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What's in the Offing for New Residential's (NRZ) Q4 Earnings?

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New Residential Investment Corp. NRZ is scheduled to report fourth-quarter and 2019 results on Feb 6, 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 (REIT), primarily focused on residential real estate investments, posted core earnings of 50 cents per share, missing the Zacks Consensus Estimate by around 2%.

Over the preceding four quarters, the company outpaced the Zacks Consensus Estimate on one occasion and missed in the other three, the average negative surprise being 0.05%. The graph below depicts this surprise history:

New Residential Investment Corp. Price and EPS Surprise
 

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

Factors at Play

Positive economic growth, strong demand for housing and mortgage rates being relatively stable are expected to have supported mortgage originations during the fourth quarter. As for New Residential, the buyout of select assets from Ditech Holding Corporation and Ditech Financial LLC for $1.2 billion in October has enhanced the company’s origination and servicing capacity, and positions it well to benefit from the strong origination environment. 

Notably, the company’s origination volume was up 200%, while servicing volume surged 100% in the September-end quarter. This trend most likely continued in the fourth quarter as well. Moreover, for 2019, it anticipates origination volumes of around $22 billion. 

Also, since the assets acquired from Ditech can insulate the company from faster prepayments in a low interest-rate environment, it will support the company’s earnings.

The rapidly-changing interest-rate environment was the key theme dominating the financial markets in 2019. In October, The Federal Open Market Committee (FOMC) slashed the federal-fund rate by 0.25%. This is expected to have resulted in higher mortgage prepayments and refinancing.

This speedy prepayment scenario will likely result in higher mortgage service rights (MSR) amortization expense for New Residential’s MSRs & Servicer Advances investment portfolio.

Volatility in the repo markets in 2019 escalated funding costs and dampened performance of many industry participants. In fact, in mid-September, the rate on overnight general collateral repo spiked to 10%, about four times more than usual levels, due to shortage of cash available for lending. This prompted the Fed to conduct a series of operations for overnight-repurchase agreements and outright U.S. Treasury bill purchases, thus injecting significant liquidity to the funding markets. Amid this, repo funding levels remained elevated during the December-end quarter.

Furthermore, credit risk related to New Residential’s non-agency residential mortgage backed securities, residential mortgage loans and consumer loans is expected to have made its fourth-quarter earnings volatile.

In fact, the credit markets witnessed volatility during fourth-quarter 2019. This resulted in tighter spreads and is expected to have adversely impacted the company’s non-agency portfolio.

Amid these, the Zacks Consensus Estimate for the fourth-quarter NII of $241.9 million reflects a year-over-year decline of 9.1%.

Moreover, prior to the fourth-quarter earnings release, the company has been witnessing downward estimate revisions. As such, the Zacks Consensus Estimate of earnings per share for the quarter under review has been revised 1.9% downward to 51 cent over the past month, reflecting analysts’ bearish sentiments. In addition, it indicates a decline of 12.1% from the prior-year quarter.

Earnings Whispers

Our proven model does not conclusively show that New Residential is likely to beat estimates this quarter. The combination of a positive Earnings ESP and a Zacks Rank #3 (Hold) or better increases the odds of an earnings beat. But that’s not the case here.

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 +1.96%.

Zacks Rank: The company currently carries a Zacks Rank of 4 (Sell).

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:

Healthpeak Properties, Inc. PEAK, slated to release fourth-quarter earnings on Feb 11, has an Earnings ESP of +1.15% and carries a Zacks Rank of 3, at present.

Equinix, Inc. (EQIX - Free Report) , set to report quarterly numbers on Feb 12, has an Earnings ESP of +0.53% and carries a Zacks Rank of 3, currently.

Host Hotels & Resorts, Inc. HST, scheduled to release October-December quarter results on Feb 19, has an Earnings ESP of +1.52% and currently holds a Zacks Rank #3.

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