NEW YORK--(BUSINESS WIRE)--Aug 7, 2018--Two Harbors Investment Corp. (NYSE: TWO), a leading hybrid mortgage real estate investment trust (REIT) that invests in residential mortgage-backed securities (RMBS), mortgage servicing rights (MSR) and other financial assets, today announced its financial results for the quarter ended June 30, 2018.

Summary

Reported book value of $15.69 per common share, representing a 3.4% total quarterly return on book value. (1) Generated Comprehensive Income of $90.8 million, or $0.52 per weighted average basic common share. Reported Core Earnings, including dollar roll income, of $93.9 million, or $0.53 per weighted average basic common share, representing a return on average common equity of 13.5%. (2)Dollar roll income of $16.5 million, or $0.09 per weighted average basic common share. Added $10.5 billion unpaid principal balance (UPB) of MSR through a bulk acquisition and monthly flow-sale arrangements, bringing total holdings to $119.5 billion UPB. Added $330 million facility to finance conventional MSR collateral; continued to advance discussions with other potential MSR financing counterparties. Post quarter-end, completed the acquisition of CYS Investments, Inc. on July 31, 2018, increasing the company’s total capital to approximately $4.8 billion. Post quarter-end, declared interim dividend of $0.158370 per share, representing a partial payment of Two Harbors’ regular third quarter common stock dividend, which is expected to be $0.47 per share; anticipate declaring the remaining $0.311630 per common share portion in the ordinary course in September 2018.

“Our strong performance this quarter, highlighted by growth in both our Core Earnings and book value, underscores that there is continued opportunity in what can be viewed as a challenging environment,” stated Thomas Siering, Two Harbors’ President and Chief Executive Officer. “Additionally, post quarter end we completed the acquisition of CYS Investments, Inc. Going forward, we believe that our larger company will enhance our ability to drive returns for our stockholders.”

(1) Return on book value for the quarter ended June 30, 2018 is defined as the increase in book value per common share from March 31, 2018 to June 30, 2018 of $0.06, plus the dividend declared of $0.47 per common share, divided by March 31, 2018 book value of $15.63 per common share. (2) Core Earnings and Core Earnings, including dollar roll income, are non-GAAP measures. Please see page 13 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.

Operating Performance The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the second quarter of 2018:

Earnings Summary Two Harbors generated Comprehensive Income of $90.8 million, or $0.52 per weighted average basic common share, for the quarter ended June 30, 2018, as compared to a Comprehensive Loss of ($23.7) million, or ($0.14) per weighted average basic common share, for the quarter ended March 31, 2018. The company records unrealized fair value gains and losses on the majority of RMBS, classified as available-for-sale, in Other Comprehensive Income. On a Comprehensive Income basis, the company recognized an annualized return on average common equity of 13.1% and (3.3%) for the quarters ended June 30, 2018 and March 31, 2018, respectively.

The company reported GAAP Net Income of $125.7 million, or $0.72 per weighted average basic common share, for the quarter ended June 30, 2018, as compared to GAAP Net Income of $321.1 million, or $1.83 per weighted average basic common share, for the quarter ended March 31, 2018. On a GAAP Net Income basis, the company recognized an annualized return on average common equity of 18.1% and 45.2% for the quarters ended June 30, 2018 and March 31, 2018, respectively.

For the second quarter of 2018, the company recognized non-Core Earnings of:

net realized losses on RMBS and mortgage loans held-for-sale of $39.0 million; net unrealized gains on certain RMBS, equity securities and mortgage loans held-for-sale of $6.7 million; other-than-temporary impairment loss of $0.2 million; net losses of $20.5 million related to swap and swaption terminations and expirations; net unrealized gains of $35.7 million associated with interest rate swaps and swaptions economically hedging interest rate exposure (or duration); net realized and unrealized gains on other derivative instruments of $6.0 million; net realized and unrealized gains on MSR of $55.8 million (1); servicing reserve release of $0.2 million; non-cash equity compensation expense of $3.5 million; and net benefit from income taxes on non-Core Earnings of $7.1 million.

