently yields more than 10%.
AGNC and Annaly operate with very similar business models, primarily investing in Agency mortgage-backed securities guaranteed against credit losses by government entities such as Freddie Mac.
About 99% of AGNC’s $97.2 billion investment portfolio is Agency MBS, while 87% of Annaly’s $109.4 billion portfolio falls into the same category.
Both REITs rely heavily on leverage to boost returns, with AGNC leveraging its portfolio 7.4 times and Annaly at 5.6 times, driving double-digit returns but also amplifying risk significantly.
These REITs function similarly to banks, profiting from the spread between mortgage portfolio income and their short-term borrowing costs, a gap that narrows when interest rates rise.
Because AGNC and Annaly invest predominantly in fixed-rate mortgages, rising rates compress their net interest margins and have historically forced both companies to cut their dividends multiple times.
The earnings volatility embedded in their fixed-rate, leveraged models makes those 16%-plus yields look far less dependable in a sustained high-rate environment like the current one.
Ladder Capital stands apart from its residential mortgage REIT peers because it invests primarily in floating-rate commercial mortgages, meaning its income actually increases as benchmark rates climb.
That structural advantage means Ladder’s earnings should rise in the current environment, while AGNC’s and Annaly’s revenues could face meaningful pressure from higher financing costs.
Ladder’s floating-rate focus removes the spread compression problem that has plagued residential mortgage REITs, giving it a more stable and potentially growing earnings base going forward.
A steadier earnings trajectory also positions Ladder Capital to grow its dividend over time, whereas AGNC and Annaly carry a well-documented history of dividend reductions during rate-tightening cycles.
For income investors weighing a 16%-plus yield against a 10%-plus yield, the risk-adjusted case clearly favors Ladder Capital’s more resilient business model in the current rate environment.
