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Two Harbors Investment Corp. Reports Third Quarter 2012 Financial Results

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, residential real properties and other financial assets, today announced its financial results for the quarter ended September 30, 2012.

  • The company reported Comprehensive Income of $524.4 million, or $1.94 per diluted weighted average common share.
  • Book value increased 15.1% to $11.44 per diluted common share at September 30, 2012, due primarily to strong appreciation in the company's Agency and non-Agency RMBS holdings, net of hedges.
  • The Agency RMBS portfolio, inclusive of IIOs, experienced a low and stable three-month average Constant Prepayment Rate (CPR) of 6%, which contributed to the RMBS portfolio's aggregate yield of 4.2%.
  • The company reported Core Earnings of $84.4 million, or $0.31 per diluted weighted average common share. Third quarter Core Earnings were impacted by timing of the capital deployment from the company's July 2012 capital raise and lower yields on the company's Agency RMBS securities acquired in recent months.
  • The company declared a dividend of $0.36 per common share, or 12.3% annualized dividend yield, based upon the September 28, 2012 closing price of $11.75.
  • The company completed an accretive public stock offering in July 2012, which resulted in the issuance of 57.5 million shares of common stock for net proceeds of approximately $592.4 million. The company completed deployment of the proceeds from this offering primarily by making additional acquisitions of RMBS securities and residential real properties.

"We had a remarkable quarter," said Thomas Siering, Two Harbors' President and Chief Executive Officer. "Our RMBS portfolio delivered its most outstanding performance since the company's formation, achieving an annualized return on average equity of 70.2% on a Comprehensive Income basis. We believe this performance demonstrates not only the advantages of our hybrid investment strategy, but also highlights the strength of our security selection process and speaks to the high caliber of our investment team."
(1) The term “total return” means (i) the change in Two Harbors' book value per share at September 30, 2012 as compared to June 30, 2012, plus (ii) dividends declared by Two Harbors in the third quarter of 2012, divided by Two Harbors' book value per share at June 30, 2012.

Operating Performance

The following table summarizes the company's GAAP and non-GAAP earnings measurements and key metrics for the third quarter of 2012:
Two Harbors Operating Performance
(dollars in thousands, except per share data) Q3-2012   YTD 2012
Annualized Annualized
Per diluted return on Per diluted return on
weighted average weighted average
Earnings   Earnings   share   equity   Earnings   share   equity
Core Earnings 1 $ 84,377 $ 0.31 11.3 % $ 224,213 $ 1.00 13.0 %
GAAP Net Income $ 26,802 $ 0.10 3.6 % $ 102,606 $ 0.46 6.0 %
Comprehensive Income $ 524,400 $ 1.94 70.2 % $ 861,718 $ 3.84 50.1 %
Operating Metrics   Q3-2012
Dividend per common share $ 0.36
Book value per diluted share at period end $ 11.44
Other operating expenses as a percentage of average equity 0.9 %

(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 and certain gains or losses on derivative instruments. 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 September 30, 2012 of $84.4 million, or $0.31 per diluted weighted average common share outstanding, as compared to Core Earnings for the quarter ended June 30, 2012 of $76.1 million, or $0.35 per diluted weighted average common share outstanding. Core Earnings were impacted by costs associated with timing of capital deployment from the company's July 2012 capital raise and lower yields on the company's Agency RMBS securities acquired in recent months.

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