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Assessing Survival Potential: Two Harbors Investment Corp.

Harrison Schwartz profile picture
Harrison Schwartz


  • Most mortgage REITs are 50-100% off their March lows yet remain far below book value.
  • The Federal Reserve's direct support of the Agency MBS market eases much of the current '2008-repeat' concerns.
  • Two Harbors has very high exposure to agency MBS securities that have appreciated in value YTD.
  • The mREIT is currently trading at a third of its book value and at a TTM dividend yield over 20%, creating a strong long-term deep value opportunity.
  • While the long-term potential for many mREITs appears strong, another wave of volatility seems likely.
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[Editor's note 5/11/2020: The author has added clarifications regarding the company's book value.]

Without a doubt, this year has been the most volatile year for mortgage REITs since the last recession. During the March crash, most mREITs lost (for a moment) 70% of their value in a matter of weeks. Since then, most are up 50-100% from their lows.

While many investors fear mREITs due to their abysmal performance in the last recession, they are one of the primary benefactors of the Federal Reserve QE policy. More on this in "Assessing Survival Potential: Exantas Capital Corp. Likely To Indirectly Gain From Liquidity Injections" which covered Exantas (XAN). Even more, most pay 20%+ dividend yields today and are trading far below book value, providing extreme value opportunity to investors.

The Value Of Agency MBS mREITs

The risks in mREITs are real. Most have total liabilities to assets of 70-90% meaning it would not take a significant rise in defaults to bankrupt the companies. Given COVID-19 has forced many businesses to close, it is likely there will at least be a significant rise in commercial mortgage defaults. That said, many hold residential MBS assets that are secured by a federal agency which drastically limits their risk. In my opinion, mREITs with high exposure to these protected assets are the best deep-value opportunity today.

During the March crash, liquidity fled financial markets, and fear poured in. This caused a rapid selloff in the agency MBS market that caused companies like Exantas to see margin calls. To illustrate, take a look at the performance of agency MBS ETF (MBB) vs. the mREIT ETF (REM) during and after the crash:

ChartData by YCharts

As you can see, the drop in MBB in March occurred while REM fell 50%. Mortgage REITs that own agency MBS securities tend to

ChartData by YCharts

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This article was written by

Harrison Schwartz profile picture
Harrison is a financial analyst who has been writing on Seeking Alpha since 2018 and has closely followed the market for over a decade. He has professional experience in the private equity, real estate, and economic research industry. Harrison also has an academic background in financial econometrics, economic forecasting, and global monetary economics.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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