Two Harbors Investment Corp. Reports Second Quarter 2010 Financial Results
NEW YORK--(BUSINESS WIRE)-- Two Harbors Investment Corp. (NYSE Amex: TWO; TWO.WS), a real estate investment trust that invests in residential mortgage-backed securities, today announced its financial results for the quarter ended June 30, 2010.
Second Quarter 2010 Highlights:
-- Portfolio delivered average annualized yield of 5.4%, an approximate 45 basis point increase over the prior quarter yield. -- Agency securities avoided the impact of GSE buyouts and experienced a three-month average Constant Prepayment Rate of 12.5%. -- Reduced weighted operating expense ratio by approximately 100 basis points through the raise of additional capital. -- Declared a dividend of $0.33 per common share, or 16% dividend yield, based upon June 30, 2010, closing price of $8.25.
"April marked an important milestone for Two Harbors" said Thomas Siering, Two Harbors' President and Chief Executive Officer. "The completion of the secondary offering, which raised net proceeds of $107 million, enabled the company to expand its portfolio while simultaneously realizing economies of scale through an approximate 100 basis point reduction in operating expenses. As we enter into the second half of 2010, we believe the portfolio's full earnings potential will drive realized earnings and cash flow, providing attractive dividends to our shareholders."
The following table summarizes the company's GAAP and non-GAAP earnings measurements and key metrics for the respective periods in 2010:
Two Harbors Operating Performance (dollars in thousands, Q1-2010 Q2-2010 Q2 YTD 2010 except per share data) Earnings Return Earnings Return Earnings Return per on per on per on Earnings Earnings diluted average Earnings diluted average Earnings diluted average weighted equity weighted equity weighted equity share share share Core $ 3,929 $ 0.29 12.6 % $ 5,764 $ 0.26 11.4 % $ 9,693 $ 0.54 11.9 % Earnings1 GAAP Net $ 5,327 $ 0.40 17.1 % $ 4,088 $ 0.18 8.1 % $ 9,415 $ 0.52 11.5 % Income Adjusted GAAP $ 6,072 $ 0.45 19.5 % $ 6,777 $ 0.30 13.4 % $ 12,848 $ 0.72 15.7 % Earnings2 Comprehensive $ 8,827 $ 0.66 28.3 % $ 3,360 $ 0.15 6.7 % $ 12,187 $ 0.68 14.9 % Income Operating Q1-2010 Q2-2010 Metrics Dividend per $ 0.36 $ 0.33 common share Book value per diluted $ 9.38 $ 8.70 share at period end Expenses as a percentage of 3.2 % 2.2 % average equity (1) Core Earnings is a non-GAAP measure that the Company defines as net income, excluding impairment losses, gains or losses on sales of securities, unrealized gains or losses on interest rate swaps, gains or losses on other derivative instruments and certain non-recurring expenses. (2) Adjusted GAAP Earnings is a non-GAAP measure that the Company defines as GAAP Net Income, excluding the unrealized fair value gains and losses associated with the Company's interest rate swaps.
Two Harbors reported Core Earnings for the quarter ended June 30, 2010 of $5.8 million or $0.26 per diluted weighted average common share outstanding, as compared to Core Earnings for the quarter ended March 31, 2010 of $3.9 million or $0.29 per diluted weighted average common share outstanding.
During the quarter, the company sold residential mortgage-backed securities (RMBS) for $14.9 million with an amortized cost of $14.1 million for a net realized gain of $0.8 million. In addition, the company recognized in earnings an unrealized loss, net of tax, of $2.7 million associated with its interest rate swaps, and net gains on other derivative instruments of approximately $0.2 million.
The company reported GAAP net income of $4.1 million or $0.18 per diluted weighted average share outstanding for the quarter ended June 30, 2010, as compared to $5.3 million or $0.40 per diluted weighted average share outstanding for the quarter ended March 31, 2010. On a GAAP basis, the company provided an annualized return on average equity of 8.1% and 17.1% for the quarters ended June 30, 2010 and March 31, 2010, respectively.
