“Regular” REITs typically buy physical properties, find someone to manage them, and lease them out. They collect rent checks and avoid paying taxes on most of these profits if they distribute 90% of their profits as payouts. This is the reason REIT stocks typically boast big yields.
Mortgage REITs (mREITs), on the other hand, don’t own buildings. They own paper. Specifically, they buy mortgage loans and collect the interest. How do they make money? By borrowing “short” (assuming short-term rates are lower) and lending “long” (if long-term rates are, as they tend to be, higher).
This business model prints money when long-term rates are steady or, better yet, declining.… Read more