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Two Harbors Investment Corp. Reports Third Quarter 2019 Financial Results

November 5, 2019

NEW YORK--(BUSINESS WIRE)--Nov 5, 2019--

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 September 30, 2019.

Quarterly Summary

“We are very proud of our strong economic return during the third quarter,” stated Thomas Siering, Two Harbors’ President and Chief Executive Officer. “Preserving book value has always been our primary goal. This quarter demonstrates how our portfolio can deliver strong total returns even when interest rates are volatile and mortgage spreads widen. This is largely driven by our strategy of pairing Agency RMBS with MSR.”

(1) Economic return is defined as the return on book value. Return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by the book value as of the beginning of the period.
(2) Core Earnings, including dollar roll income, is a non-GAAP measure. Please see page 11 for a definition of Core Earnings, including dollar roll income, 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 and third quarters of 2019:

Two Harbors Investment Corp. Operating Performance (unaudited)

(dollars in thousands, except per common share data)

 

 

 

 

Three Months Ended
September 30, 2019

 

Three Months Ended
June 30, 2019

Earnings attributable to common stockholders

 

Earnings

 

Per
weighted
average
basic
common
share

 

Annualized
return on
average
common
equity

 

Earnings

 

Per
weighted
average
basic
common
share

 

Annualized
return on
average
common
equity

Comprehensive Income

 

$

257,585

 

 

$

0.94

 

 

25.7

%

 

$

201,042

 

 

$

0.74

 

 

21.0

%

GAAP Net Income (Loss)

 

$

286,749

 

 

$

1.05

 

 

28.6

%

 

$

(109,507

)

 

$

(0.40

)

 

(11.4

)%

Core Earnings, including dollar roll income (1)

 

$

64,979

 

 

$

0.24

 

 

6.5

%

 

$

106,034

 

 

$

0.39

 

 

11.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Metrics

 

 

 

 

 

 

 

 

 

 

 

 

Dividend per common share

 

$

0.40

 

 

 

 

 

 

$

0.40

 

 

 

 

 

Annualized dividend yield (2)

 

12.2

%

 

 

 

 

 

12.6

%

 

 

 

 

Book value per common share at period end

 

$

14.72

 

 

 

 

 

 

$

14.17

 

 

 

 

 

Return on book value (3)

 

6.7

%

 

 

 

 

 

5.4

%

 

 

 

 

Other operating expenses, excluding non-cash LTIP amortization (4)

 

$

11,364

 

 

 

 

 

 

$

11,617

 

 

 

 

 

Other operating expenses, excluding non-cash LTIP amortization, as a percentage of average equity (4)

 

0.9

%

 

 

 

 

 

1.0

%

 

 

 

 

(1) Please see page 11 for a definition of Core Earnings, including dollar roll income, and a reconciliation of GAAP to non-GAAP financial information.
(2) Dividend yield is calculated based on annualizing the dividends declared in the given period, divided by the closing share price as of the end of the period.
(3) Return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus dividends declared in the period, divided by the book value as of the beginning of the period.
(4) Excludes non-cash equity compensation expense of $2.0 million for the third quarter 2019 and $2.4 million for the second quarter 2019.

“Our book value outperformance in the quarter can be primarily attributed to our portfolio positioning and composition. Our long position in higher coupons significantly outperformed,” stated Matt Koeppen, Two Harbors’ Co-Deputy Chief Investment Officer. “In August, as current coupon mortgages widened, we benefitted through our holdings in MSR, which acts as a short position in the basis.”

“This quarter highlighted that our strategy of hedging Agency RMBS with MSR works: we can provide strong economic returns with lower exposure to mortgage spreads,” stated Bill Greenberg, Two Harbors’ Co-Deputy Chief Investment Officer. “Though our portfolio strategy resulted in lower Core Earnings, it drove book value higher and improved the expected economic return profile of our business. Currently, we view the best investment opportunities to be in pairing Agency RMBS with MSR, and we expect to continue to grow capital allocated to our Rates strategy.”