"Management considers Adjusted GAAP Earnings and comprehensive income as the leading indicators of the company's operating performance," said Jeff Stolt, Two Harbors' Chief Financial Officer. "We believe Adjusted GAAP Earnings best represents the company's realized earnings and cash flow necessary to declare and pay its dividend. We believe comprehensive income is the best GAAP measure of the overall performance of the company."
Two Harbors reported Adjusted GAAP Earnings for the quarter ended June 30, 2010, of $6.8 million or $0.30 per diluted weighted average common share outstanding as compared to Adjusted GAAP Earnings for the quarter ended March 31, 2010, of $6.1 million or $0.45 per diluted weighted average common share outstanding. On an Adjusted GAAP Earnings basis, the company recognized an annualized return on average equity of 13.4% and 19.5% for the comparative periods. "Adjusted GAAP Earnings" represents a non-GAAP measure and is defined as GAAP net income (loss) exclusive of unrealized gains and losses from interest rate swaps.
The company reported comprehensive income of $3.4 million or $0.15 per diluted weighted average share outstanding for the quarter ended June 30, 2010, as compared to comprehensive income of $8.8 million or $0.66 per diluted weighted average share outstanding for the quarter ended March 31, 2010. The decrease is primarily attributable to unrealized mark-to-market losses associated with our interest rate swaps, the dilutive impacts of April's stock offering and portfolio construction costs in the form of "bid-offer" spreads that were incurred during deployment of the capital raised in the offering. On a comprehensive income basis, the company recognized an annualized return on average equity of 6.7% and 28.3% for the comparative periods. For the first two quarters of 2010, the annualized return on average equity is 14.9%.
Other Key Operating Metrics
Two Harbors declared a quarterly dividend of $0.33 per common share for the quarter ended June 30, 2010 and $0.36 per common share for the quarter ended March 31, 2010. The annualized dividend yield on the company's common stock for the quarter ended June 30, 2010, based on the June 30, 2010 closing price of $8.25, was 16.0%.
The company's book value per diluted share, after giving effect to the second quarter $0.33 dividend, was $8.70 as of June 30, 2010, compared to $9.38 as of March 31, 2010. The decrease is primarily attributable to the aforementioned effects of the stock offering in the second quarter and unrealized losses from interest rate swaps, in addition to "bid-offer" spreads attendant to and lead times associated with deployment of the new capital. The quarterly numbers do not capture the full earnings potential for the portfolio as the incremental capital was earning income in the portfolio for only 31 days on a weighted average basis. Two Harbors has now completed the investment of the proceeds from the stock offering.
Operating expenses for the second quarter were approximately $1.1 million, or 2.2% of average equity, compared to approximately $1.0 million, or 3.2%, for the first quarter.
For the quarter ended June 30, 2010, the annualized yield on average RMBS available-for-sale securities was 5.4% and the annualized cost of funds on the average borrowings was 0.6%, which resulted in a net interest rate spread of 4.8%. This is an approximate 35 basis point increase over the annualized interest rate spread for the quarter ended March 31, 2010. The company reported debt-to-equity, defined as total borrowings to fund RMBS and Agency derivatives divided by total equity, of 3.2:1.0 and 3.6:1.0 at June 30, 2010 and March 31, 2010, respectively.
In the second quarter, the company deployed proceeds from its April capital raise which resulted in a RMBS portfolio as of June 30, 2010 with a total value of $832.4 million, comprised of $637.8 million Agency RMBS and $194.7 million non-Agency RMBS. In addition, the company held $145.4 million of U.S. Treasuries. As of June 30, 2010, fixed-rate securities comprised 48.9% of the company's RMBS portfolio and adjustable-rate securities comprised 51.1% of the company's RMBS portfolio.
Two Harbors was a party to interest rate swaps as of June 30, 2010 with an aggregate notional amount of $400.0 million, of which $250.0 million was utilized to economically hedge interest rate risk associated with the company's short-term LIBOR-based repurchase agreements. This notional position represents 34.6% of the company's $722.0 million in outstanding borrowings collateralized by RMBS and Agency derivatives.
