Two Harbors Investment Corp. Reports Fourth Quarter 2012 Financial Results
Two Harbors Investment Corp. Reports Fourth Quarter 2012 Financial Results
Delivered Comprehensive Income of $185.4 Million
Business Wire
NEW YORK -- February 6, 2013
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 and other financial assets, today announced
its financial results for the quarter ended December 31, 2012.
Highlights
* Delivered Comprehensive Income of $185.4 million, or $0.63 per diluted
weighted average common share.
* Increased Book Value to $11.54 per diluted common share at December 31,
2012.
* Contributed portfolio of single-family residential homes to Silver Bay
Realty Trust Corp. ("Silver Bay") in conjunction with its initial public
offering in December 2012. In exchange, Two Harbors received approximately
17.8 million shares of Silver Bay common stock.
* Declared a dividend of $0.55 per common share. The quarterly dividend
reflects the performance of Two Harbors' residential mortgage-backed
securities (RMBS) portfolio, realized gains and taxable income derived
from the company's contribution of its single-family residential portfolio
to Silver Bay.
* Generated an aggregate yield of 4.0% in the RMBS portfolio, which was
driven by non-Agency portfolio performance of 9.5% as well as a
three-month average Constant Prepayment Rate (CPR) of 6.6% in the Agency
portfolio.
“We are pleased to have achieved a strong finish to a remarkable year for our
investment portfolio. For the year, Two Harbors delivered a return on book
value of 47% as measured by dividends declared and book value appreciation,”
said Thomas Siering, Two Harbors' President and Chief Executive Officer.
Operating Performance
The following table summarizes the company's GAAP and non-GAAP earnings
measurements and key metrics for the respective periods in 2012:
Two Harbors Operating Performance
(dollars in
thousands, Q4-2012 Full Year 2012
except per
share data)
Per Annualized Per Annualized
Earnings Earnings diluted return on Earnings diluted return on
weighted average weighted average
share equity share equity
Core $ 83,974 $ 0.28 9.8 % $ 311,085 $ 1.28 12.1 %
Earnings^1
GAAP Net $ 189,300 $ 0.64 22.1 % $ 291,906 $ 1.20 11.3 %
Income
Comprehensive $ 185,362 $ 0.63 21.6 % $ 1,047,080 $ 4.32 40.7 %
Income
Operating Q4-2012
Metrics
Dividend per $ 0.55
common share
Book value
per diluted $ 11.54
share at
period end
Other
operating
expenses as a 0.7 %
percentage of
average
equity
(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, certain gains or losses on derivative instruments, and certain
non-recurring gains and losses related to discontinued operations. 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 December 31, 2012 of
$84.0 million, or $0.28 per diluted weighted average common share outstanding,
as compared to Core Earnings for the quarter ended September 30, 2012 of $87.1
million, or $0.32 per diluted weighted average common share outstanding.
During the quarter, the company sold residential mortgage-backed securities
for $3.2 billion with an amortized cost of $3.1 billion, for a net realized
gain of $103.1 million, net of tax; recognized a change in unrealized fair
value losses on U.S. Treasury trading securities of $0.5 million, net of tax;
and recognized other-than-temporary credit impairment losses on its RMBS
securities of $1.6 million, net of tax. The company also recognized a change
in unrealized fair value gains on Silver Bay equity securities of $5.9
million, net of tax. The fair value of the Silver Bay common stock at December
31, 2012 was $335.6 million, which included these unrealized fair value gains.
The single-family real estate operations of the company are reflected as
discontinued operations in the company's financial statements. Included in the
income for discontinued operations were realized gains of $10.6 million
resulting from the contribution of the company's portfolio to Silver Bay. The
realized gain amount is subject to additional installment gains, fee
reductions and working capital adjustments, which are currently estimated to
increase the net income by $8.3 million and will be recognized in the
company's 2013 financial statements.