The company reported Core Earnings, including dollar roll, income for the quarter ended June 30, 2018 of $93.9 million, or $0.53 per weighted average basic common share outstanding. The company reported Core Earnings, including dollar roll income, from the quarter ended March 31, 2018 of $83.8 million or $0.48 per weighted average basic common share outstanding. On a Core Earnings, including dollar roll income basis, the company recognized an annualized return on average common equity of 13.5% for the quarter ended June 30, 2018, compared to 11.8% for the quarter ended March 31, 2018.

Other Key Metrics Two Harbors declared a quarterly cash dividend of $0.47 per common share for the quarter ended June 30, 2018. The annualized dividend yield on the company’s common stock for the quarter, based on the June 30, 2018 closing price of $15.80, was 11.9%.

Two Harbors declared quarterly dividends of $0.50781 per share on its 8.125% Series A fixed-to-floating rate cumulative redeemable preferred stock, $0.47656 per share on its 7.625% Series B fixed-to-floating rate cumulative redeemable preferred stock and a dividend of $0.45313 per share of the 7.25% Series C fixed-to-floating rate cumulative redeemable preferred stock. Each of the foregoing preferred dividends were paid on July 27, 2018 to the applicable preferred stockholders of record at the close of business on July 12, 2018.

The company’s book value per common share, after taking into account the second quarter 2018 common and preferred stock dividends, was $15.69 as of June 30, 2018, compared to $15.63 as of March 31, 2018, which represented a total return on book value for the quarter of 3.4%. (2)

Other operating expenses for the quarter ended June 30, 2018 were approximately $15.5 million. The company’s annualized expense ratio was 1.8% of average equity, compared to other operating expenses of $14.5 million, or 1.6% of average equity, for the quarter ended March 31, 2018. These include non-cash equity compensation expense of $3.5 million and $2.3 million, respectively.

Portfolio Summary The company’s aggregate portfolio is principally comprised of RMBS available-for-sale securities, inverse interest-only securities (Agency Derivatives) and MSR. As of June 30, 2018, the total value of the company’s portfolio was $20.8 billion.

The company’s portfolio includes rates and credit strategies. The rates strategy consisted of $17.3 billion of Agency RMBS, Agency Derivatives and MSR as well as their associated notional hedges as of June 30, 2018. The credit strategy consisted of $3.5 billion of non-Agency securities, as well as their associated notional hedges as of June 30, 2018.

(1) Excludes estimated amortization of $42.2 million, net of tax, included in Core Earnings, including dollar roll income. (2) Return on book value for the quarter ended June 30, 2018 is defined as the increase in book value per common share from March 31, 2018 to June 30, 2018 of $0.06, plus the dividend declared of $0.47 per common share, divided by March 31, 2018 book value of $15.63 per common share.

For the quarter ended June 30, 2018, the annualized yield on the company’s average aggregate portfolio was 3.91% and the annualized cost of funds on the associated average borrowings, which includes net interest rate spread on interest rate swaps, was 1.98%. This resulted in a net interest rate spread of 1.93%.

RMBS and Agency Derivatives For the quarter ended June 30, 2018, the annualized yield on average RMBS and Agency Derivatives was 3.7%, consisting of an annualized yield of 3.0% in Agency RMBS and Agency Derivatives and 8.1% in non-Agency securities.

The company experienced a three-month average constant prepayment rate (CPR) of 9.2% for Agency RMBS and Agency Derivatives held as of June 30, 2018, compared to 7.0% as of March 31, 2018. The weighted average cost basis of the principal and interest Agency portfolio was 106.7% of par and 106.4% of par as of June 30, 2018 and March 31, 2018, respectively. The net premium amortization was $45.3 million and $44.2 million for the quarters ended June 30, 2018 and March 31, 2018, respectively.

The company experienced a three-month average CPR of 6.9% for legacy non-Agency securities held as of June 30, 2018, compared to 5.7% as of March 31, 2018. The weighted average cost basis of the legacy non-Agency securities was 61.2% of par as of June 30, 2018, compared to 59.5% of par as of March 31, 2018. The discount accretion was $22.5 million for the quarter ended June 30, 2018, compared to $22.2 million for the quarter ended March 31, 2018. The total net discount remaining was $1.5 billion as of June 30, 2018, compared to $1.3 billion as of March 31, 2018, with $923.8 million designated as credit reserve as of June 30, 2018.

