Mortgage REIT Sector Dynamics and Performance

Abstract

Prior research has identified various determinants of Equity REIT sector dynamics and investment performance. This paper focuses on Mortgage REITs (MREITs) instead. MREITs are subject to the same statutory requirements as equity REITs, but invest in mortgages and MBS, and thus resemble non-depository financial institutions more than they do listed real estate investment companies. Drawing on recent theoretical advances in the financial intermediation literature, I test the hypothesis that growth and performance of MREITs are driven by variation in the capacity of chartered banks to hold credit-risky assets, which is proxied by the bank capital ratio. Using a cross-sectional comparison across the three main categories of MREITs, I show that institution-level expansion and contraction in the MREIT sector are significantly related to variation in the bank capital ratio. These sector dynamics coincide with variation in MREIT performance; notably, dividend yields and equity market valuations. I further document how MREITs adjust asset-type holdings and financing choices in response to variation in the bank capital ratio. The results constitute novel evidence on the association between the capitalization of chartered banks and growth, performance, as well as risk-taking in non-depository financial institutions.