Two Harbors Investment Corp. Reports First Quarter 2022 Financial Results
05/04/2022 - 04:30 PM
Hedge Benefits of MSR Offset Historic Spread Widening in RMBS During Volatile Quarter
NEW YORK --(BUSINESS WIRE)--
Two Harbors Investment Corp. (NYSE: TWO), an Agency + MSR mortgage real estate investment trust (REIT), today announced its financial results for the quarter ended March 31, 2022 .
Quarterly Summary
Reported book value of $5.53 per common share, representing a (2.9)% quarterly return on book value(1)
Generated Comprehensive Loss of $60.3 million
Reported Earnings Available for Distribution (EAD) of $61.7 million $0.18 per weighted average basic common share(2)
Declared a first quarter common stock dividend of $0.17 per share
Grew MSR portfolio with the acquisition of $37.2 billion $7.9 billion
“The first quarter was marked by historic repricing across the rates complex as market expectations converged with the Federal Reserve’s accelerated timeline to higher rates and quantitative tightening. Our portfolio performance in this challenging environment highlights the benefits of the paired Agency + MSR strategy and our active portfolio management,” stated Bill Greenberg , Two Harbors’ President, Chief Executive Officer and Chief Investment Officer. “After the significant spread widening in the quarter, we are poised to allocate capital to RMBS at fundamentally attractive valuations.”
(1)
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)
Earnings Available for Distribution is a non-GAAP measure. Please see page 12 for a definition of Earnings Available for Distribution 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 first quarter of 2022 and fourth quarter of 2021:
Two Harbors Investment Corp. Operating Performance (unaudited)
(dollars in thousands, except per common share data)
Three Months Ended
March 31, 2022
Three Months Ended
December 31, 2021
Earnings attributable to common stockholders
Earnings
Per
Annualized
Earnings
Per
Annualized
Comprehensive Loss
$
(60,322
)
$
(0.18
)
(12.2
) %
$
(128,594
)
$
(0.38
)
(24.7
) %
GAAP Net Income (Loss)
$
271,523
$
0.79
54.9
%
$
(15,041
)
$
(0.05
)
(2.9
) %
Earnings Available for Distribution(1)
$
61,746
$
0.18
12.5
%
$
73,276
$
0.22
14.1
%
Operating Metrics
Dividend per common share
$
0.17
$
0.17
Annualized dividend yield(2)
12.3
%
11.8
%
Book value per common share at period end
$
5.53
$
5.87
Return on book value(3)
(2.9
)%
(5.6
)%
Operating expenses, excluding non-cash LTIP amortization and nonrecurring expenses(4)
$
13,968
$
9,854
Operating expenses, excluding non-cash LTIP amortization and nonrecurring expenses, as a percentage of average equity(4)
2.1
%
1.4
%
________________
(1)
Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see page 12 for a definition of Earnings Available for Distribution 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 $4.2 million $2.5 million $0.7 million $0.7 million
Portfolio Summary
As of March 31, 2022 , the company’s portfolio was comprised of $10.1 billion $4.7 billion
The following tables summarize the company’s investment portfolio as of March 31, 2022 and December 31, 2021 :
Two Harbors Investment Corp. Portfolio
(dollars in thousands)
Portfolio Composition
As of March 31, 2022
As of December 31, 2021
(unaudited)
(unaudited)
Agency
Fixed Rate
$
6,950,536
68.9
%
$
7,140,913
76.0
%
Other Agency(1)
37,868
0.4
%
49,397
0.6
%
Total Agency
6,988,404
69.3
%
7,190,310
76.6
%
Mortgage servicing rights(2)
3,089,963
30.6
%
2,191,578
23.3
%
Other
12,530
0.1
%
12,304
0.1
%
Aggregate Portfolio
10,090,897
9,394,192
Net TBA position(3)
4,730,645
4,240,371
Total Portfolio
$
14,821,542
$
13,634,563
Portfolio Metrics
Three Months Ended
March 31, 2022
Three Months Ended
December 31, 2021
(unaudited)
(unaudited)
Average portfolio yield(4)
3.90
%
3.72
%
Average cost of financing(5)
1.01
%
0.73
%
Net spread
2.89
%
2.99
%
________________
(1)
Other Agency includes hybrid ARMs and Agency derivatives.
(2)
Based on the loans underlying the MSR reported by subservicers on a month lag, adjusted for current month purchases.
(3)
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.
(4)
Average portfolio yield includes interest income on Agency RMBS and non-Agency securities and MSR servicing income, net of estimated amortization, and servicing expenses.