As of June 30, 2018, fixed-rate investments composed 83.1% and adjustable-rate investments composed 16.9% of the company’s RMBS and Agency Derivatives portfolio.

Mortgage Servicing Rights As of June 30, 2018, the company held MSR on mortgage loans with UPB totaling $119.5 billion. (1) The MSR had a fair market value of $1.5 billion, as of June 30, 2018, and the company recognized fair value gains of $9.9 million during the quarter ended June 30, 2018.

The company does not directly service mortgage loans, but instead contracts with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the loans underlying the company’s MSR. The company recognized $77.7 million of servicing income, $11.6 million (1) of servicing expenses and $0.2 million in servicing reserve release during the quarter ended June 30, 2018.

Other Investments and Risk Management Derivatives The company held $3.0 billion notional of net long to-be-announced securities (“TBAs”) as of June 30, 2018, compared to $0.4 billion notional of net long TBAs as of March 31, 2018, which are accounted for as derivative instruments in accordance with GAAP.

As of June 30, 2018, the company was a party to interest rate swaps and swaptions with a notional amount of $26.8 billion. Of this amount, $26.1 billion notional in swaps were utilized to economically hedge interest rate exposure (or duration), and $0.7 billion net notional in swaptions were utilized as macroeconomic hedges.

(1) Excludes residential mortgage loans in securitization trusts for which the company is the named servicing administrator.

The following tables summarize the company’s investment portfolio, excluding the net TBA positions, as of June 30, 2018 and March 31, 2018:

“In the second quarter, we increased our capital allocation to MSR and non-Agency securities as we took advantage of attractive opportunities in the market,” stated Bill Roth, Two Harbors’ Chief Investment Officer. “Moreover, higher rates and a flatter yield curve during the quarter had little impact on our performance, consistent with our expectations given our low risk positioning.”

Financing Summary The company reported a debt-to-equity ratio, defined as total borrowings under repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes to fund RMBS, Agency Derivatives and MSR divided by total equity, of 5.3:1.0 as of June 30, 2018. The company reported an economic debt-to-equity ratio, defined as total borrowings under repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes to fund RMBS, Agency Derivatives and MSR, plus the implied debt on net TBA positions, divided by total equity, of 6.2:1.0 as of June 30, 2018.

As of June 30, 2018, the company had outstanding $16.9 billion of repurchase agreements funding RMBS and Agency Derivatives with 25 different counterparties. Excluding the effect of the company’s interest rate swaps, the repurchase agreements funding RMBS and Agency Derivatives had a weighted average borrowing rate of 2.30% as of June 30, 2018.

The company’s wholly owned subsidiary, TH Insurance Holdings Company LLC (TH Insurance), is a member of the FHLB. As a member of the FHLB, TH Insurance has access to a variety of products and services offered by the FHLB, including secured advances. As of June 30, 2018, TH Insurance had $865.0 million in outstanding secured advances funding RMBS, with a weighted average borrowing rate of 2.39%.

As of June 30, 2018, the company had outstanding $170.0 million of short and long-term borrowings secured by MSR collateral under revolving credit facilities with a weighted average borrowing rate of 5.33% and remaining maturities of 4.4 years and an additional $250.0 million of available capacity for borrowings. Additionally, the company had outstanding $300.0 million of long-term repurchase agreements for MSR, with a weighted average borrowing rate of 4.26%, with additional available capacity of $100.0 million.

As of June 30, 2018, the company’s aggregate repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes funding RMBS, Agency Derivatives and MSR had a weighted average of 5.3 months to maturity.

The following table summarizes the company’s borrowings by collateral type under repurchase agreements, FHLB advances, revolving credit facilities and convertible senior notes outstanding as of June 30, 2018 and March 31, 2018, and the related cost of funds for the three months ended June 30, 2018 and March 31, 2018:

This article has been truncated. You can see the rest of this article by visiting http://www.businesswire.com/news/home/20180807005896/en.