The following table summarizes the company's portfolio:
Two Harbors Portfolio (dollars in thousands, except per share data) RMBS Portfolio Composition As of June 30, 2010 Agency Bonds Fixed Rate Bonds $ 339,595 40.8 % Hybrid ARMS 298,178 35.8 % Total Agency 637,773 76.6 % Non-Agency Bonds Senior Bonds 157,409 18.9 % Mezzanine Bonds 37,265 4.5 % Total Non-Agency 194,674 23.4 % Aggregate RMBS Portfolio $ 832,447 Fixed-rate investment securities as a percentage 48.9 % of RMBS portfolio Adjustable-rate investment securities as a 51.1 % percentage of RMBS portfolio Portfolio Metrics For the Quarter Ended June 30, 2010 Annualized yield on average RMBS available-for-sale securities during the quarter Agency securities 3.5 % Non-Agency securities 11.3 % Aggregate Portfolio 5.4 % Annualized cost of funds on average repurchase 0.6 % balance during the quarter for RMBS Annualized interest rate spread for RMBS during 4.8 % the quarter Weighted average cost basis of principal and interest securities Agency $105.7 Non-Agency $59.2 Weighted average three month CPR for our portfolio Agency 12.5 % Non-Agency 12.9 % Debt-to-equity ratio at period-end1 3.2 to 1.0 (1) Defined as total borrowings to fund RMBS and Agency derivatives to total equity.
Agency securities owned by Two Harbors at June 30, 2010 experienced a three-month average Constant Prepayment Rate (CPR) of 12.5% during the second quarter of 2010 as compared to 16.2% during the first quarter of 2010. The weighted average cost basis of the Agency portfolio was 105.7% of par as of June 30, 2010 and 105.0% of par as of March 31, 2010. The net premium amortization was $2.8 million and $2.5 million for the quarters ended June 30, 2010 and March 31, 2010, respectively.
Non-Agency securities owned by Two Harbors at June 30, 2010 experienced a three-month average CPR of 12.9% during the second quarter of 2010 as compared to 11.6% during the first quarter of 2010. The weighted average cost basis of the non-Agency portfolio was 59.2% of par as of June 30, 2010 and 56.8% of par as of March 31, 2010. The discount accretion was $2.5 million and $1.1 million for the quarters ended June 30, 2010 and March 31, 2010, respectively. The total net discount remaining was $184.9 million and $118.8 million as of June 30, 2010 and March 31, 2010, respectively.
Two Harbors Investment Corp. will host a conference call on August 5, 2010, at 9:00 a.m. EST to discuss second quarter 2010 financial results and related information. To participate in the teleconference, please call toll-free 877-868-1835 (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 at www.twoharborsinvestment.com under the Webcast link. For those unable to attend, a telephone playback will be available beginning at 12 p.m. EDT on August 5, 2010 through 9 p.m. EDT on August 12, 2010. The playback can be accessed by calling 800-642-1687 (or 706-645-9291 for international callers) and providing Confirmation Code 87733680. The call will also be archived on the company's website under the Webcast link.
About Two Harbors Investment Corp.
Two Harbors Investment Corp., a Maryland corporation, is a real estate investment trust that invests in residential mortgage-backed securities. 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.
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 operation costs, the rate at which we are able to deploy our available capital, 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, the impact of new legislation or regulatory changes on our operations, 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 ("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 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 9 of this release.
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., 601 Carlson Parkway, Suite 330, Minnetonka, MN 55305, telephone 612-238-3300.
