Two Harbors Has 10% Yield To Go With Less Than Average Risk
- The company has a fairly diversified portfolio, other than the enormous position in 30 year fixed rate MBS.
- Utilizing lower levels of leverage the mREIT has substantially reduced its exposure to changes in book value resulting from interest rate shocks.
- The dividend yield is weaker than the peer group, but the exposure to interest rate risk is also dramatically lower.
- The company has also seen dramatically lower levels of CPR over several years, but there are alternative explanations.
Two Harbors Offers High Yield And Potential Price Appreciation In 2015
- TWO's diverse portfolio of earnings assets reflects correct strategy to deliver impressive returns with modest risk exposure.
- Attempts to increase exposure to conduit and MSR businesses stay an important long-term growth catalyst.
- TWO needs to reduce hedge book, which will lower funding cost and improve core EPS.
- Rates will remain low longer than anticipated by the market.
- AGNC will continue to take advantage of low interest rates and adjust its portfolio accordingly when the rates finally rise.
- TWO retains potential for significant price appreciation.
Update: Two Harbors Announces Dividends But They May Be Unsustainable
- Two Harbors Investment has just announced its latest quarterly dividend.
- Recent earnings were not strong and I did not expect the dividend would fail to be covered with lower earnings which had me concerned with the sustainability of its dividend.
- The present news is mildly bullish for the company and does not change my mildly bullish sentiment.
Two Harbors' Core EPS Expected To Flourish As Quarterly Dividends Remain Unsustainable
- Strategic investments in conduit loans, MSR, commercial real estate, and non-agency RMBS companies will help improve core EPS.
- Investments also help Two Harbors trade at premium valuations.
- Quarterly dividends not sustainable due to lower leverage and over-protection of balance sheet through heavy hedging.
Update: Two Harbors Appoints New Chief Risk Officer During A Critical Time For The CompanyChristopher F. Davis • Nov. 26, 2014
- Two Harbors Investment Corp. announced today that there will be changes to the key management position of Chief Risk Officer, effective January 1, 2015.
- While I did not predict that this management change would occur, I am very pleased with the choice of this still-relative newcomer to Two Harbors.
- This news does not change my bullish outlook, but it does give me confidence that the company has chosen someone who is a natural fit.
Update: Two Harbors Discloses Commercial Real Estate Plans - Much Needed Diversification
- Two Harbors Investment Corp. has just disclosed that it is planning to diversify into commercial real estate, marking a major shift in asset allocation for the company starting with $500,000,000.
- I previously called out its lack of real diversification, which would hamper its competitiveness and ability to adapt to a changing interest rate environment, but did not predict this move.
- This move is very exciting for the company and is very bullish for the stock in my opinion, reinforcing my prior bullish stance.
Update: Two Harbors Reports Q3 Earnings - Still A Buy But Watch That Dividend
- Two Harbors Investment has just reported its third quarter earnings.
- I predicted that book value would expand as the company could generate better core earnings to cover its dividends.
- I still like the company and rate it a buy, but watch that dividend coverage.
10.3% Dividend Two Harbors Is Looking Increasingly Challenged
- TWO produced a total economic return of 9.94% in 1H 2014 (or annualized 19.89%).
- The 10.3% dividend looks sustainable at this time.
- However, there are several new issues that may impact the non-Agency arena in the near future.
- Investors may wish to stand aside on TWO until it becomes more clear what the impact of these issues will be.
An In-Depth Look At Two Harbors' Portfolio Has Changed My Opinion
- This article was written in response to reader demand and follows-up on a recent article comparing key metrics of Two Harbors to Annaly Capital and American Capital Agency.
- I discuss portfolio composition, hedging strategies, risk management and strategic positioning of the company.
- Is Two Harbors right for your risk tolerance levels, or should you be positioned elsewhere?
Is Two Harbors Superior To Annaly And American Capital?
- I am often asked about Two Harbors and to date I have yet to opine.
- Two Harbors has several strengths and weaknesses relative to American Capital Agency and Annaly Capital.
- I provide a comparative analysis of critical mREIT metrics.
Two Harbors Remains A Hit With Its 17% Attractive Total Return
- The company’s strategic investments continue to paint an encouraging outlook.
- TWO has reduced its reliance on the repo market through FHLB membership.
- The company needs to reduce its hedged positions, as the macro-economic environment is stable with low interest rate volatility.
- Company’s significant exposure to non-agency RMBS and MSR investments will help increase earnings.
- TWO has low sensitivity of interest rates to book value.
- Compelling total return opportunity of 25%.
- Low prepayment risk.
Nearly A 10% Dividend And Appreciating Non-Agency RMBS Make Two Harbors A Buy
- TWO had a total economic return of 3.9% in Q1 2014 (about a 15.6% annual return).
- The 10 year US Treasury Note yield fell -19 bps in Q2 2014. Hence Agency fixed rate RMBS book values grew in Q2 2014.
