Unlocking mREIT Opportunities in a Declining Rate Environment: A Strategic Playbook for 2025

As the U.S. mortgage rate landscape stabilizes in Q3 2025—with 30-year fixed rates hovering between 6.75% and 7%—investors are increasingly turning their attention to mortgage REITs (mREITs) as a strategic play in a shifting yield environment. While the Federal Reserve's reluctance to cut rates has kept borrowing costs elevated, the gradual normalization of mortgage rates and improving housing market fundamentals are creating a unique window for mREITs to capitalize on rising mortgage-backed securities (MBS) valuations and optimized financing costs. For investors seeking income and capital appreciation, this is a pivotal moment to reassess the role of mREITs in a diversified portfolio.

The Mechanics of mREITs in a Declining Rate Environment

Mortgage REITs derive their value from the interplay between interest rates, MBS valuations, and debt financing. When mortgage rates decline, the market value of existing MBS portfolios rises, as these securities carry higher yields relative to newly issued bonds. This appreciation directly boosts mREITs' book values and earnings potential. Additionally, lower rates allow mREITs to refinance debt at cheaper rates, improving net interest margins. However, the benefits are not automatic; success hinges on disciplined balance sheet management, active portfolio rebalancing, and proactive hedging against prepayment risks.

The current market environment—marked by a modest housing inventory increase and a buyer's market in many regions—further amplifies the case for mREITs. While affordability challenges persist, the gradual normalization of rates (even if marginal) is expected to drive refinancing activity and stabilize prepayment speeds, reducing the volatility that has historically plagued mREITs.

Three High-Conviction mREITs for 2025

1. Angel Oak Mortgage REIT (AOMT): A Model of Capital Recycling and Credit Discipline

Angel Oak Mortgage REIT (AOMT) stands out as a top-performing mREIT in Q2 2025, with a disciplined capital recycling strategy and favorable debt costs. The company executed two securitizations in the quarter—AOMT 2025-4 and AOMT 2025-6—generating $371.5 million in loan balances and $33.9 million in cash proceeds. These funds were redeployed into high-yield assets, including HELOCs and second mortgages, which now account for a significant portion of its portfolio. AOMT's weighted average coupon rose to 8.37% by quarter-end, reflecting its strategic shift toward higher-yielding, non-QM (non-qualified mortgage) assets.

AOMT's balance sheet is a testament to its conservative approach: a recourse debt-to-equity ratio of 1.1x and $931 million in undrawn financing capacity. Its securitization platform operates at AAA spreads in the low 140s, ensuring cost-effective funding. With plans to complete another securitization in Q3 2025 and explore preferred equity as a capital-raising tool, AOMT is well-positioned to capitalize on the expanding non-QM mortgage market.

2. Blackstone Mortgage Trust (BXMT): Leverage, Liquidity, and Global Reach

Blackstone Mortgage Trust (BXMT) exemplifies the power of active management and global diversification. With a leverage ratio of 7x and a liquid balance sheet, BXMT has consistently navigated macroeconomic headwinds, including geopolitical tensions and inflationary pressures. Its sponsorship by Blackstone Inc. provides access to a global pipeline of commercial real estate assets, enabling disciplined acquisitions and risk mitigation.

BXMT's historical performance underscores its resilience: a 57.14% win rate in 3-day returns post-earnings between 2022 and 2025. This track record is attributed to its diversified real estate credit portfolio across North America and Europe, as well as its proactive approach to debt management. As mortgage rates stabilize, BXMT's ability to refinance high-cost debt and redeploy capital into higher-yielding opportunities will likely drive earnings growth.

3. Healthpeak Properties (HPP): A Reimagined Portfolio for Long-Term Growth

Healthpeak Properties (HPP), now focused on life science and medical office real estate, has repositioned its portfolio for a post-pandemic world. The company's strategic pivot to high-growth sectors—such as biotech and healthcare—has enhanced its tenant diversity and rental income stability. With a 39% undervaluation relative to its intrinsic value, HPP offers an attractive entry point for investors seeking exposure to a sector poised for long-term demand.

HPP's balance sheet is another strength: 88.1% of its debt is fixed-rate, and its leverage ratios remain within core strategy ranges. As healthcare infrastructure demand accelerates, HPP's focus on sustainable, high-quality properties in key technology and life science markets positions it to outperform in a rate-sensitive environment.

Strategic Entry Points in a Rate-Sensitive Market

The key to capitalizing on mREITs in 2025 lies in timing and valuation. While mortgage rates are not expected to decline meaningfully in Q3 2025, the gradual normalization of spreads and the Federal Reserve's potential pivot in 2026 could unlock further gains. Investors should prioritize mREITs with:
- Strong liquidity and low leverage (e.g., AOMT's 1.1x debt-to-equity ratio).
- Active management and capital recycling capabilities (e.g., BXMT's global pipeline and AOMT's securitization expertise).
- Diversified portfolios with sectoral resilience (e.g., HPP's life science and healthcare focus).

For tactical entry points, consider buying dips in high-conviction names like AOMT and HPP, which are currently undervalued relative to their intrinsic metrics. Additionally, dollar-cost averaging into BXMT during periods of market volatility can mitigate short-term risks while capturing long-term growth.

Conclusion: A Hedge Against Uncertainty

In a world of policy uncertainty and fragmented capital flows, mREITs offer a compelling blend of income, inflation hedging, and capital appreciation potential. By selecting mREITs with disciplined balance sheets, active management, and strategic sector exposure—such as AOMT, BXMT, and HPP—investors can position themselves to thrive in a declining rate environment. As the housing market evolves and refinancing activity picks up, these three mREITs are poised to deliver outsized returns for those who act decisively.