Portfolio Summary
The company’s portfolio is comprised of a Rates strategy and a Credit strategy. The Rates strategy consisted of $26.5 billion of Agency RMBS, Agency Derivatives and MSR as well as their associated notional hedges as of September 30, 2019. Additionally, the company held $9.9 billion notional of net long to-be-announced securities (TBAs) as part of the Rates strategy. The Credit strategy consisted of $3.5 billion of non-Agency securities, as well as their associated notional hedges as of September 30, 2019.

The following tables summarize the company’s investment portfolio as of September 30, 2019 and June 30, 2019:

Two Harbors Investment Corp. Portfolio

(dollars in thousands)

 

Portfolio Composition

 

As of September 30, 2019

 

As of June 30, 2019

 

 

(unaudited)

 

(unaudited)

Rates Strategy

 

 

 

 

 

 

 

 

Agency

 

 

 

 

 

 

 

 

Fixed Rate

 

$

24,750,521

 

 

82.4

%

 

$

26,291,937

 

 

82.0

%

Other Agency (1)

 

91,554

 

 

0.3

%

 

92,712

 

 

0.3

%

Total Agency

 

24,842,075

 

 

82.7

%

 

26,384,649

 

 

82.3

%

Mortgage servicing rights

 

1,651,556

 

 

5.5

%

 

1,800,826

 

 

5.6

%

Credit Strategy

 

 

 

 

 

 

 

 

Non-Agency

 

 

 

 

 

 

 

 

Senior

 

2,990,274

 

 

10.0

%

 

3,211,099

 

 

10.0

%

Mezzanine

 

483,009

 

 

1.6

%

 

575,246

 

 

1.8

%

Other

 

79,092

 

 

0.3

%

 

91,291

 

 

0.3

%

Total Non-Agency

 

3,552,375

 

 

11.9

%

 

3,877,636

 

 

12.1

%

Aggregate Portfolio

 

30,046,006

 

 

 

 

32,063,111

 

 

 

Net TBA position

 

9,863,000

 

 

 

 

9,422,000

 

 

 

Total Portfolio

 

$

39,909,006

 

 

 

 

$

41,485,111

 

 

 

Portfolio Metrics

 

Three Months Ended
September 30, 2019

 

Three Months Ended
June 30, 2019

 

 

(unaudited)

 

(unaudited)

Annualized portfolio yield during the quarter

 

3.67

%

 

3.93

%

Rates Strategy

 

 

 

 

Agency RMBS, Agency Derivatives and mortgage servicing rights

 

3.47

%

 

3.67

%

Credit Strategy

 

 

 

 

Non-Agency securities

 

5.26

%

 

6.00

%

 

 

 

 

 

Annualized cost of funds on average borrowing balance during the quarter (2)

 

2.51

%

 

2.55

%

Annualized interest rate spread for aggregate portfolio during the quarter

 

1.16

%

 

1.38

%

(1) Other Agency includes hybrid ARMs and Agency derivatives.
(2) Cost of funds includes interest spread income/expense associated with the portfolio’s interest rate swaps and caps.

Portfolio Metrics Specific to RMBS and Agency Derivatives

 

As of September 30, 2019

 

As of June 30, 2019

 

 

(unaudited)

 

(unaudited)

Weighted average cost basis of principal and interest securities

 

 

 

 

Agency (3)

 

$

104.23

 

 

$

104.31

 

Non-Agency (4)

 

$

63.63

 

 

$

61.70

 

Weighted average three month CPR

 

 

 

 

Agency

 

13.4

%

 

10.1

%

Non-Agency

 

5.9

%

 

5.3

%

Fixed-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio

 

88.2

%

 

87.8

%

Adjustable-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio

 

11.8

%

 

12.2

%

(3) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes.
(4) Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting purposes, the average purchase price for total non-Agency securities excluding the company’s non-Agency interest-only portfolio, would be $59.41 at September 30, 2019 and $58.50 at June 30, 2019.