During the quarter, the company had a net loss of $2.3 million, net of tax,
related to the termination and expiration of swaps and swaptions. In addition,
the company recognized in earnings an unrealized gain, net of tax, of $12.2
million associated with its interest rate swaps and swaptions economically
hedging its repurchase agreements and available-for-sale securities; an
unrealized gain, net of tax, of $0.6 million associated with its interest rate
swaps economically hedging its trading securities; and net losses on other
derivative instruments of approximately $20.4 million, net of tax.
The company reported GAAP Net Income of $189.3 million, or $0.64 per diluted
weighted average common share outstanding, for the quarter ended December 31,
2012, as compared to $26.8 million, or $0.10 per diluted weighted average
common share outstanding, for the quarter ended September 30, 2012. On a GAAP
basis, the company earned an annualized return on average equity of 22.1% and
3.6% for the quarters ended December 31, 2012 and September 30, 2012,
respectively.
The company reported Comprehensive Income of $185.4 million, or $0.63 per
diluted weighted average common share outstanding, for the quarter ended
December 31, 2012, as compared to $524.4 million, or $1.94 per diluted
weighted average common share outstanding, for the quarter ended September 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. On a Comprehensive Income basis, the
company recognized an annualized return on average equity of 21.6% and 70.2%
for the quarters ended December 31, 2012 and September 30, 2012, respectively.
Other Key Metrics
Two Harbors declared a quarterly dividend of $0.55 per common share for the
quarter ended December 31, 2012. The dividend was intended to distribute the
remaining REIT taxable income earned during 2012, which included taxable
income derived from Two Harbors' contribution of its single-family residential
portfolio to Silver Bay and realized gains on the company's RMBS portfolio.
The total dividends declared for the year ended December 31, 2012 were $1.71
per common share.
The company's book value per diluted share, after taking into account the
fourth quarter 2012 dividend of $0.55, was $11.54 as of December 31, 2012,
compared to $11.44 as of September 30, 2012.
Other operating expenses for the fourth quarter 2012 were approximately $6.3
million, or 0.7% of average equity, compared to approximately $4.0 million, or
0.5% of average equity, for the third quarter 2012. Other operating expenses
exclude real estate related expenses associated with the company's portfolio
of single-family residential properties. The single-family real estate
operations of the company are reflected as discontinued operations in the
company's financial statements.
Portfolio Summary
For the quarter ended December 31, 2012, the annualized yield on average RMBS
securities and Agency Derivatives was 4.0% 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
2.9%, which compares to 3.1% in the prior quarter.
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 3.4:1.0 and 3.8:1.0 at December 31, 2012 and September 30, 2012,
respectively.
The company's portfolio is principally comprised of RMBS available-for-sale
securities and Agency Derivatives. As of December 31, 2012, the total value of
the portfolio was $14.0 billion, of which approximately $11.3 billion was
Agency RMBS and Agency Derivatives and $2.7 billion was non-Agency RMBS. As of
December 31, 2012, fixed-rate securities composed 79.8% of the company's
portfolio and adjustable-rate securities composed 20.2% 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 as of December 31, 2012.
Two Harbors was a party to interest rate swaps and swaptions as of
December 31, 2012 with an aggregate notional amount of $19.0 billion, of which
$17.5 billion was utilized to economically hedge interest rate risk associated
with the company's short-term LIBOR-based repurchase agreements.
