Two Harbors Investment Corp: What Traders Need to Know

Two Harbors Financial investment Corp. (NYSE: TWO) is a property finance loan REIT, or genuine estate investment decision belief, that focuses on residential financial loans, and like with most home finance loan REITs, the earlier year or so has been a risky 1. In this post, we’ll dig into the firm’s enterprise, the current developments traders need to be mindful of, its overall performance history, and far more.

Two Harbors corporation profile

Two Harbors Investment decision Corp. is a home loan REIT that mostly invests in home loans, property finance loan-backed securities, and other home loan-associated fiscal instruments. The corporation specializes in household mortgage property, and its most important target is to crank out money, with a secondary purpose of offering inventory value appreciation. Two Harbors is the fourth-most significant property finance loan REIT by complete property and the fifth-premier by equity, as of the stop of 2020.

The company’s portfolio consists of two principal kinds of investments:

• To start with, it invests in agency-backed residential home finance loan-backed securities, or Agency RMBSs. These are home loan securities whose principal and curiosity payments are certain by government businesses this kind of as Fannie Mae, Freddie Mac, and Ginnie Mae.
• Second, Two Harbors invests in property finance loan servicing rights, or MSRs. As of December 31, 2020, Two Harbors experienced mortgage servicing legal rights on just about $186 billion in unpaid house loan balances.

If you are not common with the standard home finance loan REIT company model, these firms commonly borrow money on a shorter-expression foundation and buy mortgage loan property that pay out greater, lengthy-expression fascination charges. And the distinction concerning the two is the profit margin. For illustration, if a home finance loan REIT borrows dollars at 1% desire and owns a home finance loan with a 3% desire fee, the 2% difference is where the enterprise can make its cash.

Considering that buyers usually are not ordinarily happy with a 2% return, property finance loan REITs tend to use massive amounts of leverage to strengthen returns. As of the end of 2020, Two Harbors has a leverage ratio of 6.8-to-just one, which signifies for each $1 million in fairness, the organization has $6.8 million in personal debt. To be clear, this is quite regular for a mortgage loan REIT, but it does include to the volatility in these shares, so it can be essential for buyers to fully grasp.

Two Harbors’ combination of agency RMBSs furthermore a portfolio of MSRs can help hedge against climbing interest fees. Because home finance loan REITs borrow revenue at small-expression fees, soaring curiosity rates can reduce the profit margins on house loan-backed protection investments. Conversely, refinancing and prepayment risk drops when premiums rise, which can make MSR investments far more useful. To be guaranteed, soaring premiums are however commonly negative for mortgage loan rates (specially if rates spike bigger), but this does help offset the hazard considerably.

Two Harbors has been a general public firm since 2009, and apparently, it went public through a SPAC merger. So if you thought SPACs had been a absolutely new phenomenon, believe all over again. While their reputation absolutely surged in 2020, unique intent acquisition corporations have been around for some time. Exclusively, Two Harbors went public when merged with a blank test business run by investor Mark Ein.

Two Harbors news

By considerably, the prime information item Two Harbors buyers should really be conscious of is the COVID-19 pandemic and how it influenced the enterprise.

To make a prolonged tale quick, when the COVID-19 pandemic to start with strike, it triggered a stress in the financial marketplaces, and that involved home loans. No one knew if Americans would be in a position to repay their mortgages all through shutdowns, and this was ahead of the CARES Act gave protections to owners.

So, the value of home loan property plunged. And mainly because home loan REITs use heaps of leverage, their creditors were being worried and in quite a few cases commenced to make margin calls (demands to be repaid suitable absent). This resulted in the will need for property finance loan REITs to provide property at hearth-sale price ranges and experience huge losses.

For case in point, in a March 25, 2020, update, Two Harbors announced that it had sold its whole portfolio of non-company MBSs to lessen margin phone danger. Keep in mind, even right after the CARES Act, most buyer protections only used to company financial loans. Two Harbors also explained that its ebook worth experienced plummeted by 55% considering that the starting of the calendar year. The portfolio and the stock stabilized quickly right after, but the damage experienced been finished. By the close of the year, the e-book worth of Two Harbors’ assets experienced begun to rebound but was continue to 44% lower than it was at the end of 2019.

Apart from the COVID-19 pandemic, two other latest developments worthy of noting consist of the company’s changeover to self-administration and a significant management adjust.

First, Two Harbors made the decision to terminate its administration agreement with external agency PRCM Advisers in July 2020 and become a self-managed enterprise.

Two Harbors also experienced a recent administration shake-up, with previous co-main investment decision officer Bill Greenberg getting over as CEO in June 2020 and the firm’s other former co-chief expense officer, Matt Koeppen, using above the CIO function. These moves ended up made to support the company changeover to self-management.

Two Harbors stock cost

At very first look, it may possibly not search like Two Harbors has been a fantastic stock to own. Considering that its 2009 IPO, the inventory rate has dropped by far more than 50% as of March 2021, in comparison with a 265% rise in the S&P 500 through that time.

Nonetheless, there are two big caveats:

• Initial, Two Harbors is principally an profits investment and has yielded additional than 10% for a great deal of its history. When you consist of dividend payments, it really is a diverse story, as you may see in a little bit.
• Second, like all mortgage loan REITs, Two Harbors was intensely impacted by the COVID-19 pandemic, as reviewed in the past area. Prior to the pandemic, Two Harbors’ stock cost was truly larger for its history.

With those people two things in head, this is a seem at Two Harbors’ complete return (dividends additionally stock price) for specified time periods, as opposed with the S&P 500.