Portfolio Metrics Specific to MSR (1)

 

As of September 30, 2019

 

As of June 30, 2019

(dollars in thousands)

 

(unaudited)

 

(unaudited)

 

 

 

 

 

Unpaid principal balance

 

$

165,332,533

 

 

$

169,643,681

 

Fair market value

 

$

1,651,556

 

 

$

1,800,826

 

Gross weighted average coupon

 

 

4.1

%

 

4.1

%

Weighted average original FICO score (2)

 

 

752

 

 

 

751

Weighted average original LTV

 

 

75

%

 

75

%

60+ day delinquencies

 

 

0.3

%

 

0.3

%

Net servicing spread

 

 

26.5 basis points

 

 

 

26.3 basis points

 

 

 

 

 

 

 

 

Three Months Ended
September 30, 2019

 

Three Months Ended
June 30, 2019

 

 

(unaudited)

 

(unaudited)

Fair value losses

 

$

(234,514

)

 

$

(252,432

)

Servicing income

 

$

126,025

 

 

$

130,949

 

Servicing expenses

 

$

17,962

 

 

$

17,629

 

Servicing reserve (income) expense

 

$

(300

)

 

$

(910

)

Note: 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.
(1) Metrics exclude residential mortgage loans in securitization trusts for which the company is the named servicing administrator.
(2) FICO represents a mortgage industry accepted credit score of a borrower.

Other Investments and Risk Management Metrics

 

As of September 30, 2019

 

As of June 30, 2019

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Net long TBA notional amount (3)

 

$

9,863,000

 

 

$

9,422,000

 

Interest rate swaps and caps notional, utilized to economically hedge interest rate exposure (or duration)

 

$

41,833,495

 

 

$

40,470,277

 

Swaptions net notional, utilized as macroeconomic hedges

 

1,750,000

 

 

3,875,000

 

Total interest rate swaps, caps and swaptions notional

 

$

43,583,495

 

 

$

44,345,277

 

(3) Accounted for as derivative instruments in accordance with GAAP.

Financing Summary
The following tables summarize the company’s financing metrics and outstanding repurchase agreements, FHLB advances, revolving credit facilities, term notes and convertible senior notes as of September 30, 2019 and June 30, 2019:

September 30, 2019

 

Balance

 

Weighted
Average
Borrowing Rate

 

Weighted
Average Months
to Maturity

 

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements collateralized by RMBS

 

$

25,304,275

 

 

2.46

%

 

2.54

 

 

 

Repurchase agreements collateralized by MSR

 

262,861

 

 

3.77

%

 

14.07

 

 

 

Total repurchase agreements

 

25,567,136

 

 

2.47

%

 

2.65

 

 

25

 

FHLB advances collateralized by RMBS (4)

 

50,000

 

 

2.99

%

 

180.66

 

 

1

 

Revolving credit facilities collateralized by MSR

 

300,000

 

 

4.52

%

 

17.39

 

 

 

Term notes payable collateralized by MSR

 

394,235

 

 

4.82

%

 

56.88

 

 

n/a

 

Unsecured convertible senior notes

 

284,635

 

 

6.25

%

 

27.53

 

 

n/a

 

Total borrowings

 

$

26,596,006

 

 

 

 

 

 

 

(4) 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.

June 30, 2019

 

Balance

 

Weighted
Average
Borrowing Rate

 

Weighted
Average Months
to Maturity

 

Number of
Distinct
Counterparties

(dollars in thousands, unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements collateralized by RMBS

 

$

27,868,044

 

 

2.70

%

 

2.76

 

 

 

Repurchase agreements collateralized by MSR

 

300,000

 

 

4.15

%

 

17.10

 

 

 

Total repurchase agreements

 

28,168,044

 

 

2.70

%

 

2.90

 

 

26

 

FHLB advances collateralized by RMBS (1)

 

50,000

 

 

3.20

%

 

183.68

 

 

1

 

Revolving credit facilities collateralized by MSR

 

 

 

%

 

 

 

 

Term notes payable collateralized by MSR

 

394,061

 

 

5.20

%

 

59.90

 

 

n/a

 

Unsecured convertible senior notes

 

284,331

 

 

6.25

%

 

30.53

 

 

n/a

 

Total borrowings

 

$

28,896,436

 

 

 

 

 

 

 

(1) 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.

