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Two Harbors Investment Corp. Reports First Quarter 2016 Financial Results

NEW YORK, May 04, 2016 (BUSINESS WIRE) -- Two Harbors Investment Corp. TWO, +4.11% a real estate investment trust that invests in residential mortgage-backed securities (RMBS), residential mortgage loans, mortgage servicing rights (MSR), commercial real estate and other financial assets, today announced its financial results for the quarter ended March 31, 2016.

Summary

  • Reported Core Earnings of $71.8 million, or $0.21 per weighted average common share. [(1)]
  • Repurchased 8.0 million shares, representing 2.3% of common shares outstanding at December 31, 2015, at an average price of $7.64 per share, which was accretive to book value.
  • Closed on additional senior commercial real estate assets; aggregate portfolio carrying value of $744.3 million at March 31, 2016.
  • Added $5.0 billion unpaid principal balance (UPB) of MSR through expanded flow-sale relationships and bulk acquisition.
  • Sponsored two securitizations, issuing securities backed by approximately $628.3 million UPB of prime jumbo residential mortgage loans.
  • Reported book value of $9.70 per common share, representing a (1.8%) [(2)] total return on book value after accounting for a dividend of $0.23 per share.

“In the first quarter, we increased our capital allocation to commercial real estate assets due to the continued attractiveness of this sector,” stated Thomas Siering, Two Harbors’ President and Chief Executive Officer. “We also opportunistically purchased Agency RMBS as spreads widened intra-quarter. Our ability to dynamically allocate capital is important to our stockholders, as it allows us to take advantage of evolving market conditions.”

(1) Core Earnings is a non-GAAP measure. Please see page 13 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.
(2) Return on book value for the quarter ended March 31, 2016 is defined as the decrease in book value from December 31, 2015 to March 31, 2016 of $0.41, plus the dividend declared of $0.23 per share, divided by December 31, 2015 book value of $10.11 per share.

Operating Performance
The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the first quarter of 2016:

Two Harbors Investment Corp. Operating Performance (unaudited)
(dollars in thousands, except per share data)
Three Months Ended
March 31, 2016
Annualized
Per return on
weighted average

Earnings

Earnings share equity
Core Earnings [(1)] $ 71,844 $ 0.21

8.3 %

GAAP Net Loss $ (88,930 ) $ (0.25 ) (10.2)%
Comprehensive Loss $ (67,585 ) $ (0.19 ) (7.8)%

Operating Metrics

Dividend per common share $0.23
Book value per share at period end $9.70
Other operating expenses as a percentage of average equity 1.7%

________________

Earnings Summary
Two Harbors reported Core Earnings for the quarter ended March 31, 2016 of $71.8 million, or $0.21 per weighted average common share outstanding, as compared to Core Earnings for the quarter ended December 31, 2015 of $72.1 million, or $0.20 per weighted average common share outstanding. On a Core Earnings basis, the company recognized an annualized return on average equity of 8.3% and 7.8% for the quarters ended March 31, 2016 and December 31, 2015, respectively.

For the first quarter of 2016, the company recognized:

  • net realized gains on RMBS and mortgage loans held-for-sale of $16.7 million, net of tax;
  • net unrealized gains on certain RMBS and mortgage loans held-for-sale of $14.1 million, net of tax;
  • other-than-temporary impairment loss of $0.7 million, net of tax;
  • net gains of $9.6 million, net of tax, related to swap and swaption terminations and expirations;
  • net unrealized losses of $134.9 million, net of tax, associated with interest rate swaps and swaptions economically hedging its investment portfolio, repurchase agreements and Federal Home Loan Bank (FHLB) of Des Moines advances;
  • net realized and unrealized gains on other derivative instruments of approximately $9.4 million, net of tax;
  • net realized and unrealized gains on consolidated financing securitizations of $1.5 million, net of tax;
  • a net decrease in fair value of $88.7 million [(2)] on MSR, net of tax; and
  • securitization deal costs of $2.4 million, net of tax.
(2) Decrease in fair value on MSR, net of tax, of $88.7 million is comprised of a decrease in fair value of $73.7 million, net of tax, excluded from Core Earnings and $15.0 million, net of tax, of estimated amortization included in Core Earnings.

The company reported a GAAP Net Loss of $88.9 million, or $0.25 per weighted average common share outstanding, for the quarter ended March 31, 2016, as compared to GAAP Net Income of $210.7 million, or $0.59 per weighted average common share outstanding, for the quarter ended December 31, 2015. On a GAAP Net Income basis, the company recognized an annualized return on average equity of (10.2%) and 22.7% for the quarters ended March 31, 2016 and December 31, 2015, respectively.

The company reported a Comprehensive Loss of $67.6 million, or $0.19 per weighted average common share outstanding, for the quarter ended March 31, 2016, as compared to a Comprehensive Loss of $3.2 million, or $0.01 per weighted average common share outstanding, for the quarter ended December 31, 2015. The company records unrealized fair value gains and losses on the majority of RMBS, classified as available-for-sale, in Other Comprehensive Income (Loss). On a Comprehensive Income (Loss) basis, the company recognized an annualized return on average equity of (7.8%) and (0.3%) for the quarters ended March 31, 2016 and December 31, 2015, respectively.

