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Redwood Trust (RWT) to Post Q1 Earnings: What's in Store?

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Redwood Trust, Inc. (RWT - Free Report) is scheduled to report first-quarter 2020 results on May 8, before the opening bell. The company’s quarterly core earnings per share (EPS) are expected to have declined, while net interest income (NII) is anticipated to have improved year over year.

In the last reported quarter, this mortgage real estate investment trust (mREIT) posted core earnings of 45 cents per share, surpassing the Zacks Consensus Estimate of 37 cents.

Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate in two occasions, met in one and missed in the other. It delivered a positive surprise of 6.83%, on average, during this period. The graph below depicts this surprise history:

Redwood Trust Inc Price and EPS Surprise

 

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

Factors at Play

The liquidity-driven market mayhem, triggered by the ongoing coronavirus crisis, resulted in significant dislocations in the mortgage and credit markets. Specifically, as the economic impact of the pandemic became clear, cash preservations and concerns over the failure of meeting mortgage payments resulted in a risk-off approach by investors, who started indiscriminately shedding risky assets. With investors fleeing from residential and commercial debt, the mortgage market also felt the brunt of the selloff. This resulted in pricing pressures on mortgage backed securities (MBS). As prices of the securities declined, mREITs — which hold the securities — experienced a fall in book values. Impacts of these are expected to get reflected in Redwood Trust’s quarterly results.

The company is also expected to have witnessed a significant book-value decline, owing to unrealized losses and wider credit spreads. In fact, in an update on Mar 17, it estimated book value to be down nearly 5% since 2019 end. Further, it projected economic return on book value since Jan 1, 2020, of around negative 3%. This includes first-quarter dividend of 32 cents per share.

Additionally, with several uncertainties in the credit markets, credit-sensitive assets and non-Agency MBS (not backed by Fannie Mae and Freddie Mac) were severely impacted, driving margin calls from repo lenders.

From Mar 17 to Mar 24, the company reduced short-term security repurchase facility borrowings by 50%. Further, it was able to meet all due margin calls and had $300 million in unrestricted cash as of Mar 24.

Further, the primary-secondary spread was elevated in the first quarter. This should have resulted in high gains on sales margin during the quarter. Notably, in March, the company closed its 106th Sequoia securitization, backed by a $637-million pool of jumbo loans. This is expected to have driven its non-interest income from mortgage banking activities.

In fact, the consensus mark for first-quarter 2020 income from mortgage banking activities net is pegged at $10.05 million and indicates a sequential gain of 39%. However, a significant decline in fair value of investments due to market dislocations is expected to mar the company’s non-interest income net for the March-end quarter. Accordingly, the first-quarter consensus estimate for the same is pinned at $48 million and indicates a 17.2% sequential decline. Lower non-interest income is expected to have impacted Redwood Trust’s bottom-line performance.

As such, the Zacks Consensus Estimate of EPS has declined 10% to 27 cents over the past month, reflecting analysts’ bearish sentiments. Also, it suggests a decline of 25% from the year-ago reported figure.

Nonetheless, the Zacks Consensus Estimate for the first-quarter NII of $33.7 million indicates growth of 5.2% year over year.

Earnings Whispers

Here is what our quantitative model predicts:

Redwood Trust 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 Redwood Trust is 0.00%.

Zacks Rank: Redwood Trust 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:

Arbor Realty Trust (ABR - Free Report) , scheduled to release earnings on May 8, has an Earnings ESP of +1.59% and a Zacks Rank of 3 at present.

VEREIT, Inc. (VER - Free Report) , set to report quarterly numbers on May 20, currently has an Earnings ESP of +5.15% and a Zacks Rank of 3.

CBL Properties (CBL - Free Report) , slated to release earnings results on May 18, currently has an Earnings ESP of +11.11% and a Zacks Rank #3.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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