Borrowings by Collateral Type

 

As of September 30, 2019

 

As of June 30, 2019

(dollars in thousands)

 

(unaudited)

 

(unaudited)

Collateral type:

 

 

 

 

Agency RMBS and Agency Derivatives

 

$

24,133,606

 

 

$

25,854,494

 

Mortgage servicing rights

 

957,096

 

 

694,061

 

Non-Agency securities

 

1,220,669

 

 

2,063,550

 

Other (2)

 

284,635

 

 

284,331

 

Total/Annualized cost of funds on average borrowings during the quarter

 

$

26,596,006

 

 

$

28,896,436

 

 

 

 

 

 

Debt-to-equity ratio at period-end (3)

 

5.3

:1.0

 

5.9

:1.0

Economic debt-to-equity ratio at period-end (4)

 

7.2

:1.0

 

7.8

:1.0

 

 

 

 

 

Cost of Funds Metrics

 

Three Months Ended
September 30, 2019

 

Three Months Ended
June 30, 2019

 

 

(unaudited)

 

(unaudited)

Annualized cost of funds on average borrowings during the quarter:

 

2.8

%

 

2.9

%

Agency RMBS and Agency Derivatives

 

2.6

%

 

2.7

%

Mortgage servicing rights (5)

 

5.2

%

 

5.5

%

Non-Agency securities

 

3.5

%

 

3.7

%

Other (2)(5)

 

6.7

%

 

6.6

%

(1) Includes unsecured convertible senior notes.
(2) Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, divided by total equity.
(3) Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA positions, divided by total equity.
(4) Includes amortization of debt issuance costs.

Conference Call
Two Harbors Investment Corp. will host a conference call on November 6, 2019 at 9:00 a.m. EST to discuss third quarter 2019 financial results and related information. To participate in the teleconference, please call toll-free (800) 289-0438, conference code 4439802, approximately 10 minutes prior to the above start time. You may also listen to the teleconference live via the Internet on the company’s website at www.twoharborsinvestment.com in the Investor Relations section under the Events and Presentations link. For those unable to attend, a telephone playback will be available beginning at 12:00 p.m. EST on November 6, 2019, through 12:00 a.m. EST on November 20, 2019. The playback can be accessed by calling (888) 203-1112 , conference code 4439802. The call will also be archived on the company’s website in the Investor Relations section under the Events and Presentations link.

Two Harbors Investment Corp.
Two Harbors Investment Corp., a Maryland corporation, is a real estate investment trust that invests in residential mortgage-backed securities, mortgage servicing rights and other financial assets. Two Harbors is headquartered in New York, New York, and is externally managed and advised by PRCM Advisers LLC, a wholly owned subsidiary of Pine River Capital Management L.P. Additional information is available at www.twoharborsinvestment.com.

Forward-Looking Statements
This presentation includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ from expectations, estimates and projections and, consequently, readers should not rely on these forward-looking statements as predictions of future events. Words such as “expect,” “target,” “assume,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,” “could,” “should,” “believe,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify such forward-looking statements. These forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2018, and any subsequent Quarterly Reports on Form 10-Q, under the caption “Risk Factors.” Factors that could cause actual results to differ include, but are not limited to: the state of credit markets and general economic conditions; changes in interest rates and the market value of our assets; changes in prepayment rates of mortgages underlying our target assets; the rates of default or decreased recovery on the mortgages underlying our target assets; the occurrence, extent and timing of credit losses within our portfolio; the concentration of credit risks we are exposed to; declines in home prices; our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio; the availability and cost of our target assets; the availability and cost of financing; changes in the competitive landscape within our industry; our ability to effectively execute and to realize the benefits of strategic transactions and initiatives we have pursued or may in the future pursue; our ability to manage various operational risks and costs associated with our business; interruptions in or impairments to our communications and information technology systems; our ability to acquire MSR and successfully operate our seller-servicer subsidiary and oversee our subservicers; the impact of any deficiencies in the servicing or foreclosure practices of third parties and related delays in the foreclosure process; our exposure to legal and regulatory claims; legislative and regulatory actions affecting our business; the impact of new or modified government mortgage refinance or principal reduction programs; our ability to maintain our REIT qualification; and limitations imposed on our business due to our REIT status and our exempt status under the Investment Company Act of 1940.

