New Residential Investment Corp.  is scheduled to report fourth-quarter and 2020 results on Feb 9, before market open. The company’s fourth-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 31 cents per share, missing the Zacks Consensus Estimate of 34 cents.

Over the preceding four quarters, the company outpaced the Zacks Consensus Estimate on three occasions and missed in the other, the average surprise being 34.2%. The graph below depicts this surprise history:

Let’s see how things have shaped up prior to this announcement.

Factors at Play

During the fourth quarter, the mortgage market continued to show decent strength, backed by a strong housing market and credit spreads tightening as fiscal stimulus package and vaccine steered the economy toward recovery. Also, the yield curve started to steepen, with the long-term rates increasing modestly.

Also, the decline in mortgage rates during the quarter, increasing home sales house prices bolstered the mortgage originations market. In fact, per a quarterly forecast by Freddie Mac (FMCC Quick QuoteFMCC - Free Report) , total mortgage originations for the December-end quarter is projected to be $1.2 trillion, mainly driven by rampant refinance originations. Additionally, mortgage refinance originations are projected to be $778 billion, while purchase originations are expected to be $436 billion.

Amid the beneficial environment, the company’s origination business is expected to have continued generating substantial profit. In fact, with pre-tax income of $312.3 million in the third quarter, the originations business is expected to have a banner year. We expect the company to record robust profits for the fourth quarter as well on account of underlying tailwinds.

However, during the March selloff, New Residential was compelled to shed part of its portfolio. This has resulted in a substantial decline in portfolio income, thereby, straining NII. The trend is expected to have continued in the fourth quarter as well.

Moreover, amid the high prepayment speed, premium amortization on agency mortgage backed securities (MBS) is expected to have been heavy in the fourth quarter. This too is likely to have softened NII. Overall, the Zacks Consensus Estimate for the fourth quarter and 2020 NII of $115.8 million and $526.5 million suggests a year-over-year decline of 46.4% and 37%, respectively.

Also, the primary-secondary spread slightly declined sequentially in the fourth quarter. Therefore, we expect a contraction in gain on sale margins for New Residential relative to the fourth quarter. In fact, the Zacks Consensus Estimate for the company’s fourth-quarter net gain on originated mortgage loans held for sale is pegged at $410 million, suggesting a 17.2% fall from the third quarter’s reported gain of $495 million.

Also, New Residential's pool of mortgage service rights (MSRs), which accounts for the majority of its investments, is expected to have continued witnessing headwinds in the fourth quarter.

Specifically, the drop in mortgage rates in the fourth quarter from 2.90% to 2.67% is expected to have resulted in elevated mortgage prepayment and refinancing levels. This is expected to have strained cash flows that the company collects from excess MSRs and is anticipated to have resulted in a significant decline in MSR valuations in the fourth quarter.

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

Lastly, prior to the fourth-quarter results, New Residential has been witnessing downward estimate revisions for its EPS, reflecting bearish analyst sentiment. Notably, the Zacks Consensus Estimate for fourth-quarter EPS has been revised marginally downward to 32 cents over the past week. Further, it indicates a year-over-year fall of 47.5%.

Similarly, the consensus estimate for 2020 EPS has been revised marginally downward to $1.45 over the past week, suggesting a 33.2% decline on a year-over-year basis.

Earnings Whispers

Here is what our quantitative model predicts:

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

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 -3.7%

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 surprise this quarter:

Healthpeak Properties, Inc. , set to report quarterly numbers on Feb 9, currently has an Earnings ESP of +4.40% and a Zacks Rank of 3.

Hudson Pacific Properties, Inc. (HPP Quick QuoteHPP - Free Report) , slated to release quarterly earnings on Feb 17, has an Earnings ESP of +0.76% and a Zacks Rank of 3 at present.

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