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What's in the Cards for Two Harbors' (TWO) Q2 Earnings?

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Two Harbors Investment Corp. (TWO - Free Report) is slated to report second-quarter 2019 results on Aug 6, after market closes. The company’s results will likely reflect year-over-year decline in its net interest income (NII) and core earnings per share.

In the last reported quarter, this hybrid mortgage real estate investment trust posted core earnings (including dollar roll income) per share of 49 cents, surpassing the Zacks Consensus Estimate of 48 cents.

Over the trailing four quarters, the company beat the Zacks Consensus Estimate on three occasions and missed in the other, the average positive surprise being 4.19%. The graph below depicts this surprise history:

Two Harbors Investments Corp Price and EPS Surprise

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

Factors to Consider

Two Harbors’ portfolio consists of a rates strategy and a credit strategy. The former includes Agency residential mortgage-backed securities (MBS), Agency derivatives, mortgage servicing rights (MSR), to-be-announced securities (TBAs) and associated notional hedges.The credit strategy consisted of legacy non-Agency securities and their associated notional hedges.

During the second quarter, mortgage REITs witnessed expansion of pipelines, while origination activity began to pick up. 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 MBS 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.

Given the strength in the MBS sector, we anticipate the company to have increased investments in Agency and non-Agency portfolios.          

Although significant decline in interest rates buoyed originations, it resulted in yield-curve steepening and higher interest rate volatility. Furthermore, prepayment activity increased on account of lower interest rates. This is expected to have adversely impacted transactional activity and valuations for MSRs, thereby dampening the company’s core earnings. Further, it is expected to have thwarted spreads on Agency MBSs during the quarter under review.

Amid these, Two Harbors’ MSR portfolio is anticipated to have witnessed headwinds in the form of asset writedowns in the second quarter. Also, for second-quarter 2019, the Zacks Consensus Estimate for the company’s NII is pegged at $63.2 million and suggests a 63.3% year-over-year slump.

In addition, unfavorable U.S. treasury rates and weaker U.S. economic fundamentals might act spoilsport for the company in the to-be-reported quarter, dragging down Two Harbors’s net interest margin.

Additionally, due to the widening of agency and credit spreads, we anticipate the company to have registered a decline in its second-quarter book value.

Lastly, prior to the second-quarter earnings release, the company has been witnessing downward estimate revisions. As such, the Zacks Consensus Estimate of FFO per share for the quarter to be reported has been revised marginally downward to 42 cents over the past month, reflecting analysts’ bearish sentiments. Also, it represents a year-over-year decline of nearly 21%.

Earnings Whispers

Our proven model does not conclusively show that Two Harbors 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: Two Harbors’ Earnings ESP is -2.38%.

Zacks Rank: The company currently carries a Zacks Rank of 4 (Sell), which decreases the predictive power of ESP.

It should be noted that we caution against stocks with a Zacks Rank of 4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

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

Performance of Other REITs

AGNC Investment Corp. (AGNC - Free Report) reported second-quarter 2019 net spread and dollar-roll income (excluding estimated catch-up premium amortization benefit) of 49 cents per share, marginally missing the Zacks Consensus Estimate of 50 cents. It also came in lower than the prior-year figure of 63 cents per share.

Annaly Capital Management, Inc. (NLY - Free Report) posted second-quarter core earnings, excluding premium amortization adjustment (PAA), of 25 cents per share, missing the Zacks Consensus Estimate by a whisker. In addition, the figure compared unfavorably with the year-ago tally of 30 cents.

New Residential Investment (NRZ - Free Report) recorded April-June quarter core earnings of 53 cents per share, missing the Zacks Consensus Estimate by a whisker. Moreover, the figure compared unfavorably with the year-earliertally of 58 cents.

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