Readers are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Two Harbors does not undertake or accept any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any change in its expectations or any change in events, conditions or circumstances on which any such statement is based. Additional information concerning these and other risk factors is contained in Two Harbors’ most recent filings with the Securities and Exchange Commission (SEC). All subsequent written and oral forward-looking statements concerning Two Harbors or matters attributable to Two Harbors or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above.

Non-GAAP Financial Measures
In addition to disclosing financial results calculated in accordance with United States generally accepted accounting principles (GAAP), this press release and the accompanying investor presentation present non-GAAP financial measures, such as Core Earnings, including dollar roll income and Core Earnings per basic common share, including dollar roll income, that exclude certain items. Two Harbors’ management believes that these non-GAAP measures enable it to perform meaningful comparisons of past, present and future results of the company’s core business operations, and uses these measures to gain a comparative understanding of the company’s operating performance and business trends. The non-GAAP financial measures presented by the company represent supplemental information to assist investors in analyzing the results of its operations. However, because these measures are not calculated in accordance with GAAP, they should not be considered a substitute for, or superior to, the financial measures calculated in accordance with GAAP. The company’s GAAP financial results and the reconciliations from these results should be carefully evaluated. See the GAAP to non-GAAP reconciliation table on page 12 of this release.

Additional Information
Stockholders of Two Harbors and other interested persons may find additional information regarding the company at the SEC’s Internet site at www.sec.gov or by directing requests to: Two Harbors Investment Corp., Attn: Investor Relations, 575 Lexington Avenue, Suite 2930, New York, NY 10022, telephone (612) 629-2500.

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

 

 

September 30,
2019

 

December 31,
2018

 

 

(unaudited)

 

 

ASSETS

 

 

 

 

Available-for-sale securities, at fair value

 

$

28,318,558

 

 

$

25,552,604

 

Mortgage servicing rights, at fair value

 

1,651,556

 

 

1,993,440

 

Cash and cash equivalents

 

740,698

 

 

409,758

 

Restricted cash

 

509,689

 

 

688,006

 

Accrued interest receivable

 

87,321

 

 

86,589

 

Due from counterparties

 

314,871

 

 

154,626

 

Derivative assets, at fair value

 

230,620

 

 

319,981

 

Reverse repurchase agreements

 

180,575

 

 

761,815

 

Other assets

 

130,339

 

 

165,660

 

Total Assets

 

$

32,164,227

 

 

$

30,132,479

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

Liabilities

 

 

 

 

Repurchase agreements

 

$

25,567,136

 

 

$

23,133,476

 

Federal Home Loan Bank advances

 

50,000

 

 

865,024

 

Revolving credit facilities

 

300,000

 

 

310,000

 

Term notes payable

 

394,235

 

 

 

Convertible senior notes

 

284,635

 

 

283,856

 

Derivative liabilities, at fair value

 

17,201

 

 

820,590

 

Due to counterparties

 

231,021

 

 

130,210

 

Dividends payable

 

128,109

 

 

135,551

 

Accrued interest payable

 

122,793

 

 

160,005

 

Other liabilities

 

49,517

 

 

39,278

 

Total Liabilities

 

27,144,647

 

 

25,877,990

 

Stockholders’ Equity

 

 

 

 

Preferred stock, par value $0.01 per share; 50,000,000 shares authorized and 40,050,000 and 40,050,000 shares issued and outstanding, respectively ($1,001,250 and $1,001,250 liquidation preference, respectively)

 

977,501

 

 

977,501

 

Common stock, par value $0.01 per share; 450,000,000 shares authorized and 272,895,402 and 248,085,721 shares issued and outstanding, respectively

 

2,729

 

 

2,481

 

Additional paid-in capital

 

5,151,554

 

 

4,809,616

 

Accumulated other comprehensive income

 

748,354

 

 

110,817

 

Cumulative earnings

 

2,521,137

 

 

2,332,371

 

Cumulative distributions to stockholders

 

(4,381,695

)

 

(3,978,297

)

Total Stockholders’ Equity

 

5,019,580

 

 

4,254,489

 

Total Liabilities and Stockholders’ Equity

 

$

32,164,227

 

 

$

30,132,479

 

