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Factors to Know Ahead of New Residential's (NRZ) Q2 Earnings

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New Residential Investment Corp. NRZ is scheduled to report second-quarter 2019 results on Jul 30, before market open. The company’s results will likely display year-over-year decline in its earnings per share (EPS) and net interest income (NII).

In the last reported quarter, this New York-based mortgage real estate investment trust (REIT), which primarily focuses on residential real estate investments, posted core earnings of 53 cents per share, missing the Zacks Consensus Estimate by 1.85%.

Over the preceding four quarters, the company outpaced the Zacks Consensus Estimate on three occasions and missed in the other, the average positive surprise being 5.8%. 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

Mortgage REITs witnessed expansion of pipelines, while origination activity began to pick up, during the second quarter. Specifically, the 30-year mortgage rates declined from 4.08% at the beginning of the second quarter to 3.73% at the end of the quarter, according to figures released by Freddie Mac. This marked the lowest level of the 30-year rate since late 2016. Following suit, the 15-year fixed rates and 5-year fixed rate declined to 3.16% and 3.39%, respectively.

Lower rates boosted issuance and originations during the quarter, with issuance of agency mortgage-backed securities (MBSs) surging 43% sequentially. Also, non-agency MBS, backed by seasoned collateral, accounted for 54.3% of new issuance during the June-end quarter. This buoyed aggregate issuance by Fan-nie Mae, Freddie Mac and Ginnie Mae that hit $330.65 billion.

Although significant decline in interest rates buoyed originations, it resulted in yield-curve steepening and higher interest rate volatility. Further, prepayment activity increased on account of lower interest rates. This is expected to have negatively impacted mortgage service rights (MSR) valuations and spreads on Agency MBSs in the quarter under review.

This implies that New Residential's pool of MSRs that account for majority of its investments, will have witnessed headwinds in the form of asset writedowns in the second quarter. Amid these, the Zacks Consensus Estimate for the second-quarter NII of $240.3 million reflects a year-over-year decline of 11%.

Additionally, due to the widening of agency and credit spreads, we anticipate New Residential to register a decline in its second-quarter book value.

In June, the company announced that it has entered into an agreement with Ditech Financial LLC and Ditech Holding Corporation for the purchase of substantially all of the forward assets of Ditech Financial. It will purchase Ditech Financial’s forward Fannie Mae, Ginnie Mae and non-agency mortgage servicing rights (MSRs), carrying total unpaid principal balance of around $63 billion as of Mar 31, 2019. New Residential will also acquire net assets essential to the forward origination and servicing businesses as well as the servicer advance receivables relating to such MSRs and other. 

The acquisition will be immediately accretive to earnings, enhancing the company’s origination and servicing capacity while cushioning its portfolio from lower interest rates.

Nonetheless, there is lack of any solid catalyst prior to the second-quarter earnings release. As such, the Zacks Consensus Estimate for the to-be-reported quarter’s EPS remained unchanged at 54 cents, over the past month. The figure also reflects a year-over-year decline of 6.9%.

Earnings Whispers

Our proven model does not conclusively show that New Residential is likely to beat estimates this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or at least 3 (Hold) for this to happen. That is not the case here, as you will see below.

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

Earning ESP: New Residential’s Earnings ESP is 0.00%.

Zacks Rank: The company currently carries a Zacks Rank of 3, which increases the predictive power of ESP. However, we also need a positive ESP to be confident of an earnings beat.

Stocks That Warrant a Look

CyrusOne Inc. (CONE - Free Report) , scheduled to release earnings on Aug 1, has an Earnings ESP of +1.37% and carries a Zacks Rank #3, at present.

Corporate Office Properties Trust OFC, slated to report quarterly figures on Jul 29, has an Earnings ESP of +0.66% and carries a Zacks Rank of 3, currently. You can see the complete list of today’s Zacks #1 Rank stocks here.

KKR Real Estate Finance Trust Inc. KREF, set to release earnings on Aug 1, has an Earnings ESP of +10.66% and carries a Zacks Rank #3, at present.

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