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

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  • NRZ-PC

New Residential Investment Corp. NRZ is scheduled to report third-quarter 2021 results on Nov 2, before market open. The company’s third-quarter earnings and net interest income (NII) are likely to reflect growth from the year-ago reported figures.

This New York-based mortgage real estate investment trust (“mREIT”), primarily focused on residential real estate investments, posted core earnings of 31 cents per share in the last reported quarter, meeting the Zacks Consensus Estimate.

Over the preceding four quarters, the company met the Zacks Consensus Estimate on three occasions and missed in the other, the average negative surprise being 2.21%. 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 have shaped up prior to this announcement.

Factors at Play

In the third quarter, the mortgage market continued to show decent strength, backed by a strong housing market and favorable credit spread tightening as the government stimulus package steered the economy toward recovery. Also, the yield curve started to steepen.

Also, low mortgage rates in the quarter and high demand for home bolstered the mortgage originations market. Amid the beneficial environment and considering New Residential’s origination capacity, the company is likely to have benefited from the favorable environment in the third quarter.

Mortgage rates increased marginally in the September-end quarter. This is expected to have reduced prepayment speed. Hence, premium amortization on agency mortgage-backed securities (MBS) is expected to have been lower in the third quarter. This is likely to have alleviated NII pressure. Overall, the Zacks Consensus Estimate for third-quarter NII of $172.7 million suggests year-over-year growth of 67%.

We expect decent spread tightening across many asset classes to support a recovery in the mREIT’s book value for the September-end quarter.

New Residential’s servicing portfolio should have been resilient, with favorable mark-to-market adjustment, driven by a continued decline in forbearance requests and pay downs. The company’s net servicing revenues are expected to be $84 million for the third quarter, whereas it reported a negative $87 million in the prior quarter.

However, the primary-secondary spread slightly declined sequentially in the third quarter. Therefore, we expect a contraction in gain on sale margins for New Residential relative to the third quarter. The Zacks Consensus Estimate for the company’s third-quarter net gain on originated mortgage loans held for sale is pegged at $424 million, suggesting a 12.9% fall from the prior-year quarter’s reported figure.

The decline in mortgage prepayments and refinancing, cash flows that the company collects from excess mortgage servicing rights (MSRs) is expected to have increased and improved MSR valuations during the third quarter.

Further, due to an increase in the fair value of such excess MSRs, the company is expected to have recorded lower MSR amortization expenses.

Lastly, New Residential has been witnessing upward estimate revisions for its earnings prior to the third-quarter results, reflecting bullish analyst sentiment. Notably, the Zacks Consensus Estimate for third-quarter earnings has been revised 6% upward to 35 cents over the past month. Further, it indicates a year-over-year rise of 12.9%.

Key Developments in Q3

In August,New Residentialcompleted the previously announced acquisition of Caliber Homes Loans, Inc., an eminent mortgage originator and servicer. With this, the company has expanded its mortgage operations with around 4% of the mortgage origination market share.

Specifically, the buyout adds around $150 billion unpaid principal balance of MSRs, improved technological operations, and an expanded local presence, particularly in the purchase lending space.

Following the buyout announcement, New Residential cheered investors with a 25% dividend hike in the third-quarter dividend to 25 cents per share.

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 0.00%

Zacks Rank: It currently carries a Zacks Rank #3.

Stocks Worth a Look

Here are a few REIT stocks that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this time around:

Apple Hospitality REIT APLE, slated to release third-quarter earnings on Nov 4, has an Earnings ESP of +26.67% and it sports a Zacks Rank of 1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Life Storage LSI, slated to release earnings numbers on Nov 2, has an Earnings ESP of +0.21% and a Zacks Rank of 2 (Buy) at present.

CubeSmart CUBE, set to report quarterly numbers on Nov 4, has an Earnings ESP of +2.86% and a Zacks Rank of 2 at present.

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Life Storage, Inc. (LSI) : Free Stock Analysis Report

CubeSmart (CUBE) : Free Stock Analysis Report

New Residential Investment Corp. (NRZ) : Free Stock Analysis Report

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