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

Certain prior period amounts have been reclassified to conform to the current period presentation

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2019

 

2018

 

2019

 

2018

 

 

(unaudited)

 

(unaudited)

Interest income:

 

 

 

 

 

 

Available-for-sale securities

 

$

242,023

 

 

$

230,607

 

 

$

731,716

 

 

$

604,790

 

Other

 

7,717

 

 

6,091

 

 

24,536

 

 

13,287

 

Total interest income

 

249,740

 

 

236,698

 

 

756,252

 

 

618,077

 

Interest expense:

 

 

 

 

 

 

 

 

Repurchase agreements

 

176,450

 

 

138,343

 

 

501,361

 

 

322,735

 

Federal Home Loan Bank advances

 

391

 

 

5,301

 

 

10,406

 

 

14,655

 

Revolving credit facilities

 

3,964

 

 

3,973

 

 

15,316

 

 

5,776

 

Term notes payable

 

5,475

 

 

 

 

5,706

 

 

 

Convertible senior notes

 

4,797

 

 

4,779

 

 

14,256

 

 

14,204

 

Total interest expense

 

191,077

 

 

152,396

 

 

547,045

 

 

357,370

 

Net interest income

 

58,663

 

 

84,302

 

 

209,207

 

 

260,707

 

Other-than-temporary impairment losses

 

(5,950

)

 

(95

)

 

(11,004

)

 

(363

)

Other income:

 

 

 

 

 

 

 

 

Gain (loss) on investment securities

 

248,828

 

 

(42,996

)

 

251,977

 

 

(95,549

)

Servicing income

 

126,025

 

 

89,618

 

 

373,922

 

 

238,473

 

(Loss) gain on servicing asset

 

(234,514

)

 

20,591

 

 

(675,920

)

 

102,251

 

Gain (loss) on interest rate swap, cap and swaption agreements

 

70,620

 

 

75,857

 

 

(101,414

)

 

255,535

 

Gain (loss) on other derivative instruments

 

85,856

 

 

(31,463

)

 

270,798

 

 

(15,735

)

Other income

 

495

 

 

907

 

 

277

 

 

2,695

 

Total other income

 

297,310

 

 

112,514

 

 

119,640

 

 

487,670

 

Expenses:

 

 

 

 

 

 

 

 

Management fees

 

16,839

 

 

(5,041

)

 

42,556

 

 

18,120

 

Servicing expenses

 

17,696

 

 

16,433

 

 

54,354

 

 

42,526

 

Other operating expenses

 

13,344

 

 

17,033

 

 

42,913

 

 

47,040

 

Acquisition transaction costs

 

 

 

86,703

 

 

 

 

86,703

 

Restructuring charges

 

 

 

8,238

 

 

 

 

8,238

 

Total expenses

 

47,879

 

 

123,366

 

 

139,823

 

 

202,627

 

Income before income taxes

 

302,144

 

 

73,355

 

 

178,020

 

 

545,387

 

(Benefit from) provision for income taxes

 

(3,556

)

 

37,409

 

 

(11,188

)

 

35,142

 

Net income

 

305,700

 

 

35,946

 

 

189,208

 

 

510,245

 

Dividends on preferred stock

 

18,951

 

 

18,951

 

 

56,851

 

 

46,445

 

Net income attributable to common stockholders

 

$

286,749

 

 

$

16,995

 

 

$

132,357

 

 

$

463,800

 

Basic earnings per weighted average common share

 

$

1.05

 

 

$

0.08

 

 

$

0.50

 

 

$

2.42

 

Diluted earnings per weighted average common share

 

$

1.00

 

 

$

0.08

 

 

$

0.50

 

 

$

2.28

 

Dividends declared per common share

 

$

0.40

 

 

$

0.47

 

 

$

1.27

 

 

$

1.41

 

Weighted average number of shares of common stock:

 

 

 

 

 

 

 

 

Basic

 

272,897,575

 

 

224,399,436

 

 

266,114,772

 

 

191,846,212

 

Diluted

 

291,053,718

 

 

224,399,436

 

 

266,114,772

 

 

209,607,146

 

 

 

 

 

 

 

 

 

 

