Two Harbors Investment Corp. (NYSE: TWO; NYSE MKT: TWO.WS), a
real estate investment trust that invests in residential
mortgage-backed securities (RMBS), residential mortgage loans,
residential real properties and other financial assets, today
announced its financial results for the quarter ended
September 30, 2012.
Highlights
- The company reported Comprehensive
Income of $524.4 million, or $1.94 per diluted weighted average
common share.
- Book value increased 15.1% to $11.44
per diluted common share at September 30, 2012, due primarily to
strong appreciation in the company's Agency and non-Agency RMBS
holdings, net of hedges.
- The Agency RMBS portfolio, inclusive of
IIOs, experienced a low and stable three-month average Constant
Prepayment Rate (CPR) of 6%, which contributed to the RMBS
portfolio's aggregate yield of 4.2%.
- The company reported Core Earnings of
$84.4 million, or $0.31 per diluted weighted average common share.
Third quarter Core Earnings were impacted by timing of the capital
deployment from the company's July 2012 capital raise and lower
yields on the company's Agency RMBS securities acquired in recent
months.
- The company declared a dividend of
$0.36 per common share, or 12.3% annualized dividend yield, based
upon the September 28, 2012 closing price of $11.75.
- The company completed an accretive
public stock offering in July 2012, which resulted in the issuance
of 57.5 million shares of common stock for net proceeds of
approximately $592.4 million. The company completed deployment of
the proceeds from this offering primarily by making additional
acquisitions of RMBS securities and residential real
properties.
"We had a remarkable quarter," said Thomas Siering, Two Harbors'
President and Chief Executive Officer. "Our RMBS portfolio
delivered its most outstanding performance since the company's
formation, achieving an annualized return on average equity of
70.2% on a Comprehensive Income basis. We believe this performance
demonstrates not only the advantages of our hybrid investment
strategy, but also highlights the strength of our security
selection process and speaks to the high caliber of our investment
team."
(1) The term “total return” means (i) the change in Two Harbors'
book value per share at September 30, 2012 as compared to June 30,
2012, plus (ii) dividends declared by Two Harbors in the third
quarter of 2012, divided by Two Harbors' book value per share at
June 30, 2012.
Operating Performance
The following table summarizes the company's GAAP and non-GAAP
earnings measurements and key metrics for the third quarter of
2012:
Two Harbors Operating
Performance (dollars in thousands, except per share data)
Q3-2012 YTD 2012 Annualized Annualized Per diluted return on
Per diluted return on weighted average weighted average
Earnings Earnings share equity
Earnings share equity Core Earnings1 $ 84,377 $ 0.31
11.3 % $ 224,213 $ 1.00 13.0 % GAAP Net Income $ 26,802 $ 0.10 3.6
% $ 102,606 $ 0.46 6.0 % Comprehensive Income $ 524,400 $ 1.94 70.2
% $ 861,718 $ 3.84 50.1 %
Operating
Metrics Q3-2012 Dividend per common share $ 0.36
Book value per diluted share at period end $ 11.44 Other operating
expenses as a percentage of average equity 0.9 %
(1) Core Earnings is a non-GAAP measure that the company defines as
GAAP net income, excluding impairment losses, gains or losses on
sales of securities and termination of interest rate swaps,
unrealized gains or losses on trading securities, interest rate
swaps and swaptions and certain gains or losses on derivative
instruments. As defined, Core Earnings includes interest income
associated with the company's inverse interest-only securities
("Agency Derivatives") and premium income or loss on credit default
swaps.
Earnings Summary
Two Harbors reported Core Earnings for the quarter ended
September 30, 2012 of $84.4 million, or $0.31 per diluted
weighted average common share outstanding, as compared to Core
Earnings for the quarter ended June 30, 2012 of $76.1 million,
or $0.35 per diluted weighted average common share outstanding.
Core Earnings were impacted by costs associated with timing of
capital deployment from the company's July 2012 capital raise and
lower yields on the company's Agency RMBS securities acquired in
recent months.