- TWO has hedging that it expects to guard against interest rate moves. This makes TWO attractive even if rates go up in the near future.
- Other factors add to TWO's attractiveness. It is a buy.
Two Harbors Retains Attractiveness As An Investment Option Despite Tough Environment
- Stock retains benefit for dividend seekers with a dividend yield of 10%.
- Company looking to protect book value by repositioning its portfolio.
- Current valuations remain attractive.
- Interest rates are expected to increase as the Fed gets ready to slow its bond buying program.
- Two Harbors has ended a solid quarter with a substantial increase in its assets.
- TWO's move towards defensive cash flows from MSR, the share repurchase program and the reduction of fixed rate portfolio are all good long-term signs.
Tue, Jan. 20, 3:13 PM
- Borrowers struggling to navigate D.C.'s qualified mortgage rules might try ringing their local mortgage REIT for that refinance or new home mortgage.
- “There is demand out there for a broader credit box than what banks are providing," says JMP mREIT analyst Steve Delaney. “They’re looking at where the needs are, at borrowers in the market where funding is not available."
- Western Asset Mortgage (WMC -1.4%) is partnering with lenders to make loans which otherwise wouldn't qualify under the new standards. This lending will focus on borrowers with strong credit, but are shut out for complications surrounding things like being self-employed,
- Zais Financial (ZFC -0.1%) last year bought mortgage originator GMFS to get a pipeline to new loan supply, and Two Harbors (NYSE:TWO) has recently begun working with lenders to offer loans to those with less than stellar credit, or for those who want to make smaller down payments on jumbo loans (above the conforming $417K figure). “There continues to be a huge national cohort of people able to responsibly purchase a home that simply haven’t been able to get a mortgage,” says CEO Tom Siering.
- Ellington Financial (EFC) - a partnership, but operates similarly to a REIT - has invested in at least two lenders and built out its team to find non-QM business. “These will be relatively small investments to start with, but they should have the potential to generate a large pipeline of new investments for us, especially in the non-QM, non-prime space,” says CEO Larry Penn.
- Not all are getting involved. American Capital's (AGNC -1.7%) Gary Kain is waiting to see how others fare before stepping in.
Wed, Jan. 14, 1:17 PM
- Agency MBS are off to their worst start relative to Treasurys since 1997 as the big drop in interest rates has investors nervous about a surge in refinancing. Returns on paper backed by Fannie, Freddie, or Ginnie Mae are 60 basis points less than those on Treasurys of similar duration so far this month.
- Also stoking the trend are changes to government programs aimed at making mortgage credit easier to obtain.
- Earlier today, the MBA reported applications for home-loan refis jumped 66% last week.
- Prices of agency MBS currently average 106.5 cents on the dollar, meaning owners would lose 6.5% if immediately repaid.
- Annaly Capital (NLY -1.3%), American Capital Agency (AGNC -1.2%), Armour Residential (ARR -2%), Two Harbors (TWO -0.9%), Invesco Mortgage (IVR -1.9%), American Capital Mortgage (MTGE -1.3%), Dynex (DX -0.5%), Apollo Residential (AMTG -1.2%), Anworth (ANH -0.9%), Western Asset (WMC -1.6%).
- ETFs: REM, MORT, MORL
Dec. 30, 2014, 12:37 PM
- Nearly all the mREITs sell at discounts to their most recently disclosed book value, with sector giants Annaly Mortgage (NYSE:NLY) and American Capital Agency (NASDAQ:AGNC) trading at double-digit discounts.
- Often a sizable haircut to book may make sense, as in the case of Armour Residential (NYSE:ARR) and Javelin Mortgage (NYSE:JMI), both of which just cut their dividend (they have the same external manager).
- Of the 24 companies examined, New York Mortgage Trust (NASDAQ:NYMT) and Capstead Mortgage (NYSE:CMO) stand alone in trading at premiums to book value.
- The full list
Dec. 16, 2014, 4:15 PM
Dec. 9, 2014, 12:57 PM
- Unable to catch a bid for a few sessions, mortgage REITs (REM +1%) have turned higher in afternoon action, led by Annaly (NLY +0.7%) and American Capital Agency (AGNC +1.5%).
- Helping are jitters in the stock market (though U.S. averages are well off the lows), and a 10-year Treasury yield that's retreated all the way to 2.21% after hitting the mid-2.30s on the back of Friday's strong jobs number.
- Armour (ARR +1.1%), Two Harbors (TWO +0.9%), CYS Investments (CYS +1.4%), Invesco (IVR +1.8%), American Capital Mortgage (MTGE +1%), Hatteras Financial (HTS +2%), Capstead (CMO +2%).
- Other ETFs: MORT, MORL
- Also showing some green are the recently beaten-up BDCs, including Prospect Capital (PSEC +0.2%), Fifth Street Finance (FSC +0.2%), Ares Capital (ARCC +0.5%), FS Investment (FSIC), Triangle Capital (TCAP +1.7%).