TWO HARBORS INVESTMENT CORP.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS), CONTINUED

(dollars in thousands)

Certain prior period amounts have been reclassified to conform to the current period presentation

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2019

 

2018

 

2019

 

2018

 

 

(unaudited)

 

(unaudited)

Comprehensive income (loss):

 

 

 

 

 

 

 

 

Net income

 

$

305,700

 

 

$

35,946

 

 

$

189,208

 

 

$

510,245

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

Unrealized (loss) gain on available-for-sale securities

 

(29,164

)

 

(119,796

)

 

637,537

 

 

(499,460

)

Other comprehensive (loss) income

 

(29,164

)

 

(119,796

)

 

637,537

 

 

(499,460

)

Comprehensive income (loss)

 

276,536

 

 

(83,850

)

 

826,745

 

 

10,785

 

Dividends on preferred stock

 

18,951

 

 

18,951

 

 

56,851

 

 

46,445

 

Comprehensive income (loss) attributable to common stockholders

 

$

257,585

 

 

$

(102,801

)

 

$

769,894

 

 

$

(35,660

)

TWO HARBORS INVESTMENT CORP.

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL INFORMATION

(dollars in thousands, except share data)

Certain prior period amounts have been reclassified to conform to the current period presentation

 

 

Three Months Ended
September 30,

 

Three Months
Ended June 30,

 

 

2019

 

2019

 

 

(unaudited)

 

(unaudited)

Reconciliation of Comprehensive income to Core Earnings:

 

 

 

 

Comprehensive income attributable to common stockholders

 

$

257,585

 

 

$

201,042

 

Adjustment for other comprehensive loss (income) attributable to common stockholders:

 

 

 

 

Unrealized loss (gain) on available-for-sale securities attributable to common stockholders

 

29,164

 

 

(310,549

)

Net income (loss) attributable to common stockholders

 

$

286,749

 

 

$

(109,507

)

 

 

 

 

 

Adjustments for non-Core Earnings:

 

 

 

 

Other-than-temporary impairments and loss recovery adjustments

 

7,275

 

 

12,895

 

Realized gains on securities

 

(250,267

)

 

(23,589

)

Unrealized losses on securities

 

1,439

 

 

1,148

 

Realized and unrealized losses on mortgage servicing rights

 

161,214

 

 

174,212

 

Realized gains on termination or expiration of swaps, caps and swaptions

 

(75,409

)

 

(55,513

)

Unrealized losses on interest rate swaps, caps and swaptions

 

23,940

 

 

167,174

 

Gains on other derivative instruments

 

(85,916

)

 

(63,953

)

Other (income) loss

 

(114

)

 

899

 

Change in servicing reserves

 

(300

)

 

(910

)

Non-cash equity compensation expense

 

1,980

 

 

2,396

 

Net (benefit from) provision for income taxes on non-Core Earnings

 

(5,612

)

 

782

 

Core Earnings attributable to common stockholders, including dollar roll income (1)(2)

 

$

64,979

 

 

$

106,034

 

 

 

 

 

 

Weighted average basic common shares

 

272,897,575

 

 

272,863,153

 

Core Earnings, including dollar roll income, attributable to common stockholders per weighted average basic common share

 

$

0.24

 

 

$

0.39

 

(1) Core Earnings, including dollar roll income, is a non-U.S. GAAP measure that we define as comprehensive income (loss) attributable to common stockholders, excluding “realized and unrealized gains and losses” (impairment losses, realized and unrealized gains and losses on the aggregate portfolio, reserve expense for representation and warranty obligations on MSR, non-cash compensation expense related to restricted common stock and restructuring charges) and transaction costs associated with the acquisition of CYS. As defined, Core Earnings includes interest income or expense and premium income or loss on derivative instruments and servicing income, net of estimated amortization on MSR. “Dollar roll income” is the economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. We believe the presentation of Core Earnings, including dollar roll income, provides investors greater transparency into our period-over-period financial performance and facilitates comparisons to peer REITs.
(2) Beginning with the June 30, 2019 reporting period, the company refined the MSR amortization method utilized in the calculation of Core Earnings, including dollar roll income. The new method includes an adjustment for any gain or loss on the capital used to purchase the MSR and allows Core Earnings to better reflect how the carry earned on MSR varies as a function of prepayment rates.

