Two Harbors Investment Corp. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stockholders' Equity

Stockholders' Equity

12 Months Ended

Dec. 31, 2018

Equity [Abstract]

Stockholders' Equity

Equity

Redeemable Preferred Stock

The following is a summary of the Company's series of cumulative redeemable preferred stock issued and outstanding as of December 31, 2018. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company, each series of preferred stock will rank on parity with one another and rank senior to the Company's common stock with respect to the payment of the dividends and the distribution of assets.

As of December 31, 2018

(in thousands)

Class of Stock

Issuance Date

Shares issued and outstanding

Carrying Value

Contractual rate

Redemption date ⁽¹⁾

Fixed to floating rate conversion date ⁽²⁾

Floating annual rate ⁽³⁾

Fixed-to-Floating rate

Series A

March 14, 2017

5,750

138,872

8.125

April 27, 2027

3M LIBOR + 5.660%

Series B

July 19, 2017

11,500

278,094

7.625

July 27, 2027

3M LIBOR + 5.352%

Series C

November 27, 2017

11,800

285,584

7.250

January 27, 2025

3M LIBOR + 5.011%

Fixed Rate

Series D

July 31, 2018

3,000

74,964

7.750

July 31, 2018

N/A

Series E

July 31, 2018

8,000

199,987

7.500

July 31, 2018

N/A

Total

40,050

$977,501

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(1)	Subject to the Company's right under limited circumstances to redeem the preferred stock earlier than the redemption date disclosed in order to preserve its qualification as a REIT or following a change in control of the Company.


(2)	For the fixed-to-floating rate redeemable preferred stock, the dividend rate will remain at a annual fixed rate of the $25.00 per share liquidation preference from the issuance date up to but not including the transition date disclosed within. Effective the conversion date and onward, dividends will accumulate on a floating rate basis according to the terms disclosed within (3) below.


(3)	On and after the fixed to floating rate conversion date, the dividend will accumulate and be payable quarterly at a percentage of the $25.00 per share liquidation preference equal to an annual floating rate of three-month LIBOR plus the spread indicated within each preferred class.

On July 31, 2018, upon the closing of the merger with CYS, the Company issued 3,000,000 shares of newly classified 7.75% Series D Cumulative Redeemable Preferred Stock, par value $0.01 per share, and 8,000,000 shares of newly classified 7.50% Series E Cumulative Redeemable Preferred Stock, par value $0.01 per share, in exchange for all shares of CYS’s Series A and Series B cumulative redeemable preferred stock outstanding prior to the effective time of the merger. Pursuant to the terms of the merger agreement with CYS, the terms of the Company’s Series D and Series E Cumulative Redeemable Preferred Stock are substantially similar to the terms of CYS’s Series A and Series B Cumulative Redeemable Preferred Stock.

For each series of preferred stock, the Company may redeem the stock on or after the redemption date in whole or in part, at any time or from time to time. Each series of preferred stock has a par value of $0.01 per share and a liquidation and redemption price of $25.00, plus any accumulated and unpaid dividends thereon up to, but excluding, the redemption date. Through December 31, 2018, the Company had declared and paid all required quarterly dividends on the Company’s preferred stock.

Distributions to Preferred Stockholders

The following table presents cash dividends declared by the Company on its preferred stock since their issuances:



Declaration Date	Record Date	Payment Date	Cash Dividend Per Preferred Share
Series A Preferred Stock:
December 18, 2018	December 31, 2018	January 28, 2019	$	0.507810
September 20, 2018	October 12, 2018	October 29, 2018	$	0.507810
June 19, 2018	July 12, 2018	July 27, 2018	$	0.507810
March 20, 2018	April 12, 2018	April 27, 2018	$	0.507810
December 14, 2017	January 12, 2018	January 29, 2018	$	0.507810
September 14, 2017	October 12, 2017	October 27, 2017	$	0.507810
June 15, 2017	July 12, 2017	July 27, 2017	$	0.750430
Series B Preferred Stock:
December 18, 2018	December 31, 2018	January 28, 2019	$	0.476560
September 20, 2018	October 12, 2018	October 29, 2018	$	0.476560
June 19, 2018	July 12, 2018	July 27, 2018	$	0.476560
March 20, 2018	April 12, 2018	April 27, 2018	$	0.476560
December 14, 2017	January 12, 2018	January 29, 2018	$	0.476560
September 14, 2017	October 12, 2017	October 27, 2017	$	0.518920
Series C Preferred Stock:
December 18, 2018	December 31, 2018	January 28, 2019	$	0.453130
September 20, 2018	October 12, 2018	October 29, 2018	$	0.453130
June 19, 2018	July 12, 2018	July 27, 2018	$	0.453130
March 20, 2018	April 12, 2018	April 27, 2018	$	0.453130
December 14, 2017	January 12, 2018	January 29, 2018	$	0.302080
Series D Preferred Stock:
December 18, 2018	December 31, 2018	January 28, 2019	$	0.484375
September 20, 2018	October 1, 2018	October 15, 2018	$	0.484375
Series E Preferred Stock:
December 18, 2018	December 31, 2018	January 28, 2019	$	0.468750
September 20, 2018	October 1, 2018	October 15, 2018	$	0.468750