(5)
Average cost of financing includes swap interest rate spread and amortization of upfront payments made or received upon entering.
Portfolio Metrics Specific to RMBS and Agency Derivatives
As of March 31, 2022
As of December 31, 2021
(unaudited)
(unaudited)
Weighted average cost basis of Agency principal and interest securities(1)
$
104.77
$
104.66
Weighted average three month CPR on Agency RMBS
17.3
%
27.7
%
Fixed-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio
99.3
%
99.1
%
Adjustable-rate investments as a percentage of aggregate RMBS and Agency Derivatives portfolio
0.7
%
0.9
%
______________
(1)
Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes.
Portfolio Metrics Specific to MSR(1)
As of March 31, 2022
As of December 31, 2021
(dollars in thousands)
(unaudited)
(unaudited)
Unpaid principal balance
$
229,415,913
$
193,770,566
Gross coupon rate
3.2
%
3.3
%
Current loan size
$
330
$
322
Original FICO(2)
760
758
Original LTV
71
%
72
%
60+ day delinquencies
1.0
%
1.3
%
Net servicing fee
26.3 basis points
26.3 basis points
Three Months Ended
March 31, 2022
Three Months Ended
December 31, 2021
(unaudited)
(unaudited)
Fair value gains (losses)
$
410,624
$
(131,828
)
Servicing income
$
136,626
$
125,511
Servicing expenses
$
24,061
$
21,605
Change in servicing reserves
$
608
$
(23
)
________________
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 March 31, 2022
As of December 31, 2021
(dollars in thousands)
(unaudited)
(unaudited)
Net long TBA notional amount(1)
$
4,622,000
$
4,116,000
Interest rate swaps notional, utilized to economically hedge interest rate exposure (or duration)
$
24,299,647
$
20,387,300
Swaptions net notional, utilized as macroeconomic hedges
(2,761,000
)
(1,761,000
)
Total interest rate swaps and swaptions notional
$
21,538,647
$
18,626,300
________________
(1)
Accounted for as derivative instruments in accordance with GAAP.
Financing Summary
The following tables summarize the company’s financing metrics and outstanding repurchase agreements, revolving credit facilities, term notes and convertible senior notes as of March 31, 2022 and December 31, 2021 :
March 31, 2022
Balance
Weighted
Weighted
Number of
(dollars in thousands, unaudited)
Repurchase agreements collateralized by RMBS
$
7,472,656
0.40
%
2.22
19
Repurchase agreements collateralized by MSR
400,000
3.88
%
10.32
1
Total repurchase agreements
7,872,656
0.58
%
2.63
20
Revolving credit facilities collateralized by MSR and related servicing advance obligations
570,761
3.78
%
9.83
4
Term notes payable collateralized by MSR
397,074
3.26
%
26.86
n/a
Unsecured convertible senior notes
281,403
6.25
%
45.57
n/a
Total borrowings
$
9,121,894
December 31, 2021
Balance
Weighted
Weighted
Number of
(dollars in thousands, unaudited)
Repurchase agreements collateralized by RMBS
$
7,531,445
0.17
%
2.15
19
Repurchase agreements collateralized by MSR
125,000
4.00
%
5.95
1
Total repurchase agreements
7,656,445
0.24
%
2.21
20
Revolving credit facilities collateralized by MSR and related servicing advance obligations
420,761
3.46
%
14.50
4
Term notes payable collateralized by MSR
396,776
2.90
%
29.82
n/a
Unsecured convertible senior notes
424,827
6.25
%
32.34
n/a
Total borrowings
$
8,898,809
Borrowings by Collateral Type
As of March 31, 2022
As of December 31, 2021
(dollars in thousands)
(unaudited)
(unaudited)
Collateral type:
Agency RMBS and Agency Derivatives
$
7,472,437
$
7,531,274
Mortgage servicing rights and related servicing advance obligations
1,367,835
942,537
Other - secured
219
171
Other - unsecured(1)
281,403
424,827
Total
$
9,121,894
$
8,898,809
Debt-to-equity ratio at period-end(2)
3.5 :1.0
3.2 :1.0
Economic debt-to-equity ratio at period-end(3)
5.1 :1.0
4.7 :1.0
Cost of Funds Metrics
Three Months Ended
March 31, 2022
Three Months Ended
December 31, 2021
(unaudited)
(unaudited)
Annualized cost of funds on average borrowings during the quarter:
1.0
%
1.0
%
Agency RMBS and Agency Derivatives
0.3
%
0.2
%
Mortgage servicing rights and related servicing advance obligations(4)
4.1
%
4.2
%
Other - secured
2.2
%
1.8
%
Other - unsecured(1)(4)
6.6
%
6.9
%
____________________
(1)
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 May 5, 2022 at 9:00 a.m. ET to discuss first quarter 2022 financial results and related information. The conference call will be webcast live and accessible in the Investors section of the company’s website at www.twoharborsinvestment.com/investors . To participate in the teleconference, please call toll-free (877) 502-7185, approximately 10 minutes prior to the above start time. For those unable to attend, a telephone playback will be available beginning at 12:00 p.m. ET on May 5, 2022 , through 12:00 p.m. ET on May 19, 2022 . The playback can be accessed by calling (877) 660-6853, conference code 13727886. The call will also be archived on the company’s website in the News & Events section.