The following table summarizes the company's investment portfolio:
Two Harbors Portfolio
(dollars in thousands, except per share data)
RMBS and Agency Derivatives As of December 31, 2012
Portfolio Composition
Agency Bonds
Fixed Rate Bonds $ 10,823,674 77.5 %
Hybrid ARMs 188,429 1.3 %
Total Agency 11,012,103 78.8 %
Agency Derivatives 301,264 2.2 %
Non-Agency Bonds
Senior Bonds 2,132,272 15.3 %
Mezzanine Bonds 518,466 3.7 %
Non-Agency Other 4,113 —
Total Non-Agency 2,654,851 19.0 %
Aggregate Portfolio $ 13,968,218
Fixed-rate investment
securities as a percentage of 79.8 %
aggregate portfolio
Adjustable-rate investment
securities as a percentage of 20.2 %
aggregate portfolio
Portfolio Metrics For the Quarter Ended
December 31, 2012
Annualized yield on average
RMBS and Agency Derivatives
during the quarter
Agency 2.9 %
Non-Agency 9.5 %
Aggregate Portfolio 4.0 %
Annualized cost of funds on
average repurchase balance 1.1 %
during the quarter^1
Annualized interest rate
spread for aggregate 2.9 %
portfolio during the quarter
Weighted average cost basis
of principal and interest
securities
Agency $ 108.18
Non-Agency^2 $ 52.17
Weighted average three month
CPR for its RMBS and Agency
Derivative portfolio
Agency 6.6 %
Non-Agency 3.2 %
Debt-to-equity ratio at 3.4 to 1.0
period-end^3
(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 $47.88 at
December 31, 3012.
(3) Defined as total borrowings to fund RMBS, residential mortgage loans and
Agency Derivatives divided by total equity.
“The flexibility of Two Harbors' hybrid approach greatly benefited our
stockholders in 2012,” said Bill Roth, Two Harbors' Chief Investment Officer.
“The shifting investment landscape during the year provided us the opportunity
to raise and deploy capital into non-Agency securities early in 2012, as well
as to take advantage of an attractive opportunity in Agencies in the summer.
We believe that our strong fourth quarter and full year performance is
attributed to our nimble stance and opportunistic approach.”
The company experienced a three-month average CPR of 6.6% for Agency RMBS
securities and Agency Derivatives held as of December 31, 2012, as compared to
6.0% for securities held as of September 30, 2012. The weighted average cost
basis of the Agency portfolio was 108.2% of par as of December 31, 2012,
comparable to the prior quarter. The net premium amortization was $43.9
million and $39.7 million for the quarters ended December 31, 2012 and
September 30, 2012, respectively.
The company experienced a three-month average CPR of 3.2% for non-Agency RMBS
securities held as of December 31, 2012, as compared to 3.0% for securities
held as of September 30, 2012. The weighted average cost basis of the
non-Agency portfolio was 52.2% of par as of December 31, 2012 and 52.4% of par
as of September 30, 2012. The discount accretion was $37.3 million and $36.2
million for the quarters ended December 31, 2012 and September 30, 2012,
respectively. The total net discount remaining was $2.3 billion as of
December 31, 2012 and September 30, 2012, with $1.3 billion designated as
credit reserve as of December 31, 2012.
Business Diversification
Single-Family Residential Properties
On December 19, 2012, the company completed its contribution of single-family
homes to Silver Bay in exchange for approximately 17.8 million shares of
Silver Bay common stock. The company had previously announced its intention,
subject to the discretion and approval of its Board of Directors and in
compliance with applicable securities laws, to distribute these Silver Bay
shares to Two Harbors' stockholders by means of a special dividend following
the expiration of a 90-day lockup period. As of the date of this release, the
company has not issued an announcement nor has the Board of Directors made a
final determination concerning any such distribution.
Securitization
As of December 31, 2012, the company had acquired mortgage loans held-for-sale
with a carrying value of $58.6 million and had outstanding purchase
commitments to acquire an additional $56.9 million. It is the company's
intention in the future to securitize these loans and/or exit through a whole
loan sale.
Warrants
During the fourth quarter 2012, warrant holders exercised warrants to purchase
approximately 3.5 million 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 $38 million. As of December 31, 2012, approximately 13.5 million
warrants remained outstanding. The warrants expire on November 7, 2013.