Common Stock

Issuance of Common Stock in Connection with Acquisition of CYS Investments, Inc.

On July 31, 2018, in exchange for all of the shares of CYS common stock outstanding immediately prior to the effective time of the merger, the Company issued approximately 72.6 million new shares of common stock, as well as aggregate cash consideration of $15.0 million, to CYS common stockholders.

Reverse Stock Split

On September 14, 2017, the Company’s board of directors approved a one-for-two reverse stock split of its outstanding shares of common stock. The reverse stock split was effected on November 1, 2017 at 5:01 p.m. Eastern Time, following the special dividend of Granite Point common stock. At the effective time, every two issued and outstanding shares of the Company’s common stock were converted into one share of common stock. No fractional shares were issued in connection with the reverse stock split; instead, each stockholder holding fractional shares was entitled to receive, in lieu of such fractional shares, cash in an amount determined on the basis of the volume weighted average price of the Company’s common stock on the NYSE on November 1, 2017. In connection with the reverse stock split, the number of authorized shares of the Company’s common stock was also reduced on a one-for-two basis, from 900 million to 450 million. The par value of each share of common stock remained unchanged. All per share amounts, common shares outstanding and restricted shares for all periods presented have been adjusted on a retroactive basis to reflect the reverse stock split.

As of December 31, 2018, the Company had 248,085,721 shares of common stock outstanding. The following table presents a reconciliation of the common shares outstanding for the years ended December 31, 2018, 2017 and 2016:



	Number of common shares
Common shares outstanding, December 31, 2015	176,953,403
Issuance of common stock	30,301
Issuance of restricted stock ⁽¹⁾	852,459
Repurchase of common stock	(4,010,000	)
Common shares outstanding, December 31, 2016	173,826,163
Issuance of common stock	26,950
Issuance of restricted stock ⁽¹⁾	643,474
Common shares outstanding, December 31, 2017	174,496,587
Issuance of common stock	72,616,483
Issuance of restricted stock ⁽¹⁾	972,651
Common shares outstanding, December 31, 2018	248,085,721

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(1)	Represents shares of restricted stock granted under the Second Restated 2009 Equity Incentive Plan, net of forfeitures, of which 1,593,701 restricted shares remained subject to vesting requirements at December 31, 2018.

Distributions to Common Stockholders

The following table presents cash dividends declared by the Company on its common stock during the he years ended December 31, 2018, 2017 and 2016:



Declaration Date	Record Date	Payment Date	Cash Dividend Per Common Share
December 18, 2018	December 31, 2018	January 28, 2019	$	0.470000
September 20, 2018	October 1, 2018	October 29, 2018	$	0.311630
July 13, 2018	July 25, 2018	July 30, 2018	$	0.158370
June 19, 2018	June 29, 2018	July 27, 2018	$	0.470000
March 20, 2018	April 2, 2018	April 27, 2018	$	0.470000
December 14, 2017	December 26, 2017	December 29, 2017	$	0.470000
September 14, 2017	September 29, 2017	October 27, 2017	$	0.520000
June 15, 2017	June 30, 2017	July 27, 2017	$	0.520000
March 14, 2017	March 31, 2017	April 27, 2017	$	0.500000
December 15, 2016	December 30, 2016	January 27, 2017	$	0.480000
September 15, 2016	September 30, 2016	October 20, 2016	$	0.460000
June 16, 2016	June 30, 2016	July 20, 2016	$	0.460000
March 15, 2016	March 31, 2016	April 21, 2016	$	0.460000

