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What's in the Cards for New Residential's (NRZ) Q3 Earnings?

Zacks Equity Research

New Residential Investment Corp. NRZ is scheduled to report third-quarter 2019 results on Oct 25, before market open. The company’s third-quarter earnings per share (EPS) and net interest income (NII) are likely to reflect year-over-year (y/y) declines.

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 two occasions for as many misses, the average positive surprise being 3.6%. 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

During the third quarter, mortgage REITs are expected to have witnessed expansion of production pipelines driven by strong origination activity. Given the recent mortgage rate declines, refinancing activities have gone up, along with rise in originations.

Specifically, the 30-year mortgage rates declined from 3.75% at the week ended Jul 3, 2019 to 3.64% at the week ended Sep 26, 2019. With mortgage rates at three-year lows, New Residential will likely have benefited from this favorable environment in the third quarter, given its origination capacity.

The company’s total origination volume was up 79% sequentially to $3.8 billion in the June-end quarter. This trend most likely continued in the third quarter as well.

Further, the company has a significant population of callable rights at its disposal. Prudent execution of deals is expected to have offered additional cash flows from call rights as well as securitization of originated loans.

Also, during the quarter, New Residential’s board of directors authorized the share buyback of up to $200 million of the company’s common shares through Dec 31, 2020. This share-buyback program indicates management’s confidence in its business and commitment to reward shareholders. With a favorable debt/equity ratio, this capital-deployment plan is expected to be sustainable. For the third quarter, we anticipate the company to have repurchased shares under this program.

However, credit risk related to the company’s non-agency residential mortgage backed securities, residential mortgage loans and consumer loans is expected to have made its third-quarter earnings volatile.

Further, New Residential's pool of mortgage service rights that account for majority of its investments is expected to have continued witnessing headwinds in the form of asset writedowns during the September-end quarter. Amid these, the Zacks Consensus Estimate for the third-quarter NII of $225.6 million reflects a y/y decline of 14.1%.

Moreover, prior to the third-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 3.7% downward to 52 cent over the past month, reflecting analysts’ bearish sentiments. In addition, it indicates y/y decline of 17.5%

Key Developments during Q3

In August, New Residential announced signing an agreement for the acquisition of shares of DGG RE Investments that operates under the name of Guardian Asset Management. It is a preeminent provider of field services in the United States and also offers property-management services to government agencies, asset management firms and financial institutions.

Through this buyout, New Residential will add a leading field service business to its ancillary business platform. The addition of Guardian, along with the company’s investment in Covius, advances New Residential’s strategy to capture ancillary economics related to its mortgage asset and servicing and origination businesses, thereby boosting revenues and earnings. The transaction is expected to close in fourth-quarter 2019.

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 -1.92%.

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:

Jernigan Capital, Inc. JCAP, scheduled to release earnings on Oct 30, has an Earnings ESP of +0.54% and carries a Zacks Rank of 3, at present.

MFA Financial, Inc. MFA, slated to report July-September quarter results on Nov 6, has an Earnings ESP of +1.78% and currently holds a Zacks Rank of 3.

Stag Industrial, Inc. STAG, set to release quarterly figures on Oct 30, has an Earnings ESP of +1.1% and carries a Zacks Rank of 3, at present.

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