What's in the Cards for New Residential's (NRZ) Q2 Earnings?

New Residential Investment Corp. NRZ is scheduled to report second-quarter 2020 results on Jul 22, before market open. The company’s second-quarter earnings per share (EPS) and net interest income (NII) are likely to reflect year-over-year declines.

In the last reported quarter, this New York-based mortgage real estate investment trust (mREIT), primarily focused on residential real estate investments, posted core earnings of 48 cents per share, surpassing the Zacks Consensus Estimate of 24 cents.

Over the preceding four quarters, the company outpaced the Zacks Consensus Estimate on two occasions and missed in the other two, the average surprise being 28.95%. The graph below depicts this surprise history:

New Residential Investment Corp. Price and EPS Surprise

New Residential Investment Corp. Price and EPS Surprise

New Residential Investment Corp. price-eps-surprise | New Residential Investment Corp. Quote

Let’s see how things are shaping up prior to this announcement.

Factors at Play

Rebounding from the steep sell-off in March, which resulted in mREITs witnessing a drastic decline in share prices and book values, the mortgage market stabilized during the second quarter. This was supported by the Federal Reserve’s continuous purchase of Agency mortgage-backed securities, a decline in benchmark interest rates to near zero and improvement in housing data.

Also, given that the mortgage rate recorded several new lows during the quarter, refinancing and origination activities have gone up. Specifically, the 30-year mortgage rates declined from 3.33% at the week ended Apr 2, 2020, to 3.07% at the week ended Jul 2, 2020.

Given New Residential’s origination capacity, the company will likely have benefited from this favorable environment in the second quarter. In fact, its subsidiary that oversees origination business — NewRez LLC — originated $2.7 billion UPB in April 2020, per an update provided by the company on May 20.

Moreover, it noted robust gains on sale margins in its origination business. This was likely driven by elevated primary-secondary spreads and high mortgage applications during the quarter under review. Notably, the Zacks Consensus Estimate for the company’s second-quarter net gain on originated mortgage loans, held-for-sale is pinned at $225 million, indicating a sequential increase of 25%.

While the company’s estimated book value per common share as of May 15 of $10.71 remains unchanged from that of March end, we expect major spread tightening across many asset classes to support a recovery in the mREIT’s book value for the June-end quarter.

New Residential’s servicing portfolio should have been resilient in the April-June quarter, with positive mark-to-market adjustment, driven by a continued decline in forbearance requests and favorable interest rate changes. The company’s net servicing revenues are expected to be $187 million for the second quarter, whereas it reported negative $28 million in the prior quarter.

During the second quarter, the company witnessed an improvement in operations, with a continued increase in non-agency asset values and a significant decline in the mark-to-market exposure of its portfolio. This also enabled New Residential to double its second-quarter dividend to 10 cents.

However, New Residential's pool of mortgage service rights (MSRs), which accounts for the majority of its investments, is expected to have continued witnessing headwinds during the June-end quarter.

Specifically, the decline in mortgage rates is expected to have driven higher mortgage prepayments and refinancing. This is likely to have impacted cash flows that the company collects from excess MSRs and have resulted in a significant decline in MSR valuations during the second quarter.

Further, due to a decline in the fair value of such excess MSRs, the company is expected to have recorded higher MSR amortization expenses for its MSRs & Servicer Advances investment portfolio in the second quarter.

Amid this, the Zacks Consensus Estimate for the second-quarter NII of $87.9 million suggests a year-over-year decline of 53.3%. The improvement in non-agency asset values is also expected to have resulted in lower impairment charges. Hence, NII after impairment is projected to be $96 million.  Nonetheless, the figure indicates a 42.1% year-over-year decline.

Lastly, the company’s activities during the quarter were inadequate to gain analyst confidence. Consequently, the Zacks Consensus Estimate for second-quarter earnings per share has been unchanged at 27 cents over the past month. Further, it indicates a 49.1% decline year over year.

Earnings Whispers

Here is what our quantitative model predicts:

New Residential does not have the right combination of two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for New Residential is 0.00%

Zacks Rank: It currently carries a Zacks Rank #3.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks That Warrant a Look

Here are a few stocks in the REIT sector that you may want to consider, as our model shows that these have the right combination of elements to report a positive surprise this quarter:

First Industrial Realty Trust, Inc. FR, slated to release second-quarter earnings on Jul 22, has an Earnings ESP of +1.12% and a Zacks Rank of 2 (Buy) at present.

Host Hotels & Resorts, Inc. HST, set to report quarterly numbers on Jul 30, currently has an Earnings ESP of +17% and a Zacks Rank of 3.

Iron Mountain Incorporated IRM, slated to release second-quarter earnings on Aug 6, has an Earnings ESP of +1.19% and a Zacks Rank of 3 at present.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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