- ETFs: BDCL, BDCS, BIZD
- Previously: Money flows back into fixed income (Dec. 9, 2014)
Nov. 26, 2014, 8:46 AM
- Current Chief Risk Office Paul Richardson - who has served in the role for a number of years - will remain a partner and chief risk officer of Two Harbors' (NYSE:TWO) external manager, Pine River Capital Management.
- He's being replaced, effective January 1, by Robert Rush who has been managing director, risk management since September of 2013.
- Source: Press Release
Nov. 17, 2014, 9:02 AM
- Two Harbors' (NYSE:TWO) external manager Pine River Capital Management hires Jack Taylor as Global Head of Commercial Real Estate and two others as managing directors, and plans an initial allocation of about $500M of equity capital to the initiative.
- Prior to joining Pine River, Taylor was managing director and head of the global real estate finance business for Prudential Real Estate Investors. The two managing directors were part of Taylor's team at Prudential.
- Source: Press Release
Nov. 4, 2014, 4:21 PM
- Q3 core earnings of $82.8M or $0.23 per share vs. $89.7M and $0.24 in Q2. Dividend is $0.26.
- Book value per share of $11.25 vs. $11.09 at the end of Q2. Today's close of $10.18 is a 9.5% discount to book.
- Portfolio: Rate strategy consists of $10.4B of agency MBS and MSR vs. $10.8B in Q2. Credit strategy consists of $3.9B of non-agency MBS, interests in consolidated securitization trusts, prime jumbo mortgages, and credit-sensitive loans vs. $3.7B in Q2.
- CPR on agency holdings of 7.9% vs. 8.5% in Q2 (other mREITs have seen mostly rising CPR on agency MBS).
- Conference call tomorrow at 9 ET
- Previously: Two Harbors Investment misses by $0.02
- TWO flat after-hours
Nov. 4, 2014, 4:12 PM
Sep. 16, 2014, 4:17 PM
Sep. 2, 2014, 2:26 PM
- REITs and other so-called "shadow bankers" for the last several years have used captive insurers to join Federal Home Loan Banks, thus getting access to more dependable financing and better terms than they otherwise could.
- The FHFA for some time has voiced its concern over the practice, and under new rules just proposed, would sunset those existing memberships over a five year period.
- ETFs: REM, MORT, MORL
- Two Harbors (TWO -1.8%), Invesco Mortgage (IVR -1.9%), Hatteras Financial (HTS -1.2%), Dynex Capital (DX -1.1%), PennyMac Mortgage (PMT -1.5%), Annaly Capital (NLY -0.8%), American Capital Agency (AGNC -0.3%).
Aug. 6, 2014, 4:56 PM
- Q2 core earnings of $89.7M or $0.24 per share vs. $88.2M and $0.24 in Q1. Dividend is $0.26.
- Book value per share of $11.09 up $0.38 from Q1. Today's close of $10.29 is a 7.2% discount to book.
- Total portfolio value of $14.5B. Rates strategy: $10.8B of agency MBS and MSRs. Credit strategy: $3.7B of non-agency MBS, and other assets (prime jumbo loans, for instance). Net interest spread for overall portfolio of 3.4%. CPR on agency holdings of 8.5% up rom 6.4% in Q1.
- UPB on MSRs is $45.6B; fair market value of rights is $500.5M.
- Conference call tomorrow at 9 ET
- Previously: Two Harbors Investment misses by $0.01
- TWO +0.8% AH
Aug. 6, 2014, 4:17 PM
Jun. 26, 2014, 3:54 PM
- Enjoying the decline in interest rates even among some hawkish stomping of feet by St. Louis Fed boss Jim Bullard, the mortgage REIT sector (REM +0.9%) is broadly higher. Sector giants: Annaly Capital (NLY +0.6%) and American Capital Agency (AGNC +1.1%).
- Others: Two Harbors (TWO +1.9%), Chimera (CIM +1.8%), American Capital Mortgage (MTGE +1%), Cherry Hill Mortgage (CHMI +1.4%), New York Mortgage Trust (NYMT +1.1%).
- Other ETFs: MORT, MORL
Jun. 17, 2014, 4:27 PM| Comment!
May. 27, 2014, 11:49 AM
- It's been a good year so far, but much of the sector (REM +0.6%) continues to trade at a discount to book value, says Harter. Through he expects the environment to turn less favorable over the next year, those discounts have already priced this in.
- His top pick is Two Harbors (TWO +0.7%), with the build-out of its MSR and jumbo conduit businesses complimenting its MBS portfolio.
- Other favorites are Apollo Residential Mortgage (AMTG +0.7%) and ZAIS Financial (ZFC -0.3%) as their discounts to book aren't consistent with the risks.
- Other ETFs: MORT, MORL
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