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They themselves borrow money at one rate and lend it out at another, their
profitability is directly tied to interest rate changes. Like the banks they’re
related to, mREITs almost always bring in more revenue when interest rates
are high, since it’s easier to widen the spread between what they’re buying
and what they’re selling.
However, there are times when interest rates can rise too quickly or
unexpectedly for an mREIT’s good, leaving it squeezed between a rock and a
hard place.
Understanding that risk, management teams try to be very careful about
timing their loans receivable with their loans payable. Even so, the larger
circumstances they operate under can make it difficult for investors to tell
exactly how good or bad they’ve played the system until everything is said
and done.
That’s not as much of a problem with falling interest rates, though not in a
“potential positive surprise” way. In those environments, it only makes sense
for businesses to take advantage of the situation and refinance their debt.
Which can dampen mREITs’ profits.
As such, they aren’t necessarily great buy-and-hold positions. They’re much
more fair-weather friends when push comes to shove.
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