Dividends and Taxable Earnings
The company declared dividends to stockholders totaling $443.4 million, or
$1.71 per share, for the 2012 taxable year. As a REIT, the company is required
to distribute at least 90% of its taxable income to stockholders, subject to
certain distribution requirements. The company distributed approximately 98%
of its 2012 taxable earnings to stockholders.
Conference Call
Two Harbors Investment Corp. will host a conference call on February 7, 2013
at 9:00 am EST to discuss fourth quarter 2012 financial results and related
information. To participate in the teleconference, please call toll-free (877)
868-1835, Conference Code 85675161, (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 February 7, 2013
through 9 p.m. EST on February 25, 2013. The playback can be accessed by
calling (855) 859-2056 (or (404) 537-3406 for international callers) and
providing Confirmation Code 85675161. 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 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 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 1400, Minnetonka, MN
55305, telephone 612-629-2500.
TWO HARBORS INVESTMENT CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
December 31, 2012 December 31, 2011
(unaudited)
ASSETS
Available-for-sale securities, at fair $ 13,666,954 $ 6,249,252
value
Trading securities, at fair value 1,002,062 1,003,301
Equity securities, at fair value 335,638 —
Mortgage loans held-for-sale, at fair 58,607 5,782
value
Cash and cash equivalents 821,108 360,016
Restricted cash 302,322 166,587
Accrued interest receivable 42,613 23,437
Due from counterparties 39,974 32,587
Derivative assets, at fair value 462,080 251,856
Other assets 82,586 7,566
Total Assets $ 16,813,944 $ 8,100,384
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Repurchase agreements $ 12,624,510 $ 6,660,148
Derivative liabilities, at fair value 129,294 49,080
Accrued interest payable 19,060 6,456
Due to counterparties 412,861 45,565
Accrued expenses 13,295 8,912
Dividends payable 164,347 56,239
Income taxes payable — 3,898
Total liabilities $ 13,363,367 $ 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; 900,000,000 shares
authorized and 298,813,258 and 2,988 1,406
140,596,708 shares issued and
outstanding, respectively
Additional paid-in capital 2,948,345 1,373,099
Accumulated other comprehensive income 696,458 (58,716 )
(loss)
Cumulative earnings 449,358 157,452
Cumulative distributions to (646,572 ) (203,155 )
stockholders
Total stockholders’ equity 3,450,577 1,270,086
Total Liabilities and Stockholders’ $ 16,813,944 $ 8,100,384
Equity
TWO HARBORS INVESTMENT CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands, except per share data)
Certain prior period amounts have been reclassified to conform to the current period
presentation
Three Months Ended Year Ended
December 31, December 31,
2012 2011 2012 2011
(unaudited) (unaudited)
Interest income:
Available-for-sale $ 135,466 $ 71,713 $ 448,620 $ 197,126
securities
Trading securities 1,295 1,376 4,873 4,159
Mortgage loans 247 2 609 2
held-for-sale
Cash and cash 324 106 944 347
equivalents
Total interest 137,332 73,197 455,046 201,634
income
Interest expense 24,369 9,129 72,106 22,709
Net interest income 112,963 64,068 382,940 178,925
Other-than-temporary (1,642 ) (1,437 ) (10,952 ) (5,102 )
impairment losses
Other income:
Gain on investment 108,219 360 122,466 36,520
securities, net
(Loss) gain on
interest rate swap (6,096 ) 1,411 (159,775 ) (86,769 )
and swaption
agreements
(Loss) gain on other