TWO HARBORS INVESTMENT CORP.

SUMMARY OF QUARTERLY CORE EARNINGS

(dollars in millions, except per share data)

Certain prior period amounts have been reclassified to conform to the current period presentation

 

 

 

Three Months Ended

 

 

September 30,
2019

 

June 30,
2019

 

March 31,
2019

 

December 31,
2018

 

September 30,
2018

 

 

(unaudited)

Net Interest Income:

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

251.1

 

 

$

269.1

 

 

$

245.5

 

 

$

252.0

 

 

$

236.7

 

Interest expense

 

191.1

 

 

192.4

 

 

163.5

 

 

162.3

 

 

152.4

 

Net interest income

 

60.0

 

 

76.7

 

 

82.0

 

 

89.7

 

 

84.3

 

Other income:

 

 

 

 

 

 

 

 

 

 

Servicing income, net of amortization (1)

 

52.7

 

 

52.7

 

 

52.5

 

 

46.9

 

 

37.1

 

Interest spread on interest rate swaps and caps

 

19.1

 

 

22.9

 

 

23.7

 

 

15.3

 

 

16.2

 

Gain on other derivative instruments

 

 

 

16.7

 

 

28.7

 

 

29.8

 

 

30.2

 

Other income

 

0.4

 

 

0.5

 

 

0.5

 

 

0.6

 

 

0.6

 

Total other income

 

72.2

 

 

92.8

 

 

105.4

 

 

92.6

 

 

84.1

 

Expenses

 

46.2

 

 

42.9

 

 

45.2

 

 

42.3

 

 

42.5

 

Core Earnings, including dollar roll income before income taxes

 

86.0

 

 

126.6

 

 

142.2

 

 

140.0

 

 

125.9

 

Income tax expense (benefit)

 

2.0

 

 

1.6

 

 

0.6

 

 

0.3

 

 

(0.1

)

Core Earnings, including dollar roll income

 

84.0

 

 

125.0

 

 

141.6

 

 

139.7

 

 

126.0

 

Dividends on preferred stock

 

19.0

 

 

19.0

 

 

18.9

 

 

19.0

 

 

19.0

 

Core Earnings attributable to common stockholders, including dollar roll income (2)

 

$

65.0

 

 

$

106.0

 

 

$

122.7

 

 

$

120.7

 

 

$

107.0

 

Weighted average basic Core EPS, including dollar roll income

 

$

0.24

 

 

$

0.39

 

 

$

0.49

 

 

$

0.49

 

 

$

0.48

 

 

 

 

 

 

 

 

 

 

 

 

Core earnings return on average common equity, including dollar roll income

 

6.5

%

 

11.1

%

 

14.3

%

 

13.8

%

 

12.4

%

(1) Amortization refers to the portion of change in fair value of MSR primarily attributed to the realization of expected cash flows (runoff) of the portfolio. This amortization has been deducted from Core Earnings, including dollar roll income. Amortization of MSR is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value. As discussed on page 11, the company has refined the MSR amortization method utilized in the calculation of Core Earnings beginning with the period ended June 30, 2019. MSR amortization amounts for periods ending prior to June 30, 2019 have not be adjusted.
(2) Please see page 11 for a definition of Core Earnings, including dollar roll income, and a reconciliation of GAAP to non-GAAP financial information.

 

View source version on businesswire.com:https://www.businesswire.com/news/home/20191105006155/en/

CONTACT: Margaret Field, Investor Relations, Two Harbors Investment Corp., (212) 364-3663 or

margaret.field@twoharborsinvestment.com

KEYWORD: NEW YORK UNITED STATES NORTH AMERICA

INDUSTRY KEYWORD: CONSTRUCTION & PROPERTY PROFESSIONAL SERVICES REIT FINANCE

SOURCE: Two Harbors Investment Corp.

Copyright Business Wire 2019.

PUB: 11/05/2019 04:15 PM/DISC: 11/05/2019 04:15 PM

http://www.businesswire.com/news/home/20191105006155/en