Two Harbors Investment Corp. (NYSE: TWO), an Agency RMBS + MSR real estate investment trust (REIT), today announced its financial results for the quarter ended June 30, 2023.
Quarterly Summary
- Reported book value of $16.39 per common share, and declared a second quarter common stock dividend of $0.45 per share, representing a 2.2% quarterly economic return on book value.(1)
- Generated Comprehensive Income of $31.5 million, or $0.31 per weighted average basic common share.
- Generated Income Excluding Market-Driven Value Changes (IXM) of $0.60 per weighted average basic common share.(2)
- Reported Earnings Available for Distribution (EAD) of $(3.7) million, or $(0.04) per weighted average basic common share.(3)
- Repurchased 593,453 shares of common stock at an average price of $11.89 per share.
- Repurchased 513,818 shares of preferred stock at an average price of $19.39 per share.(4)
- Settled $14.8 billion unpaid principal balance (UPB) of MSR through flow-sale acquisitions and three bulk purchases.
“In the second quarter, many of the unknown variables in the market were resolved. Congress passed a resolution on the debt ceiling, inflation expectations and the Fed path of rate hikes appeared well contained, and the market readily absorbed the supply of RMBS being auctioned by the FDIC,” stated Bill Greenberg, Two Harbors’ President and CEO. “This led to lower volatility, which supported positive performance in our portfolio, while spreads remained at historically attractive levels. Further, with mortgage rates still around 7%, prepayment speeds should remain slow which is very accretive to our MSR asset. We believe that this is a terrific environment for investing in our Agency and MSR strategy.”
“After an initial bout of spread widening in the beginning of the quarter, volatility subsided and spreads tightened across the coupon stack leading to positive returns for RMBS. Low realized volatility in June improved hedge-adjusted returns for RMBS. We opportunistically added lower coupon RMBS to our portfolio mix early in the quarter which performed well as the fear of supply from FDIC sales diminished,” stated Nick Letica, Two Harbors’ Chief Investment Officer. “MSR packages remain well bid with notable strong demand, even with historically high supply this year. We settled $14.7 billion UPB of MSR in the quarter. Our investments in MSR also positively contributed to our performance as prepayment speeds remained slow.”
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(1) | Economic 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 book value as of the beginning of the period. | |
(2) | Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure. Please see page 11 for a definition of IXM and a reconciliation of GAAP to non-GAAP financial information. | |
(3) | Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see page 12 for a definition of EAD and a reconciliation of GAAP to non-GAAP financial information. | |
(4) | Includes 225,886 Series A, 215,072 Series B and 72,860 Series C preferred shares. |
Operating Performance
The following table summarizes the company’s GAAP and non-GAAP earnings measurements and key metrics for the second quarter of 2023 and first quarter of 2023:
Two Harbors Investment Corp. Operating Performance (unaudited) | |||||||||||||||||||||
(dollars in thousands, except per common share data) | |||||||||||||||||||||
Three Months Ended June 30, 2023 | Three Months Ended March 31, 2023 | ||||||||||||||||||||
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 (Loss) | $ | 31,478 | $ | 0.31 | 8.1 | % | $ | (63,242 | ) | $ | (0.69 | ) | (15.5 | )% | |||||||
GAAP Net Income (Loss) | $ | 187,784 | $ | 1.94 | 48.3 | % | $ | (189,173 | ) | $ | (2.05 | ) | (46.3 | )% | |||||||
Income Excluding Market-Driven Value Changes(1) | $ | 57,501 | $ | 0.60 | 14.8 | % | $ | 54,393 | $ | 0.59 | 13.3 | % | |||||||||
Earnings Available for Distribution(2) | $ | (3,716 | ) | $ | (0.04 | ) | (1.0 | )% | $ | 8,273 | $ | 0.09 | 2.0 | % | |||||||
Operating Metrics | |||||||||||||||||||||
Dividend per common share | $ | 0.45 | $ | 0.60 | |||||||||||||||||
Annualized dividend yield(3) | 13.0 | % | 16.3 | % | |||||||||||||||||
Book value per common share at period end | $ | 16.39 | $ | 16.48 | |||||||||||||||||
Economic return on book value(4) | 2.2 | % | (3.6 | )% | |||||||||||||||||
Operating expenses, excluding non-cash LTIP amortization and nonrecurring expenses(5) | $ | 11,885 | $ | 13,097 | |||||||||||||||||
Operating expenses, excluding non-cash LTIP amortization and nonrecurring expenses, as a percentage of average equity(5) | 2.2 | % | 2.3 | % | |||||||||||||||||
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(1) | Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure. Please see page 11 for a definition of IXM and a reconciliation of GAAP to non-GAAP financial information. | |
(2) | Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see page 12 for a definition of EAD and a reconciliation of GAAP to non-GAAP financial information. | |
(3) | 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. | |
(4) | Economic return on book value is defined as the (decrease) increase 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. | |
(5) | Excludes non-cash equity compensation expense of $1.7 million for the second quarter of 2023 and $6.1 million for the first quarter of 2023 and nonrecurring expenses of $7.1 million for the second quarter of 2023 and $5.4 million for the first quarter of 2023. |
Portfolio Summary
As of June 30, 2023, the company’s portfolio was comprised of $12.3 billion of Agency RMBS, MSR and other investment securities as well as their associated notional debt hedges. Additionally, the company held $2.9 billion bond equivalent value of net long to-be-announced securities (TBAs).