Two Harbors Investment Corp.
Two Harbors Investment Corp. , a Maryland corporation, is an internally managed real estate investment trust that invests in residential mortgage-backed securities, mortgage servicing rights and other financial assets. Two Harbors is headquartered in St. Louis Park, MN. 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, 2021 , 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; the ongoing impact of the COVID-19 pandemic, and the actions taken by federal and state governmental authorities and GSEs in response, on the U.S. economy, financial markets and our target assets; 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; 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 decision to terminate our management agreement with PRCM Advisers LLC and the ongoing litigation with PRCM Advisers related to such termination; 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 earnings available for distribution and earnings available for distribution per basic common share that exclude certain items. The non-GAAP financial measures presented by the company provide supplemental information to assist investors in analyzing the company’s results of operations and help facilitate comparisons to industry peers. 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, 1601 Utica Avenue South , Suite 900, St. Louis Park, MN , 55416, telephone (612) 453-4100.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
March 31 ,
2022
December 31 ,
2021
(unaudited)
ASSETS
Available-for-sale securities, at fair value (amortized cost $7,139,506 and $7,005,013 , respectively; allowance for credit losses $11,573 and $14,238 , respectively)
$
6,970,718
$
7,161,703
Mortgage servicing rights, at fair value
3,089,963
2,191,578
Cash and cash equivalents
620,214
1,153,856
Restricted cash
855,930
934,814
Accrued interest receivable
25,160
26,266
Due from counterparties
302,302
168,449
Derivative assets, at fair value
58,496
80,134
Reverse repurchase agreements
138,625
134,682
Other assets
212,400
262,823
Total Assets
$
12,273,808
$
12,114,305
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Repurchase agreements
$
7,872,656
$
7,656,445
Revolving credit facilities
570,761
420,761
Term notes payable
397,074
396,776
Convertible senior notes
281,403
424,827
Derivative liabilities, at fair value
127,529
53,658
Due to counterparties
187,891
196,627
Dividends payable
72,558
72,412
Accrued interest payable
9,991
18,382
Other liabilities
124,641
130,464
Total Liabilities
9,644,504
9,370,352
Stockholders’ Equity:
Preferred stock, par value $0.01 per share; 100,000,000 shares authorized and 29,050,000 shares issued and outstanding ($726,250 liquidation preference)
702,550
702,550
Common stock, par value $0.01 per share; 700,000,000 shares authorized and 344,132,215 and 343,911,324 shares issued and outstanding, respectively
3,441
3,439
Additional paid-in capital
5,629,661
5,625,179
Accumulated other comprehensive (loss) income
(145,499
)
186,346
Cumulative earnings
1,498,253
1,212,983
Cumulative distributions to stockholders
(5,059,102
)
(4,986,544
)
Total Stockholders’ Equity
2,629,304
2,743,953
Total Liabilities and Stockholders’ Equity
$
12,273,808
$
12,114,305
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(dollars in thousands)
Certain prior period amounts have been reclassified to conform to the current period presentation
Three Months Ended
March 31 ,
2022
2021
(unaudited)
Interest income:
Available-for-sale securities
$
44,647
$
55,652
Other
199
457
Total interest income
44,846
56,109
Interest expense:
Repurchase agreements
8,343
8,470
Revolving credit facilities
5,676
4,695
Term notes payable
3,256
3,211
Convertible senior notes
5,042
6,350
Total interest expense
22,317
22,726
Net interest income
22,529
33,383
Other income:
(Loss) gain on investment securities
(52,342
)
132,868
Servicing income
136,626
107,119
Gain on servicing asset
410,624
327,438
Loss on interest rate swap and swaption agreements
(38,041
)
(15,599
)
Loss on other derivative instruments
(101,762
)
(276,011
)
Other loss
(44
)
(5,742
)
Total other income
355,061
270,073
Expenses:
Servicing expenses
24,704
24,947
Compensation and benefits
12,193
8,188
Other operating expenses
6,625
7,487
Total expenses
43,522
40,622
Income before income taxes
334,068
262,834
Provision for income taxes
