Navigating the Risks and Rewards of High-Yield REITs in a Volatile Market

In the ever-shifting landscape of 2025, high-yield real estate investment trusts (REITs) remain a double-edged sword for income-focused investors. While their attractive dividend yields can outpace traditional fixed-income assets, they also carry elevated risks such as leverage, interest rate sensitivity, and sector-specific volatility. With macroeconomic uncertainties—ranging from inflationary pressures to geopolitical tensions—shaping market dynamics, only a select few REITs have demonstrated the resilience and fundamentals to justify inclusion in income-oriented portfolios. This article examines the key risks and rewards of high-yield REITs and identifies the standout names that still offer compelling value.

The High-Yield REIT Landscape in 2025

The REIT sector in 2025 is characterized by a bifurcation: while some REITs thrive under disciplined leverage and niche market exposure, others struggle to sustain dividends amid rising borrowing costs and asset depreciation. For instance, mortgage REITs like Orchid Island Capital (ORC) and AGNC Investment Corp. (AGNC) have leveraged their portfolios to generate yields exceeding 16%, but their reliance on interest rate hedging and asset liquidity introduces volatility. Meanwhile, specialty REITs such as Innovative Industrial Properties (IIPR) and Community Healthcare Trust (CHCT) offer stable cash flows through long-term leases but face sector-specific headwinds like regulatory changes or tenant default risks.

Key Risks to Consider

1. Interest Rate Sensitivity: Most high-yield REITs, particularly mortgage REITs, are highly sensitive to rate fluctuations. A 1% rise in rates can erode net interest margins, as seen in Ellington Credit Co. (EARN), which reported a net loss in Q4 2024 despite adjusted distributable earnings covering its dividend.
2. Leverage and Liquidity: Aggressive leverage amplifies returns but also magnifies losses. Orchid Island Capital (ORC), with an 8.1x leverage ratio, exemplifies this trade-off. Its book value declined from $8.40 to $8.09 in 2024, reflecting the fragility of leveraged portfolios.
3. Sector-Specific Vulnerabilities: Cannabis-focused REITs like IIPR face regulatory and operational risks, while healthcare REITs such as CHCT must navigate occupancy rates and tenant creditworthiness.

Top REITs for Income-Seeking Investors

Despite these challenges, several REITs have demonstrated resilience and sustainable income generation in 2025:

1. Arbor Realty Trust (ABR) – 14.9% Yield

ABR stands out for its consistent distributable earnings, which have exceeded its $0.43/share dividend for 13 consecutive quarters. In Q4 2024, it originated $1.1 billion in new loans, showcasing its ability to scale operations. Its focus on multifamily and healthcare real estate provides a buffer against economic downturns.

2. Community Healthcare Trust (CHCT) – 11.0% Yield

CHCT's healthcare real estate portfolio, spanning 197 properties, offers defensive characteristics. Despite a 16% drop in funds from operations (FFO), the REIT's acquisition pipeline of $170 million in properties positions it for long-term growth. Its tenants, including hospitals and clinics, typically have strong credit profiles.

3. Dynex Capital (DX) – 16.5% Yield

DX's strategic shift to interest rate swaps in 2024 boosted net interest spreads by 200–300 basis points. Its increased leverage to 7.9x and focus on high-yielding agency RMBS demonstrate active risk management. Investors should monitor its economic return of 7.4% for 2024 as a proxy for sustainability.

4. Innovative Industrial Properties (IIPR) – 14.0% Yield

IIPR's cannabis-focused model remains controversial but has generated steady cash flows through triple-net leases. While Q4 2024 saw a 3% revenue decline due to tenant issues, a $3.9 million lease termination fee and new acquisitions offset losses. Its 13.7-year weighted average lease term provides insulation against short-term volatility.

5. AGNC Investment Corp. (AGNC) – 16.2% Yield

AGNC's consistent $1.44/share dividend and 13.2% economic return for 2024 highlight its appeal. Despite a Q4 loss of $0.99/share, its leverage on agency MBS and dollar roll income provide a floor for earnings. Investors should track its tangible net book value per share ($9.08) to gauge asset health.

Why Only a Handful Deserve a Place in Portfolios

The high-yield REIT space is crowded, but only a few names balance attractive returns with prudent risk management. For example, Chimera Investment Corp. (CIM) and Pennymac Mortgage Investment Trust (PMT) have faced declining earnings and liquidity constraints, making them less suitable for conservative investors. Similarly, Orchid Island Capital (ORC)'s 20.2% yield comes at the cost of extreme leverage and interest rate exposure.

Investors should prioritize REITs with:
- Strong EBITDA Coverage: ABR and IIPR consistently cover dividends, reducing cut risks.
- Diversified Portfolios: CHCT's healthcare real estate and DX's agency RMBS mitigate sector-specific shocks.
- Active Management: Ellington Credit Co. (EARN)'s 5.07% net interest margin reflects disciplined asset selection.

Conclusion: Balancing Yield and Stability

In a volatile market, high-yield REITs can enhance income portfolios but require careful screening. The REITs highlighted above—Arbor Realty Trust, Community Healthcare Trust, and Dynex Capital—offer a blend of yield, operational strength, and risk mitigation. However, investors must remain vigilant about macroeconomic shifts, particularly in interest rates and sector-specific trends. By focusing on REITs with sustainable business models and conservative leverage, income-focused investors can navigate the risks and rewards of this dynamic asset class.

Before allocating capital, ensure your portfolio is diversified across sectors and geographies. High-yield REITs should complement, not dominate, a well-balanced income strategy.