Two Harbors: Weak Earnings

seekingalpha10-30

Two Harbors Investment Corp. is highly sensitive to interest rate changes, with Q3 earnings weak and dividend coverage increasingly opaque.The company's focus on mortgage servicing rights (MSRs) aims ...

Source Link

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

{"i18n":{"language":"en_US"},"isChannel":false,"data":{"share":"https://ttm.financial/m/news/2479491264?lang=en_US&edition=fundamental","thumbnail":"https://static.seekingalpha.com/cdn/s3/uploads/getty_images/150653512/image_150653512.jpg","is_english":true,"pubTime":"2024-10-30 05:18","share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","id":"2479491264","market":"sg","top_or_hot":-1,"title":"Two Harbors: Weak Earnings","media":"seekingalpha","content":"<div>\n<p>Two Harbors Investment Corp. is highly sensitive to interest rate changes, with Q3 earnings weak and dividend coverage increasingly opaque.The company's focus on mortgage servicing rights (MSRs) aims ...</p>\n\n<a href=\"https://seekingalpha.com/article/4730618-two-harbors-weak-earnings\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Two Harbors: Weak Earnings</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nTwo Harbors: Weak Earnings\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-10-30 05:18 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4730618-two-harbors-weak-earnings><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Two Harbors Investment Corp. is highly sensitive to interest rate changes, with Q3 earnings weak and dividend coverage increasingly opaque.The company's focus on mortgage servicing rights (MSRs) aims ...</p>\n\n<a href=\"https://seekingalpha.com/article/4730618-two-harbors-weak-earnings\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"TWO","symbol_name":"TWO HARBORS INVESTMENT CORP","start_time":0,"source_url":"https://seekingalpha.com/article/4730618-two-harbors-weak-earnings","article_id":"2479491264","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/150653512/image_150653512.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2479491264","pubTimestamp":1730236719,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Two Harbors Investment Corp. is highly sensitive to interest rate changes, with Q3 earnings weak and dividend coverage increasingly opaque.The company's focus on mortgage servicing rights (MSRs) aims ","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":["earning"],"viewcount":null,"language":"en","relate_stocks":{"TWO":"TWO HARBORS INVESTMENT CORP"},"translate_title":"两港：盈利疲软","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TWO":0.9},"content_text":"Two Harbors Investment Corp. is highly sensitive to interest rate changes, with Q3 earnings weak and dividend coverage increasingly opaque.The company's focus on mortgage servicing rights (MSRs) aims to reduce exposure to rate changes, but earnings indicate underlying issues.Q3 comprehensive income was $19.3 million, with a net loss of $250.2 million, with very little earnings available for distribution, raising concerns about dividend sustainability.Preferred shares are recommended over common stock due to better stability and less risk of dividend cuts.   Chris Parsons  Two Harbors Investment Corp. (NYSE:TWO), a popular mortgage real estate investment trust, or mREIT, and one that we follow, is very sensitive to moves in interest rates. So, we had our first interest rate cut from the Federal Reserve during the just announced quarter. And earnings for distribution were quite weak, nowhere near the dividend paid. While the company will stress such earnings are not the best gauge for coverage, whether the dividend is covered or not has become more and more opaque. That said, the company had to contend with a 50 basis point cut, only to deal with rates that have surged in the last month. The stock moved lower all month on rates surging, which hurts the ability to make money and strategic moves in their holdings. But Q3 was weak. Let us discuss. What kind of rate environment is good for Two Harbors Investment Corp.? Interest rates in 2024 have risen and then declined, and then rose again in the last month. We have to tell you that given TWO's portfolio is focused primarily on mortgage servicing rights, or MSRs, higher for longer interest rates are considered benefiting the company. But rapidly shifting rates are not a benefit. Now, when interest rates are high, prepayment risk for the mREITs declines as refinancing volume is much lower in the mortgage space given new mortgages are at much higher rates than average. Some short-term declines in Q3 spurred some repayment activity. What we know is that spreads continued to be volatile, and rapid shifts in rates are not positive for the company's earnings potential, which in our opinion has only weakened over time. Two Harbors’ President and CEO noted this in the press release: With MSR at our core, we have built an investment portfolio with RMBS that has less exposure to changes in mortgage spreads than portfolios without MSR, while still preserving upside to decreasing volatility and spread tightening\" The CIO added: Our portfolio benefited from the net performance of mortgages in the third quarter, but performance across the stack was uneven. We entered the quarter with an up-in-coupon bias, but as interest rates declined we shifted our TBA coupons lower, tracking the change in current coupon exposure coming from our MSR. MSR valuations remain well supported with strong demand as the supply of bulk sales continues to normalize from the record levels of the past few years. Nevertheless, we believe there will continue to be opportunities to add MSR at attractive levels, enhanced by our deep expertise coupled with the benefits of our in-house servicing and recapture operations.” So the heavier focus on MSR should be less exposed to significant changes in spreads (that is moves in rates) but the earnings seemingly indicate there are issues here. While MSR valuations benefit from still strong demand, seeing “attractive valuation” implies lower pricing of the instruments. We see earnings available for distribution were weak. Q3 earnings In Q3, Two Harbors reported comprehensive income of just $19.3 million, or $0.18 per share. This was an improvement from Q2, which was also questionable in our opinion. Is the company putting more capital to work? This is suggested by the fact that total debt-to-equity ticking higher. Total debt-to-equity increased from 4.5X in Q2 2024 to 4.6X in Q3 2024. The portfolio is still seeing interest expense outpace interest income. Net interest expense was $42.3 million. However, servicing income far outpaces servicing costs, and servicing income was $167.8 million. Other income was a loss of $335.9 million, ouch. This stems from losses on interest rate swaps and servicing assets. Factoring in expenses, we saw a huge net loss of $250.2 million of $2.42 per share. What about dividend coverage? Two Harbors' Dividend coverage When you see low income, and huge losses, kind of tough to argue that the dividend is well covered. We have said this before, but the way many of these mREITs have reported their dividend coverage over the years has evolved. When we say evolved, it is much more opaque. A bit of accounting wizardry, really. Two Harbors now uses so-called earnings available for distribution. This is an adjusted measure which 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 certain cash related operating expenses. Management, however, notes that this figure is just one the board uses to determine dividends. In our opinion, this dividend is in trouble. Folks, earnings available for distribution were just $0.13. The dividend paid was $0.45. So, where is the dividend payment coming from? One would think of taking on more debt, selling assets, etc. However, given that it is only one measure the board uses, it is difficult to gauge whether the earnings power covers the dividend. The fact is, this metric does not capture hedging derivatives and weighted yield to maturity at purchase. But given real income, it is unlikely. Book Value Increases We also look to book value. In Q3, book value narrowed from the sequential quarter. Book value was reported at $14.93 compared to $15.19 at the start of the quarter. It was also down from $15.64 at the end of Q1. Trending in the wrong direction. This, along with questionable dividend coverage, is why we see a huge discount-to-book. A 20% discount to book is historically a buy signal in this space, and thus, we think this presents a possible trading opportunity for some upside with the current $12.04 price. However, book value is eroding, and income metrics do not seem to cover the payout. Still better to consider preferred shares While Two Harbors' common stock offers a bountiful yield, consider buying the preferred shares. It's a much better way to play it than the commons in this space more often than not. You do not have to deal with dividend cuts. You can trade depending on discount or premiums in the preferred pricing. The common stock is all over the place. A dividend cut could be very likely, though more clear delineation of how it is covered or how the board continues to pay what seems like an uncovered dividend would help immensely. We think you should avoid the commons and consider the preferred shares, if at all.  We welcome your comments.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479491264"}