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What's in the Offing for Two Harbors (TWO) in Q1 Earnings?

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·5 min read
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Two Harbors Investment Corp. TWO is slated to report first-quarter 2020 results on May 6, after market close. The company’s results will likely reflect year-over-year declines in its revenues and core earnings per share (EPS).

In the last reported quarter, this hybrid mortgage real estate investment trust (mREIT) posted core EPS of 25 cents, missing the Zacks Consensus Estimate of 40 cents.

Over the trailing four quarters, the company missed the Zacks Consensus Estimate on three occasions and beat in the other, the negative surprise being 18.97%, on average. The graph below depicts this surprise history:

Two Harbors Investments Corp Price and EPS Surprise

Two Harbors Investments Corp Price and EPS Surprise
Two Harbors Investments Corp Price and EPS Surprise

Two Harbors Investments Corp price-eps-surprise | Two Harbors Investments Corp Quote

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

Factors to Consider

The liquidity-driven market distress, 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 the company’s quarterly results.

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. To meet the margin calls and de-lever portfolios, mREITs are expected to have resorted to asset sales at lower valuations.

In light of such unprecedented conditions, during the first quarter, asset spreads in Two Harbors’ Agency residential MBS (RMBS) and legacy non-Agency RMBS witnessed material widening, and received margin calls. Hence, on Mar 25, the company sold a substantial portion of its non-agency RMBS portfolio, thereby eliminating further outsized margin call exposure on the assets.

As of the same date, the company’s portfolio consisted of $20 million worth Agency MBS and mortgage servicing rights (MSR) grouped under its rates strategy. Further, the company announced a 55% decline in its book value from the start of the quarter till Mar 25. This is expected to have resulted from declining price premiums in its specified pools, lower MBS valuations, and significant losses from its derivatives and hedging instruments.

Also, the company suspended its first-quarter 2020 common stock and preferred stock dividends to maintain portfolio liquidity.

As the servicer of record for the MSR assets in its portfolio, the company has likely faced headwinds on the servicing advances front. Given the mortgage forbearance allowance options in the CARES Act, mortgage servicers are under compulsion to pay advances to bond holders to cover delinquent mortgage payments. Hence, Two Harbors has likely faced material servicing advance obligations, with an expected increase in delinquencies.

Given these concerns, the company’s revenues are expected to have declined year over year. In fact, for first-quarter 2020, the Zacks Consensus Estimate for its revenues is pinned at $39.3 million and suggests a 52% year-over-year slump.

Lastly, prior to the first-quarter earnings release, the company has been witnessing downward estimate revisions. As such, the Zacks Consensus Estimate of EPS for the quarter to be reported has moved nearly 21% downward to 34 cents over the past month, reflecting analysts’ bearish sentiments. Also, it suggests a year-over-year decline of 30.6%.

Earnings Whispers

Here is what our quantitative model predicts:

Two Harbors 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 Two Harbors is -5.88%.

Zacks Rank: Two Harbors carries a Zacks Rank #5 (Strong 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:

Hannon Armstrong Sustainable Infrastructure Capital, Inc. HASI, scheduled to release earnings on May7, has an Earnings ESP of +5.52% and a Zacks Rank of 3 at present.

SBA Communications Corporation SBAC, set to report quarterly numbers on May 5, currently has an Earnings ESP of +0.67% and a Zacks Rank of 3.

Americold Realty Trust COLD, expected to release earnings results on May 7, currently has an Earnings ESP of +9.74% 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.

Today, See These 5 Potential Home Runs >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Two Harbors Investments Corp (TWO) : Free Stock Analysis Report
SBA Communications Corporation (SBAC) : Free Stock Analysis Report
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI) : Free Stock Analysis Report
Americold Realty Trust (COLD) : Free Stock Analysis Report
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