During the quarter, the company sold residential mortgage-backed
securities for $9.4 million with an amortized cost of $9.6 million,
for a net realized loss of $0.2 million, net of tax; recognized a
change in unrealized fair value gains on U.S. Treasury trading
securities of $1.8 million, net of tax; and recognized
other-than-temporary credit impairment losses on its RMBS
securities of $0.6 million, net of tax. During the quarter, the
company had a net loss of $5.0 million, net of tax, related to swap
terminations and swaption expirations. In addition, the company
recognized in earnings an unrealized loss, net of tax, of $54.0
million associated with its interest rate swaps and swaptions
economically hedging its repurchase agreements and
available-for-sale securities; an unrealized loss, net of tax, of
$3.0 million associated with its interest rate swaps economically
hedging its trading securities; and net gains on other derivative
instruments of approximately $3.2 million, net of tax.
The company reported GAAP Net Income of $26.8 million, or $0.10
per diluted weighted average common share outstanding, for the
quarter ended September 30, 2012, as compared to $24.0
million, or $0.11 per diluted weighted average common share
outstanding, for the quarter ended June 30, 2012. On a GAAP
basis, the company earned an annualized return on average equity of
3.6% and 4.5% for the quarters ended September 30, 2012 and
June 30, 2012, respectively.
The company reported Comprehensive Income of $524.4 million, or
$1.94 per diluted weighted average common share outstanding, for
the quarter ended September 30, 2012, as compared to $141.6
million, or $0.66 per diluted weighted average common share
outstanding, for the quarter ended June 30, 2012. The company
records unrealized fair value gains and losses for RMBS securities,
classified as available-for-sale, as Other Comprehensive Income in
the Statement of Stockholders' Equity. The third quarter 2012 was
positively impacted by an aggregate unrealized increase in fair
value of $497.6 million on the company's portfolio, driven by
appreciation in the company's Agency and non-Agency RMBS holdings.
On a Comprehensive Income basis, the company recognized an
annualized return on average equity of 70.2% and 26.6% for the
quarters ended September 30, 2012 and June 30, 2012,
respectively.
Other Key Metrics
Two Harbors declared a quarterly dividend of $0.36 per common
share for the quarter ended September 30, 2012. The annualized
dividend yield on the company's common stock for the third quarter,
based on the September 28, 2012 closing price of $11.75, was
12.3%.
The company's book value per diluted share, after giving effect
to the third quarter 2012 dividend of $0.36, was $11.44 as of
September 30, 2012, compared to $9.94 as of June 30,
2012.
Other operating expenses for the third quarter 2012 were
approximately $6.5 million, or 0.9% of average equity, compared to
approximately $4.2 million, or 0.8%, for the second quarter 2012.
Third quarter operating expenses were impacted by an increase in
real estate related expenses associated with the company's
portfolio of single-family residential properties.
Portfolio Summary
For the quarter ended September 30, 2012, the annualized
yield on average RMBS securities and Agency Derivatives was 4.2%
and the annualized cost of funds on the average borrowings, which
includes net interest rate spread expense on interest rate swaps,
was 1.1%. This resulted in a net interest rate spread of 3.1%,
which compares to 3.6% in the prior quarter. Net interest spread
for the third quarter was impacted primarily by lower yields on the
company's Agency RMBS securities acquired in recent months. Third
quarter net interest spread was also affected to a lesser extent by
significantly extending the company's repurchase agreements and the
incremental expense associated with maintaining the company's
interest rate hedging strategy as the company aligned its notional
hedging positions with the capital deployed from its July 2012
common stock offering.
The company reported debt-to-equity, defined as total borrowings
to fund RMBS securities, residential mortgage loans and Agency
Derivatives divided by total equity, of 3.8:1.0 and 4.3:1.0 at
September 30, 2012 and June 30, 2012, respectively. The
third quarter debt-to-equity ratio was impacted by proceeds
received from the issuance of common stock in connection with
warrants exercised in September.
The company's portfolio is principally comprised of RMBS
available-for-sale securities and Agency Derivatives. As of
September 30, 2012, the total value of the portfolio was $15.3
billion, of which approximately $12.8 billion was Agency RMBS and
Agency Derivatives and $2.5 billion was non-Agency RMBS. As of
September 30, 2012, fixed-rate securities composed 82.1% of
the company's portfolio and adjustable-rate securities composed
17.9% of the company's portfolio. In addition, the company held
$1.0 billion of U.S. Treasuries classified on its balance sheet as
trading securities and $190.9 million of Investments in Real Estate
as of September 30, 2012.