The following tables summarize the company’s investment portfolio as of June 30, 2023 and March 31, 2023:
Two Harbors Investment Corp. Portfolio | ||||||||||||
(dollars in thousands) | ||||||||||||
Portfolio Composition | As of June 30, 2023 | As of March 31, 2023 | ||||||||||
(unaudited) | (unaudited) | |||||||||||
Agency RMBS | $ | 8,887,839 | 72.6 | % | $ | 8,676,453 | 72.0 | % | ||||
Mortgage servicing rights(1) | 3,273,956 | 26.7 | % | 3,072,445 | 25.5 | % | ||||||
Other | 87,808 | 0.7 | % | 300,126 | 2.5 | % | ||||||
Aggregate Portfolio | 12,249,603 | 12,049,024 | ||||||||||
Net TBA position(2) | 2,894,560 | 3,692,956 | ||||||||||
Total Portfolio | $ | 15,144,163 | $ | 15,741,980 | ||||||||
Portfolio Metrics | Three Months Ended June 30, 2023 | Three Months Ended March 31, 2023 | ||||
(unaudited) | (unaudited) | |||||
Average portfolio yield(3) | 5.24 | % | 5.09 | % | ||
Average cost of financing(4) | 5.08 | % | 4.57 | % | ||
Net spread | 0.16 | % | 0.52 | % | ||
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(1) | Based on the loans underlying the MSR reported by subservicers on a month lag, adjusted for current month purchases. | |
(2) | Represents bond equivalent value of TBA position. Bond equivalent value is defined as notional amount multiplied by market price. Accounted for as derivative instruments in accordance with GAAP. | |
(3) | Average portfolio yield includes interest income on Agency and non-Agency investment securities, MSR servicing income, net of estimated amortization, and servicing expenses, and the implied asset yield portion of TBA dollar roll income on TBAs. MSR estimated 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, which is deemed a non-GAAP measure due to the company’s decision to account for MSR at fair value. TBA dollar roll income is the non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. | |
(4) | Average cost of financing includes interest expense and amortization of deferred debt issuance costs on borrowings under repurchase agreements (excluding those collateralized by U.S. Treasuries), revolving credit facilities, term notes payable and convertible senior notes, interest spread income/expense and amortization of upfront payments made or received upon entering into interest rate swap agreements, U.S. Treasury futures income, and the implied financing benefit/cost portion of dollar roll income on TBAs. TBA dollar roll income is the non-GAAP economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements. U.S. Treasury futures income is the economic equivalent to holding and financing a relevant cheapest-to-deliver U.S. Treasury note or bond using short-term repurchase agreements. |
Portfolio Metrics Specific to Agency RMBS | As of June 30, 2023 | As of March 31, 2023 | ||||||
(unaudited) | (unaudited) | |||||||
Weighted average cost basis(1) | $ | 101.41 | $ | 102.05 | ||||
Weighted average experienced three-month CPR | 6.5 | % | 5.3 | % | ||||
Gross weighted average coupon rate | 5.6 | % | 5.7 | % | ||||
Weighted average loan age (months) | 22 | 19 | ||||||
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(1) | Weighted average cost basis includes Agency principal and interest RMBS only and utilizes carrying value for weighting purposes. |
Portfolio Metrics Specific to MSR(1) | As of June 30, 2023 | As of March 31, 2023 | ||||||
(dollars in thousands) | (unaudited) | (unaudited) | ||||||
Unpaid principal balance | $ | 222,622,177 | $ | 212,444,503 | ||||
Gross coupon rate | 3.4 | % | 3.4 | % | ||||
Current loan size | $ | 340 | $ | 337 | ||||
Original FICO(2) | 759 | 760 | ||||||
Original LTV | 72 | % | 72 | % | ||||
60+ day delinquencies | 0.6 | % | 0.7 | % | ||||
Net servicing fee | 26.4 basis points | 26.5 basis points | ||||||
Three Months Ended
| Three Months Ended
| |||||||
(unaudited) | (unaudited) | |||||||
Fair value gains (losses) | $ | 21,679 | $ | (28,079 | ) | |||
Servicing income | $ | 175,223 | $ | 153,320 | ||||
Servicing expenses | $ | 25,477 | $ | 26,772 | ||||
Change in servicing reserves | $ | (301 | ) | $ | 1,564 | |||
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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. Portfolio metrics, other than UPB, represent averages weighted by UPB. | |
(2) | FICO represents a mortgage industry accepted credit score of a borrower. | |
Other Investments and Risk Management Metrics | As of June 30, 2023 | As of March 31, 2023 | ||||||
(dollars in thousands) | (unaudited) | (unaudited) | ||||||
Net long TBA notional amount(1) | $ | 3,051,000 | $ | 3,718,000 | ||||
Futures notional | $ | |||||||