derivative (27,276 ) (10,719 ) (40,906 ) 26,755
instruments
Gain on mortgage 1,679 — 2,270 —
loans
Total other income 76,526 (8,948 ) (75,945 ) (23,494 )
(loss)
Expenses:
Management fees 9,886 5,178 33,168 14,241
Other operating 6,255 3,156 17,678 9,673
expenses
Total expenses 16,141 8,334 50,846 23,914
Income from
continuing 171,706 45,349 245,197 126,415
operations before
income taxes
Benefit from income (10,203 ) (6,170 ) (42,219 ) (1,106 )
taxes
Net income from
continuing $ 181,909 $ 51,519 $ 287,416 $ 127,521
operations
Income (loss) from
discontinued $ 7,391 $ (89 ) $ 4,490 $ (89 )
operations
Net income
attributable to $ 189,300 $ 51,430 $ 291,906 $ 127,432
common stockholders
Basic earnings
(loss) per weighted
average common share
Continuing $ 0.62 $ 0.37 $ 1.19 $ 1.29
operations
Discontinued 0.02 — 0.02 —
operations
Net income $ 0.64 $ 0.37 $ 1.21 $ 1.29
Diluted earnings
(loss) per weighted
average common share
Continuing $ 0.61 $ 0.37 $ 1.18 $ 1.29
operations
Discontinued 0.03 — 0.02 —
operations
Net income $ 0.64 $ 0.37 $ 1.20 $ 1.29
Dividends declared $ 0.55 $ 0.40 $ 1.71 $ 1.60
per common share
Weighted average
shares outstanding - 295,492,372 140,592,941 242,014,751 98,826,868
Basic
Weighted average
shares outstanding - 296,229,245 140,592,941 242,432,156 98,826,868
Diluted
Comprehensive
income:
Net income $ 189,300 $ 51,430 $ 291,906 $ 127,432
Other comprehensive
(loss) income:
Unrealized (loss)
gain on (3,938 ) (32,391 ) 755,174 (81,335 )
available-for-sale
securities, net
Other comprehensive (3,938 ) (32,391 ) 755,174 (81,335 )
(loss) income
Comprehensive income $ 185,362 $ 19,039 $ 1,047,080 $ 46,097
TWO HARBORS INVESTMENT CORP.
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL INFORMATION
(UNAUDITED)
(dollars in thousands, except per share data)
Certain prior period amounts have been reclassified to conform to the current
period presentation
Three Months Ended Year Ended
December 31, December 31,
2012 2011 2012 2011
Reconciliation of
net income
attributable to
common stockholders
to
Core Earnings:
Net income
attributable to $ 189,300 $ 51,430 $ 291,906 $ 127,432
common stockholders
Adjustments for
non-core earnings:
(Gain) loss on sale
of securities and (104,452 ) (2,035 ) (115,338 ) (31,619 )
mortgage loans, net
of tax
Other-than-temporary
impairment loss 1,642 1,437 10,952 5,102
(gain), net of tax
Unrealized (gain)
loss on trading
securities, equity (5,128 ) 1,624 (7,372 ) (2,329 )
securities
and mortgage loans,
net of tax
Unrealized (loss)
gain, net of tax, on
interest rate swap
and
swaptions (12,180 ) (6,046 ) 73,830 43,141
economically hedging
repurchase
agreements and
available-for-sale
securities
Unrealized (gain)
loss, net of tax, on
interest rate swap (552 ) (669 ) 9,959 (4,099 )
economically hedging
trading securities
Realized loss (gain)
on termination or
expiration of swaps 2,307 (728 ) 21,931 19,255
and swaptions, net
of tax
Loss (gain) on other
derivative 20,428 10,546 29,707 (3,345 )
instruments, net of
tax
(Income) loss from
discontinued (7,391 ) 89 (4,490 ) 89
operations
Core Earnings $ 83,974 $ 55,648 $ 311,085 $ 153,627
Weighted average
shares outstanding - 295,492,372 140,592,941 242,014,751 98,826,868
Basic
Weighted average
shares outstanding - 296,229,245 140,592,941 242,432,156 98,826,868
Diluted
Core Earnings per
weighted average $ 0.28 $ 0.40 $ 1.28 $ 1.55
share outstanding -
diluted
Contact:
Two Harbors Investment Corp.
July Hugen, Investor Relations
612-629-2514
July.Hugen@twoharborsinvestment.com
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