Other Key Metrics
Two Harbors declared a quarterly cash dividend of $0.23 per common share for the quarter ended March 31, 2016. The annualized dividend yield on the company’s common stock for the quarter, based on the March 31, 2016 closing price of $7.94, was 11.6%.

The company’s book value per share, after taking into account the first quarter 2016 dividend of $0.23 per share, was $9.70 as of March 31, 2016, compared to $10.11 as of December 31, 2015, which represented a total return on book value for the quarter of (1.8%). [(1)]

Other operating expenses for the quarter ended March 31, 2016 were approximately $14.9 million, or 1.7% of average equity, compared to approximately $16.1 million, or 1.7% of average equity, for the quarter ended December 31, 2015.

Portfolio Summary
The company’s aggregate portfolio is principally comprised of RMBS available-for-sale securities, inverse interest-only securities (Agency Derivatives), MSR, residential mortgage loans held-for-sale, net economic interests in consolidated securitization trusts and commercial real estate assets. As of March 31, 2016, the total value of the company’s portfolio was $12.2 billion.

The company’s portfolio includes rates, credit and commercial real estate strategies. The rates strategy consisted of $8.7 billion of Agency RMBS, Agency Derivatives and MSR as well as their associated notional hedges as of March 31, 2016. The credit strategy consisted of $2.8 billion of non-Agency RMBS, net economic interests in consolidated securitization trusts, prime jumbo residential mortgage loans and credit sensitive residential mortgage loans, as well as their associated notional hedges as of March 31, 2016. The commercial strategy consisted of senior and mezzanine commercial real estate assets with an aggregate carrying value of $744.3 million as of March 31, 2016.

For the quarter ended March 31, 2016, the annualized yield on the company’s average aggregate portfolio was 4.58% and the annualized cost of funds on the associated average borrowings, which includes net interest rate spread expense on interest rate swaps, was 1.21%. This resulted in a net interest rate spread of 3.37%.

(1) Return on book value for the quarter ended March 31, 2016 is defined as the decrease in book value from December 31, 2015 to March 31, 2016 of $0.41, plus the dividend declared of $0.23 per share, divided by December 31, 2015 book value of $10.11 per share.

RMBS and Agency Derivatives
For the quarter ended March 31, 2016, the annualized yield on average RMBS and Agency Derivatives was 4.2%, consisting of an annualized yield of 3.3% in Agency RMBS and Agency Derivatives and 8.3% in non-Agency RMBS.

The company experienced a three-month average constant prepayment rate (CPR) of 9.2% for Agency RMBS and Agency Derivatives held as of March 31, 2016, compared to 10.3% for those securities held as of December 31, 2015. The weighted average cost basis of the principal and interest Agency portfolio was 106.6% of par as of March 31, 2016 and 108.1% of par as of December 31, 2015. The net premium amortization was $24.2 million and $25.3 million for the quarters ended March 31, 2016 and December 31, 2015, respectively.

The company experienced a three-month average CPR of 5.3% for non-Agency principal and interest RMBS held as of March 31, 2016, as compared to 6.2% for those securities held as of December 31, 2015. The weighted average cost basis of the non-Agency portfolio was 58.2% of par as of March 31, 2016, compared to 60.4% of par as of December 31, 2015. The discount accretion was $16.8 million for the quarter ended March 31, 2016, compared to $19.2 million for the quarter ended December 31, 2015. The total net discount remaining was $1.0 billion as of March 31, 2016, compared to $1.1 billion as of December 31, 2015, with $0.4 billion designated as credit reserve as of March 31, 2016.

As of March 31, 2016, fixed-rate investments composed 83.7% and adjustable-rate investments composed 16.3% of the company’s RMBS and Agency Derivatives portfolio.

As of March 31, 2016, the company had residential mortgage loans held-for-investment with a carrying value of $3.7 billion and the company’s collateralized borrowings had a carrying value of $2.8 billion, resulting in net economic interests in consolidated securitization trusts of $896.0 million.

Mortgage Servicing Rights
The company held MSR on mortgage loans with UPB totaling $55.3 billion. The MSR had a fair market value of $446.2 million as of March 31, 2016, and the company recognized unrealized losses of $101.4 million during the quarter ended March 31, 2016.

The company does not directly service mortgage loans, but instead contracts with fully licensed subservicers to handle substantially all servicing functions for the loans underlying the company’s MSR. The company recognized $34.1 million of servicing income, $7.4 million of servicing expenses and $0.5 million in reserve expense for representation and warranty obligations during the quarter ended March 31, 2016.

Residential Mortgage Loans Held for Sale
As of March 31, 2016, the company held prime jumbo residential mortgage...


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