MREITs in a High-Rate Environment: Is Now the Time to Invest in Apollo Commercial Real Estate Finance (ARI), NexPoint (NREF), and Ellington (EFC)?

The mortgage REIT (mREIT) sector has long been a double-edged sword for investors, offering high yields but often at the cost of volatility. As the Federal Reserve's rate cuts in 2025 begin to ease the burden of historically high interest rates, the question arises: Are ARI, NREF, and EFC positioned to capitalize on this shift, or do lingering risks outweigh their potential rewards? This analysis evaluates their strategic positioning, leverage management, and dividend sustainability amid tightening spreads and mortgage volatility.

Apollo Commercial Real Estate Finance (ARI): A High-Yield Gamble

Apollo Commercial Real Estate Finance (ARI) has shown resilience in Q3 2025, reporting $1.0 billion in new loan originations, which bodes well for redeploying capital and boosting earnings in Q4. Its $8.6 billion diversified loan portfolio, spanning U.S. and European properties, reflects a focus on risk-adjusted returns according to company data. However, ARI's dividend sustainability remains a concern. A forward-looking payout ratio of 106.94% indicates that dividends exceed earnings, raising red flags for long-term viability. While Q3 distributable earnings of $0.30 per share supported a $0.25 dividend (implying a 9.9% yield), the company's leverage ratios and net interest margin (NIM) data remain opaque in filings.

A critical risk for ARI is its exposure to tightening spreads. Despite a weighted-average unlevered yield of 7.7% on its loan portfolio, the company's GAAP net income of $0.34 per share in Q3 2025 masks a five-year trend of annual losses deepening by 40.9%. This underscores the fragility of its earnings model in a high-rate environment. Investors must weigh ARI's aggressive growth strategy against its precarious dividend coverage and potential margin compression.

NexPoint Real Estate Finance (NREF): A Cautionary Optimism

NexPoint Real Estate Finance (NREF) has demonstrated stronger earnings growth, with net interest income surging from $6.4 million to $36.1 million in the first nine months of 2025. This reflects improved portfolio performance and financing efficiency. However, NREF's leverage ratio of 14.71 (as of March 2025) is among the highest in the sector according to financial data, amplifying its vulnerability to rising funding costs. While the Fed's rate cuts may narrow spreads, NREF's Q4 net profit margin of 23.61%-a modest recovery from earlier losses-suggests ongoing operational challenges as reported by market analysis.

NREF's focus on multi-family and single-family rental markets offers some insulation from commercial real estate downturns, but its high leverage and reliance on short-term financing remain risks as noted in industry reports. The company's ability to sustain its 2.2% earnings growth in 2025 will depend on its capacity to manage liquidity and avoid overexposure to volatile sectors.

Ellington Financial (EFC): A Balanced Approach

Ellington Financial (EFC) stands out for its disciplined risk management. According to financial reports, a recourse debt-to-equity ratio of 1.7:1 and a diversified portfolio of residential and commercial mortgages, coupled with dynamic hedging strategies, position EFC to navigate volatility. Its 96% dividend payout ratio for 2025 is more sustainable than ARI's, though still tight as analyzed by dividend experts.

EFC's Q4 2025 net interest margins highlight its adaptability: The credit portfolio's margin dipped to 2.90% from 3.02% due to higher funding costs, while the Agency portfolio's margin rose to 2.46% as detailed in earnings reports. This duality reflects EFC's ability to balance risk and reward. Additionally, its estimated book value per share of $13.17 as of November 2025 provides a buffer against market swings. While EFC's 25.3% earnings growth forecast for 2025 is ambitious, its strategic flexibility and lower leverage make it a more attractive bet in a high-rate environment.