Can RITM, AGNC and NLY benefit from potential rate cuts in 2024?

With the Federal Reserve hinting that its aggressive interest-rate rises have come to a stop as it looks at more cuts in 2024, mortgage REITs like Rithm Capital (NYSE:RITM), AGNC Investment (NASDAQ:AGNC) and Annaly Capital Management (NYSE:NLY) are poised to benefit next year.

Mortgage REITs have had a hard time, as they had to battle high interest rates, which weighed on the sector. Major mortgage REITs had also seen large declines in book value in the last three years. But the now, the REITs can breathe a sigh of relief as the Fed expects to start cutting interest rates three times next year.

Mortgage REITS have also been cutting dividend lately.

Share performance:

NLY has fallen ~5% on a year to date basis, while AGNC fell 5.5%. RITM has gained 34%.

Mortgage REIT Index (DJUSMR) has gained 4.4% on a year to date basis.

Annaly Capital Management (NLY) had posted a drop in its Q3 earnings for distribution for a fifth straight quarter as higher interest rates and spreads weighed on the mortgage REIT's economic return, while Rithm Capital (RITM) Q3 earnings held up better than expected.

AGNC Investment (AGNC) turned in Q3 earnings that topped the average analyst estimate but slid both sequentially and from a year ago as the agency mortgage-backed securities market had continued to suffer from bond-market volatility.

What analysts are saying

SA analysts on NLY, RITM and AGNC rate the stocks at a Buy.

SA contributor The Asian Investor said, mortgage REITs AGNC and Annaly could benefit from a change in interest rates in 2024.

"Buying mortgage REITs ahead of a downturn in interest rates may be a wise move," added The Asian Investor.

However, SA contributor Jussi Askola is wary of mortgage REITs, sayinng despite offering these high dividend yields, most mortgage REITs have been very poor investments over the long run. In fact, their track record is among the worst in the entire financial market.

"I believe that this is because most mREITs are too heavily dependent on external macro factors that are out of their control. Small changes in interest rates or spreads can have a significant impact on their businesses, and predicting these factors is very challenging," Askola said.

SA contributor Jonathan Weber said that RITM has evolved its business model and is expanding into asset management, which has significant growth potential.

"The other positive for the sector is our expectation that home prices will remain relatively stable and that the economic downturn next year will only be modest, which should combine to support continued strength in mortgage credit," KBW added.