Two Harbors was a party to interest rate swaps and swaptions as
of September 30, 2012 with an aggregate notional amount of
$18.2 billion, of which $17.2 billion was utilized to economically
hedge interest rate risk associated with the company's short-term
LIBOR-based repurchase agreements. During the third quarter, the
company maintained its interest rate hedging strategy and aligned
its notional hedging positions with the capital deployed from its
July 2012 common stock offering.
The following table summarizes the company's investment
portfolio:
Two Harbors Portfolio (dollars in thousands,
except per share data) As of September 30, RMBS and Agency
Derivatives Portfolio Composition 2012 Agency Bonds Fixed
Rate Bonds $ 12,268,507 80.2 % Hybrid ARMs 200,556 1.3 %
Total Agency
12,469,063 81.5 % Agency Derivatives 328,635 2.2 % Non-Agency Bonds
Senior Bonds 1,989,885 13.0 % Mezzanine Bonds 506,620 3.3 %
Non-Agency Other 4,291 — Total Non-Agency 2,500,796
16.3 % Aggregate Portfolio $ 15,298,494
Fixed-rate investment securities as a percentage of aggregate
portfolio 82.1 % Adjustable-rate investment securities as a
percentage of aggregate portfolio 17.9 % For the Quarter
Ended Portfolio Metrics September 30, 2012 Annualized yield
on average RMBS and Agency Derivatives during the quarter Agency
3.1 % Non-Agency 9.6 % Aggregate Portfolio 4.2 % Annualized cost of
funds on average repurchase balance during the quarter1 1.1 %
Annualized interest rate spread for aggregate portfolio during the
quarter 3.1 % Weighted average cost basis of principal and interest
securities Agency $ 108.15 Non-Agency2 $ 52.38 Weighted average
three month CPR for its RMBS and Agency Derivative portfolio Agency
6.0 % Non-Agency 3.0 % Debt-to-equity ratio at period-end3
3.8 to 1.0
(1) Cost of funds includes interest spread expense
associated with the portfolio's interest rate swaps. (2) Average
purchase price utilized carrying value for weighting purposes. If
current face were utilized for weighting purposes, total non-Agency
RMBS excluding the company's non-Agency interest-only portfolio
would be $47.71 at September 30, 3012. (3) Defined as total
borrowings to fund RMBS, residential mortgage loans and Agency
Derivatives divided by total equity.
"We are extremely proud of our portfolio's performance this
quarter," stated Bill Roth, Two Harbors' Co-Chief Investment
Officer. "Both our Agency and non-Agency strategies contributed
significantly to our return."
"Managing prepayment risk has become increasingly important
given today's low rate environment and the government initiated
refinancing programs available to homeowners,” continued Roth. "In
light of this, we are pleased that our Agency portfolio continues
to experience low and stable prepayment speeds."
The company experienced a three-month average CPR of 6.0% for
Agency RMBS securities and Agency Derivatives held as of
September 30, 2012, comparable to the prior quarter. The
weighted average cost basis of the Agency portfolio was 108.2% of
par as of September 30, 2012 and 107.5% of par as of
June 30, 2012. The net premium amortization was $39.7 million
and $31.0 million for the quarters ended September 30, 2012
and June 30, 2012, respectively.
The company experienced a three-month average CPR of 3.0% for
non-Agency RMBS securities held as of September 30, 2012, as
compared to 2.1% for securities held as of June 30, 2012. The
weighted average cost basis of the non-Agency portfolio was 52.4%
of par as of September 30, 2012 and 52.1% of par as of
June 30, 2012. The discount accretion was $36.2 million and
$34.1 million for the quarters ended September 30, 2012 and
June 30, 2012, respectively. The total net discount remaining
was $2.3 billion as of September 30, 2012 and June 30,
2012, with $1.3 billion designated as credit reserve as of
September 30, 2012.
Business Diversification
Single-Family Residential
Properties
On September 11, 2012, the company announced the proposed
contribution of its portfolio of single-family residential
properties to Silver Bay Realty Trust Corp. (“Silver Bay”), a newly
formed entity intended to qualify as a REIT. In exchange for its
contribution, Two Harbors would receive shares of common stock of
Silver Bay. As of September 30, 2012, Two Harbors had purchased
property with a carrying value of $190.9 million in single-family
residential properties. The properties are classified as investment
in real estate on the consolidated balance sheet.
Securitization
In late 2011, the company began acquiring prime nonconforming
residential mortgage loans from select mortgage loan originators
and secondary market institutions. As of September 30, 2012 the
company had acquired mortgage loans held-for-sale with a carrying
value of $14.6 million and had outstanding purchase commitments to
acquire an additional $319.9 million. It is the company's intention
in the future to securitize these loans and/or exit through a whole
loan sale.