48,798
22,677
Net income
285,270
240,157
Dividends on preferred stock
13,747
17,216
Net income attributable to common stockholders
$
271,523
$
222,941
Basic earnings per weighted average common share
$
0.79
$
0.81
Diluted earnings per weighted average common share
$
0.72
$
0.74
Dividends declared per common share
$
0.17
$
0.17
Weighted average number of shares of common stock:
Basic
343,998,511
273,710,765
Diluted
384,822,202
311,465,060
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS, CONTINUED
(dollars in thousands)
Certain prior period amounts have been reclassified to conform to the current period presentation
Three Months Ended
March 31 ,
2022
2021
(unaudited)
Comprehensive loss:
Net income
$
285,270
$
240,157
Other comprehensive loss, net of tax:
Unrealized loss on available-for-sale securities
(331,845
)
(271,453
)
Other comprehensive loss
(331,845
)
(271,453
)
Comprehensive loss
(46,575
)
(31,296
)
Dividends on preferred stock
13,747
17,216
Comprehensive loss attributable to common stockholders
$
(60,322
)
$
(48,512
)
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
March 31 ,
Three Months Ended
December 31 ,
2022
2021
(unaudited)
(unaudited)
Reconciliation of Comprehensive loss to Earnings Available for Distribution:
Comprehensive loss attributable to common stockholders
$
(60,322
)
$
(128,594
)
Adjustment for other comprehensive loss attributable to common stockholders:
Unrealized loss on available-for-sale securities
331,845
113,553
Net income (loss) attributable to common stockholders
$
271,523
$
(15,041
)
Adjustments to exclude reported realized and unrealized (gains) losses:
Realized loss (gain) on securities
52,394
(28,912
)
Unrealized (gain) loss on securities
(1,166
)
23,939
Provision for credit losses
1,114
3,347
Realized and unrealized (gain) loss on mortgage servicing rights
(410,624
)
131,828
Realized loss on termination or expiration of interest rate swaps and swaptions
56,264
5,143
Unrealized gain on interest rate swaps and swaptions
(18,964
)
(36,360
)
Realized and unrealized loss on other derivative instruments
102,615
12,624
Other realized and unrealized losses (gains)
44
(1,856
)
Other adjustments:
MSR amortization(1)
(67,179
)
(64,631
)
TBA dollar roll income(2)
22,405
34,781
U.S. Treasury futures income(3)
(329
)
3,711
Change in servicing reserves
608
(22
)
Non-cash equity compensation expense
4,161
2,525
Other nonrecurring expenses
689
665
Net provision for income taxes on non-EAD
48,191
1,535
Earnings available for distribution to common stockholders(4)
$
61,746
$
73,276
Weighted average basic common shares
343,998,511
335,100,737
Earnings available for distribution to common stockholders per weighted average basic common share
$
0.18
$
0.22
_____________
(1)
MSR 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.
(2)
TBA dollar roll income is the economic equivalent to holding and financing Agency RMBS using short-term repurchase agreements.
(3)
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.
(4)
EAD is a non-GAAP measure that we define as comprehensive loss attributable to common stockholders, excluding realized and unrealized gains and losses on the aggregate portfolio, provision for (reversal of) credit losses, reserve expense for representation and warranty obligations on MSR, non-cash compensation expense related to restricted common stock and other nonrecurring expenses. As defined, EAD includes net interest income, accrual and settlement of interest on derivatives, dollar roll income on TBAs, U.S. Treasury futures income, servicing income, net of estimated amortization on MSR and recurring cash related operating expenses. EAD provides supplemental information to assist investors in analyzing the Company’s results of operations and helps facilitate comparisons to industry peers. EAD is one of several measures our board of directors considers to determine the amount of dividends to declare on our common stock and should not be considered an indication of our taxable income or as a proxy for the amount of dividends we may declare.
View source version on businesswire.com : https://www.businesswire.com/news/home/20220504006072/en/
Paulina Sims , Senior Director, Investor Relations, Two Harbors Investment Corp. , (612) 446-5431, Paulina.Sims@twoharborsinvestment.com
Source: Two Harbors Investment Corp.