On September 14, 2017, the Company’s board of directors declared a special dividend pursuant to which the 33.1 million shares of Granite Point common stock acquired by the Company in exchange for the contribution of its equity interests in TH Commercial Holdings LLC to Granite Point on June 28, 2017 would be distributed, on a pro rata basis, to the holders of Two Harbors common stock outstanding at the close of business on October 20, 2017. The Granite Point common stock was distributed on November 1, 2017. Due to its controlling ownership interest in Granite Point through November 1, 2017, the Company consolidated Granite Point on its financial statements. Effective November 1, 2017 (the date the 33.1 million shares of Granite Point common stock were distributed to the Company’s common stockholders), the Company no longer had a controlling interest in Granite Point and, therefore, deconsolidated Granite Point and its subsidiaries from its financial statements and reclassified all of Granite Point’s prior period assets, liabilities and results of operations to discontinued operations.

Dividend Reinvestment and Direct Stock Purchase Plan

The Company sponsors a dividend reinvestment and direct stock purchase plan through which stockholders may purchase additional shares of the Company’s common stock by reinvesting some or all of the cash dividends received on shares of the Company’s common stock. Stockholders may also make optional cash purchases of shares of the Company’s common stock subject to certain limitations detailed in the plan prospectus. The plan allows for the issuance of up to an aggregate of 3,750,000 shares of the Company’s common stock. As of December 31, 2018, 227,852 shares have been issued under the plan for total proceeds of approximately $4.4 million, of which 28,711, 27,194 and 30,301 shares were issued for total proceeds of $0.4 million, $0.5 million and $0.5 million during the years ended December 31, 2018, 2017 and 2016, respectively.

Share Repurchase Program

The Company’s share repurchase program allows for the repurchase of up to an aggregate of 37,500,000 shares of the Company’s common stock. Shares may be repurchased from time to time through privately negotiated transactions or open market transactions, pursuant to a trading plan in accordance with Rules 10b5-1 and 10b-18 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, or by any combination of such methods. The manner, price, number and timing of share repurchases are subject to a variety of factors, including market conditions and applicable SEC rules. The share repurchase program does not require the purchase of any minimum number of shares, and, subject to SEC rules, purchases may be commenced or suspended at any time without prior notice. The share repurchase program does not have an expiration date. As of December 31, 2018, a total of 12,067,500 shares had been repurchased by the Company under the program for an aggregate cost of $200.4 million; of these, 4,010,000 shares were repurchased for a total cost of $61.3 million during the year ended December 31, 2016. No shares were repurchased during the years ended December 31, 2018 and 2017.

At-the-Market Offering

As of December 31, 2018, the Company was party to an equity distribution agreement under which the Company was authorized to sell up to an aggregate of 10,000,000 shares of its common stock from time to time in any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 under the Securities Act of 1933, as amended, or the Securities Act. As of December 31, 2018, 3,792,935 shares of common stock had been sold under the equity distribution agreement for total accumulated net proceeds of approximately $77.6 million. No shares were sold during the years ended December 31, 2018, 2017 and 2016. Subsequent to year-end, the Company terminated its prior equity distribution agreement and entered into a new equity distribution agreement with a total of 35,000,000 shares authorized for issuance. Refer to Note 21-Subsequent Events for further discussion.

Accumulated Other Comprehensive (Loss) Income

Accumulated other comprehensive (loss) income at December 31, 2018 and December 31, 2017 was as follows:



(in thousands)	December 31, 2018			December 31, 2017
Available-for-sale securities
Unrealized gains	$	498,744		$	475,694
Unrealized losses	(387,927		)	(140,881		)
Accumulated other comprehensive (loss) income	$	110,817		$	334,813

Reclassifications out of Accumulated Other Comprehensive (Loss) Income

The Company reclassifies unrealized gains and losses on AFS securities in accumulated other comprehensive income to net (loss) income upon the recognition of any other-than-temporary impairments and realized gains and losses on sales, net of income tax effects, as individual securities are impaired or sold. The following table summarizes reclassifications out of accumulated other comprehensive income for the years ended December 31, 2018, 2017 and 2016:



	Affected Line Item in the Consolidated Statements of Comprehensive (Loss) Income	Amount Reclassified out of Accumulated Other Comprehensive (Loss) Income
		Year Ended
(in thousands)		December 31,
		2018		2017		2016
Other-than-temporary impairments on AFS securities	Total other-than-temporary impairment losses	$	470	$	789	$	1,822
Realized losses (gains) on sales of certain AFS securities, net of tax	Loss on investment securities	253,869		5,207		(102,852		)
Total		$	254,339	$	5,996	$	(101,030	)