TWO HARBORS INVESTMENT CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (dollars in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2010 2009 2010 2009 Interest income: Available-for-sale $ 9,088 $ - $ 15,241 $ - securities Cash and cash 37 7 43 55 equivalents Total interest 9,125 7 15,284 55 income Interest expense 863 - 1,381 - Net interest 8,262 7 13,903 55 income Other income: Gain on sale of investment 834 - 2,031 - securities, net Loss on interest rate swap (4,054 ) - (5,601 ) - agreements Gain on other derivative 152 - 1,098 - instruments Total other income (3,068 ) - (2,472 ) - Expenses: Management fees 748 - 1,205 - Operating expenses 1,132 1,386 2,120 1,706 Total expenses 1,880 1,386 3,325 1,706 Net income (loss) before income 3,314 (1,379 ) 8,106 (1,651 ) taxes Benefit from 774 155 1,309 247 income taxes Net income (loss) 4,088 (1,224 ) 9,415 (1,404 ) Accretion of Trust Account income relating to common - (37 ) - (68 ) stock subject to possible conversion Net income (loss) attributable to $ 4,088 $ (1,261 ) $ 9,415 $ (1,472 ) common stockholders Net income (loss) available per share to common $ 0.18 $ (0.05 ) $ 0.52 $ (0.06 ) stockholders, basic and diluted: Weighted average shares outstanding: Basic 22,438,121 24,936,558 17,933,689 24,936,558 Diluted 22,466,691 24,936,558 17,959,072 24,936,558 Comprehensive income (loss): Net income (loss) $ 4,088 $ (1,224 ) $ 9,415 $ (1,404 ) Other comprehensive income Net unrealized gain on available-for-sale (728 ) - 2,772 - securities, net of tax Other comprehensive (728 ) - 2,772 - income Comprehensive $ 3,360 $ (1,224 ) $ 12,187 $ (1,404 ) income (loss)
TWO HARBORS INVESTMENT CORP. CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share data) ASSETS June 30, December 31, 2010 2009 (unaudited) Available-for-sale securities, at fair value $ 977,884 $ 494,465 Cash and cash equivalents 71,441 26,105 Total earning assets 1,049,325 520,570 Restricted cash 18,647 8,913 Accrued interest receivable 3,757 2,580 Due from counterparties 20,765 4,877 Derivative assets, at fair value 32,633 364 Prepaid expenses 118 572 Deferred tax assets 894 - Prepaid tax assets 632 490 Total Assets $ 1,126,771 $ 538,366 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Repurchase agreements $ 866,278 $ 411,893 Derivative liabilities, at fair value 21,636 - Accrued interest payable 460 114 Deferred tax liabilities - 124 Accrued expenses and other liabilities 2,422 1,030 Dividends payable 8,622 3,484 Total liabilities 899,418 416,645 Stockholders' Equity Preferred stock, par value $0.01 per share; 50,000,000 - - shares authorized; no shares issued and oustanding Common stock, par value $0.01 per share; 450,000,000 shares authorized and 26,067,590 261 134 and 13,379,209 shares issued and outstanding, respectively Additional paid-in capital 238,521 131,756 Accumulated other comprehensive income (loss) 1,822 (950 ) Cumulative (losses) earnings 3,680 (5,735 ) Cumulative distributions to stockholders (16,931 ) (3,484 ) Total stockholders' equity 227,353 121,721 Total Liabilities and Stockholders' Equity $ 1,126,771 $ 538,366
TWO HARBORS INVESTMENT CORP. RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL INFORMATION (dollars in thousands, except per share data) Three Months Ended June 30, Six Months Ended June 30, 2010 2009 2010 2009 Reconciliation of net income (loss) attributable to common stockholders to Core Earnings: Net income (loss) attributable to common $ 4,088 $ (1,261 ) $ 9,415 $ (1,472 ) stockholders Adjustments for non-core earnings: Gain on sales of (834 ) - (2,031 ) - securities, net of tax Unrealized loss on interest rate swap 2,689 - 3,433 - agreements, net of tax Gain on other derivative instruments, (179 ) (1,124 ) net of tax Core Earnings $ 5,764 $ (1,261 ) $ 9,693 $ (1,472 ) Weighted average shares 22,466,691 17,959,072 outstanding - diluted Core Earnings per weighted average share $ 0.26 NM $ 0.54 NM outstanding - diluted Three Months Ended June 30, Six Months Ended June 30, 2010 2009 2010 2009 Reconciliation of net income (loss) attributable to common stockholders to Adjusted GAAP Earnings: Net income (loss) attributable to common $ 4,088 $ (1,261 ) $ 9,415 $ (1,472 ) stockholders Adjustments to GAAP Net Income: Unrealized loss on interest rate swap 2,689 - 3,433 - agreements, net of tax Adjusted GAAP Earnings $ 6,777 $ (1,261 ) $ 12,848 $ (1,472 ) Weighted average shares 22,466,691 17,959,072 outstanding - diluted Adjusted GAAP Earnings per weighted average $ 0.30 NM $ 0.72 NM share outstanding - diluted NM = not meaningful
Source: Two Harbors Investment Corp.
Released August 4, 2010