Public Stock Offerings
The company completed an accretive public stock offering in July
2012, which resulted in the issuance of 57.5 million shares of
common stock for net proceeds of approximately $592.4
million. The company completed deployment of the proceeds from
this offering primarily by making additional acquisitions of RMBS
securities and residential real properties.
Warrants
During the third quarter 2012, warrant holders exercised
warrants to purchase 15,975,017 shares of the company's common
stock at an exercise price of $11.00 per share. This resulted in
proceeds to the company totaling approximately $175.7 million. As
of September 30, 2012, 17,073,983 warrants remain outstanding.
Conference Call
Two Harbors Investment Corp. will host a conference call on
November 7, 2012 at 9:00 a.m. EST to discuss third quarter
2012 financial results and related information. To participate in
the teleconference, please call toll-free (877) 868-1835 (or (914)
495-8581 for international callers) 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 p.m.
EST on November 7, 2012 through 9 p.m. EST on
November 25, 2012. The playback can be accessed by calling
(855) 859-2056 (or (404) 537-3406 for international callers) and
providing Confirmation Code 50062843. 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, residential mortgage loans, residential real properties
and other financial assets. Two Harbors is headquartered in
Minnetonka, Minnesota, 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 press release 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. Factors that could cause actual
results to differ include, but are not limited to, higher than
expected operating costs, changes in prepayment speeds of mortgages
underlying our RMBS, the rates of default or decreased recovery on
the mortgages underlying our non-Agency securities, failure to
recover certain losses that are expected to be temporary, changes
in interest rates or the availability of financing, the impact of
new legislation or regulatory changes on our operations, the impact
of any deficiencies in the servicing or foreclosure practices of
third parties and related delays in the foreclosure process, the
inability to acquire mortgage loans or securitize the mortgage
loans we acquire, the inability to acquire residential real
properties at attractive prices or lease such properties on a
profitable basis, the impact of new or modified government mortgage
refinance or principal reduction programs, and unanticipated
changes in overall market and economic conditions.
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. 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 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 Two Harbors' operations; however, as these measures
are not in accordance with GAAP, they should not be considered a
substitute for, or superior to, the financial measures calculated
in accordance with GAAP. Our GAAP financial results and the
reconciliations from these results should be carefully evaluated.
See the GAAP to Non-GAAP reconciliation table on page 10 of this
release.
Additional Information
Stockholders and warrant holders 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, 601 Carlson
Parkway, Suite 150, Minnetonka, MN 55305, telephone
612-629-2500.
TWO HARBORS INVESTMENT CORP. CONDENSED CONSOLIDATED BALANCE
SHEETS (dollars in thousands, except per share data)
September 30, 2012 December 31, 2011 (unaudited) ASSETS
Available-for-sale securities, at fair value $ 14,969,859 $
6,249,252 Trading securities, at fair value 1,002,461 1,003,301
Mortgage loans held-for-sale, at fair value 14,553 5,782 Investment
in real estate, net 190,907 — Cash and cash equivalents 833,608
360,016 Restricted cash 206,190 166,587 Accrued interest receivable
46,919 23,437 Due from counterparties 28,965 32,587 Derivative
assets, at fair value 496,788 251,856 Other assets 74,445
7,566 Total Assets $ 17,864,695 $ 8,100,384
LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities Repurchase
agreements $ 14,034,327 $ 6,660,148 Derivative liabilities, at fair
value 132,322 49,080 Accrued interest payable 13,147 6,456 Due to
counterparties 170,090 45,565 Accrued expenses 17,008 8,912
Dividends payable 106,325 56,239 Income taxes payable —
