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Factors Influencing New Residential's (NRZ) Q3 Earnings

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New Residential Investment Corp. NRZ is scheduled to report third-quarter 2020 results on Oct 26, before market open. The company’s third-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 34 cents per share, surpassing the Zacks Consensus Estimate of 29 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 35.9%. 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 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

The residential mortgage market witnessed one of the most robust recoveries during the third quarter since the peak of the pandemic sell-off in March that continued into April. In fact, favorable regulatory changes and continued Fed purchases of mortgage bonds have fueled this rebound.

Moreover, the coronavirus outbreak-related forbearance levels continued to improve during the July-September period. In fact, according to new data from Black Knight’s McDash Flash Forbearance Tracker, as of Sep 22, 3.6 million mortgages remained in active coronavirus-related forbearance plans in which borrowers are permitted to postpone monthly payments. These active coronavirus-related forbearances represent $751 billion in unpaid principal.

This indicates that the volume of mortgages in active forbearance dropped 1.17 million plans or 24% since the highest level in May.

A decline in forbearances and a decent balance of servicer advances are expected to have aided New Residential’s third-quarter performance. Notably, the continued decline in forbearance requests and favorable interest rate changes are expected to have resulted in positive mark-to-market adjustment for the company’s servicing portfolio. Amid these, the company’s net servicing revenues are expected to be $113 million for the third quarter, whereas it reported negative $90 million in the prior quarter.

Moreover, in the past quarters, it made significant efforts to strengthen its origination and servicing platforms. Notably, in July, the company’s mortgage lending unit NewRez collaborated with Salesforce to use the latter’s financial services cloud and Customer 360 to connect its loan origination, servicing and marketing efforts. Such past moves are expected to have helped the company to benefit from healthy primary-secondary spreads and high mortgage applications during the quarter under review.

In fact, amid low mortgage rates that prevailed in the third quarter, mortgage originations have significantly increased year over year. Refinancing activity has been the main driver of the outsized application volume. Moreover, the fixed income markets were relatively more stable during the September-end quarter as compared to the previous quarter. These are expected to have positioned New Residential to materially grow its income from originations in the quarter under review.

Additionally, the Zacks Consensus Estimate for the company’s third-quarter net gain on originated mortgage loans held for sale is pegged at $315 million, suggesting a 1.6% rise from the second quarter’s reported gain.

However, New Residential's pool of mortgage service rights (MSRs), which accounts for the majority of its investments, is expected to have continued witnessing headwinds during the September-end quarter.

Specifically, the decline in mortgage rates is expected to have driven higher mortgage prepayments and refinancing. This is likely to have impacted cash flows that the company collects from excess MSRs and have resulted in a significant decline in MSR valuations during the third quarter.

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

Overall, the Zacks Consensus Estimate for third-quarter NII of $120 million suggests a year-over-year decline of 40.7%.

Lastly, the company has been witnessing downward estimate revisions for its EPS prior to the third-quarter earnings release. Notably, the Zacks Consensus Estimate for third-quarter EPS has been revised marginally downward to 34 cents over the past month. Further, it indicates a 32% year-over-year decline.

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 -2.94%

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:

Lexington Realty Trust LXP, set to report quarterly numbers on Nov 5, currently has an Earnings ESP of +1.33% and a Zacks Rank of 3.

National Storage Affiliates Trust NSA, slated to release third-quarter earnings on Nov 5, has an Earnings ESP of +2.44% and a Zacks Rank of 2 (Buy) at present.

Ventas, Inc. VTR, slated to release third-quarter earnings on Nov 6, has an Earnings ESP of +2.03% and a Zacks Rank of 3 at present.

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