Two Harbors reports mixed results in Q3, grossing $20 billion in service

Two Harbors Investment Corp. used standard accounting principles to make a profit in the third quarter, but another measure of gains and losses on financial instruments posted losses due to market volatility.

Real estate investment trust GAAP earnings of approximately $263.9 million compared to losses of approximately $86.2 million in the prior quarter and net income of approximately $52.6 million in the prior year period.

However, Two Harbors also posted a combined loss of over $287.8 million. That pales in comparison to his $90.4 million total loss in the second quarter. A year ago in the third quarter, Two Harbors reported her comprehensive income of $45.2 million.

The third quarter was “one of the most challenging market conditions in decades,” CEO Bill Greenberg said on the company’s earnings call. Common REIT Concerns Holding mortgage-backed securities during the accounting period.

Two Harbors sold $20 billion of mortgage servicing rights as part of a portfolio rebalancing. This included shifting the company’s hedging strategy from swaps to Treasuries and Eurodollar futures.

BTIG researchers said in the report, “The company prioritizes pools of liquidity and uncollateralized collateral to support margin calls, indicating that lower margin hedging products are preferred and necessary. I think there are,” he said.

At quarter end, mortgage servicing rights represented approximately 18% of the company’s investment portfolio. About 57% was invested in Agency MBS and about 25% was invested in net positions in ‘to be announced’ (future delivery) securitizations.

After the end of the quarter, the REIT conducted a 1/4 reverse stock split, share buyback Includes 2.9 million preferred shares. Management characterized the latter as a relatively low-risk way to deploy the company’s capital.

“Given that prepaid yields are in the mid-teens to low-teens, with zero convexity risk, prepayment risk, credit risk, or market risk, we feel this is a good use of capital,” Greenberg said. He said.

BTIG analysts called the strategy an investor differentiator when it came to Two Harbors, but noted that the benefits may only go so far.

“This is one of the first mortgage REITs I have seen recently to bid for preferred stock instead of common stock. I support efforts to control the shape of the capital structure, but buy back more stock We believe that flexibility is somewhat limited because of leverage,” the researchers said.

Two Harbors’ capital structure includes $1.4 billion of common stock, $650 million of preferred stock and $287.5 million of convertible notes due 2026, BTIG analysts noted. I’m here.

“We estimate that we have approximately $1 billion of capital to support our MSRs (including senior and unsecured) and approximately $1.3 billion remaining to support our RMBS portfolio and other hedges. We think it’s very leveraged, we don’t see a lot of it, and there’s room to comfortably increase leverage,” the researchers said.

Two Harvars executives said they have taken a more moderate approach to leverage recently, but they may raise it if monetary policymakers provide clearer guidance on the path interest rates take. rice field.

“After that, we’ll probably see lower volatility, a little more green light, and more leverage,” said Nick Lettika, chief investment officer at Two Harbors.

Other post-quarter developments noted by management on Wednesday include: Pending Acquisition of RoundPoint Servicing Two Harbors’ Matrix Financial Services subsidiary is on track to close about a year from now.

The acquisition is “expected to close in the third quarter of 2023,” said Lettika.

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