3,898 Total liabilities $ 14,473,219 $ 6,830,298
Stockholders’ Equity Preferred stock, par value $0.01 per share;
50,000,000 shares authorized; no shares issued and outstanding — —
Common stock, par value $0.01 per share; 450,000,000 shares
authorized and 295,350,370 and 140,596,708 shares issued and
outstanding, respectively 2,954 1,406 Additional paid-in capital
2,910,293 1,373,099 Accumulated other comprehensive income (loss)
700,396 (58,716 ) Cumulative earnings 260,058 157,452 Cumulative
distributions to stockholders (482,225 ) (203,155 ) Total
stockholders’ equity 3,391,476 1,270,086 Total
Liabilities and Stockholders’ Equity $ 17,864,695 $
8,100,384 TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands, except per share data)
Three Months Ended Nine Months
Ended September 30, September 30, 2012 2011
2012 2011 (unaudited) (unaudited) Interest income:
Available-for-sale securities $ 124,621 $ 65,919 $ 313,154 $
125,413 Trading securities 1,278 1,706 3,578 2,783 Mortgage loans
held-for-sale 167 — 362 — Cash and cash equivalents 243
114 620 241 Total
interest income 126,309 67,739 317,714 128,437 Interest expense
20,743 7,218 47,737
13,580 Net interest income 105,566 60,521 269,977 114,857
Other-than-temporary impairment losses (559 ) (3,371 ) (9,310 )
(3,665 ) Other income: Gain on investment securities, net 2,527
31,432 14,247 36,159 Loss on interest rate swap and swaption
agreements (76,472 ) (39,311 ) (153,679 ) (88,180 ) Gain (loss) on
other derivative instruments 3,454 22,361 (13,053 ) 37,474 Other
income 731 — 822 —
Total other (loss) income (69,760 ) 14,482 (151,663 ) (14,547 )
Expenses: Management fees 9,733 4,785 24,086 9,063 Other operating
expenses 6,546 2,850 14,328
6,516 Total expenses 16,279 7,635
38,414 15,579 Income before
income taxes 18,968 63,997 70,590 81,066 (Benefit from) provision
for income taxes (7,834 ) 9,388 (32,016 )
5,064 Net income attributable to common stockholders
$ 26,802 $ 54,609 $ 102,606
$ 76,002 Basic earnings per weighted average
common share $ 0.10 $ 0.42 $ 0.46 $ 0.90 Diluted earnings per
weighted average common share $ 0.10 $ 0.42 $ 0.46 $ 0.90
Weighted average shares outstanding - Basic 270,005,212 130,607,566
224,058,762 84,751,854 Weighted average shares outstanding -
Diluted 270,937,960 130,607,566 224,369,678 84,751,854
Comprehensive income (loss): Net income $ 26,802 $ 54,609 $ 102,606
$ 76,002 Other comprehensive income (loss): Unrealized gain (loss)
on available-for-sale securities, net 497,598 (72,573
) 759,112 (48,944 ) Other comprehensive income
(loss) 497,598 (72,573 ) 759,112
(48,944 ) Comprehensive income (loss) $ 524,400 $
(17,964 ) $ 861,718 $ 27,058
TWO HARBORS INVESTMENT CORP. RECONCILIATION OF GAAP TO
NON-GAAP FINANCIAL INFORMATION (UNAUDITED) (dollars in thousands,
except per share data) Three Months Ended Nine
Months Ended September 30, September 30, 2012 2011
2012 2011
Reconciliation of net income attributable
to common stockholders to Core Earnings:
Net income attributable to common stockholders $ 26,802 $
54,609 $ 102,606 $ 76,002 Adjustments for non-core earnings:
Loss (gain) on sale of securities and mortgage loans, net of tax
277 (27,422 ) (10,862 ) (29,584 ) Other-than-temporary impairment
loss, net of tax 559 3,371 9,310 3,665 Unrealized gains on trading
securities and mortgage loans, net of tax (2,082 ) (2,422 ) (2,091
) (3,953 ) Unrealized loss, net of tax, on interest rate swap and
swaptions economically hedging repurchase agreements and
available-for-sale securities 53,970 16,650 86,010 49,186
Unrealized loss (gain), net of tax, on interest rate swap
economically hedging trading securities 3,038 (4,686 ) 10,511
(3,429 ) Realized loss on termination or expiration of swaps and
swaptions, net of tax 4,980 19,834 19,624 19,983 (Gain) loss on
other derivative instruments, net of tax (3,167 ) (8,133 ) 9,105
(13,891 ) Core
Earnings $ 84,377 $ 51,801 $ 224,213
$ 97,979 Weighted average shares
outstanding - Basic 270,005,212 130,607,566 224,058,762 84,751,854
Weighted average shares outstanding - Diluted 270,937,960
130,607,566 224,369,678 84,751,854 Core Earnings per
weighted average share outstanding - basic and diluted $ 0.31 $
0.40 $ 1.00 $ 1.16
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