Two Harbors Mixes It Up to Maximize Profits

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It didn't take hybrid mortgage REIT Two Harbors Investment (NYSE: TWO  ) long to spring back -- with vigor -- after the spectacularly lousy earnings reports from agency-only player American Capital Agency (NASDAQ: AGNC  ) and its hybrid buddy American Capital Mortgage. Its own first-quarter report was to die for, and the stock has risen over 6% on the day following that announcement.

2013 is starting off sweet for the hybrid REIT
Despite missing earnings per share estimates by $0.03, Two Harbors managed to keep its net interest spread at 2.9%, with no decrease from the previous quarter. The trust took a hit on book value of $0.35 -- not too disappointing considering the special Silver Bay Realty (NYSE: SBY  ) dividend of $1.01 Two Harbors passed around with its own $0.32 payout, about six weeks ago.

In addition, Two Harbors noted an almost threefold increase in net income from the year ago quarter, from $51,800 to $143,716, and a hike in core earnings from $63,777 to $89,657. Is it any wonder that the share price has been on a tear?

Variety is the stuff of profit
Two Harbors is never shy about stepping outside of the box in the quest for profit. Silver Bay, for example, is one of only two such REITs that were created to take advantage of the recent single-family rental craze, which has been so profitable for companies like the Blackstone Group (NYSE: BX  ) .

On the mortgage front, Two Harbors notes that it has acquired a passel of prime jumbo home loans, which it likely plans to securitize. The company's CEO, Tom Siering, also addresses this issue on the earnings call, where he states that the trust was involved in a $400 million securitization of prime jumbo loans. This puts Two Harbors in the company of mREIT Redwood Trust (NYSE: RWT  ) , which has nearly single-handedly brought back the jumbo-loan securitization market over the past two years. If Redwood's success is any indication -- it recently reported first-quarter net income of $61 million, compared to the year-ago figure of $30 million -- Two Harbors is on the right track.

The newest project for the ambitious mREIT concerns mortgage servicing rights. The lucrative MSR market has flourished lately, as banks unload these products to comply with new capital rules. Earlier this month, Two Harbors announced its purchase of a small servicing company with approval from Fannie Mae, Freddie Mac, and Ginnie Mae. The company, Matrix Financial Services, hasn't been very active in the mortgage business, meaning it also carries no baggage that could cause trouble for Two Harbors, according to CEO Siering. 

This, of course, puts the trust in a perfect position to begin acquiring MSRs -- and start making megaprofits like industry heavy Nationstar Mortgage (NYSE: NSM  ) , which has seen its share price skyrocket by nearly 200% over the past year, and recently reported an increase in revenue of 163% year over year.

It seems pretty clear that Two Harbors has been keeping an eye on those that are making money, and it isn't afraid to join them. For investors, that's just the kind of management scenario that can't be beat.

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Related Tickers

9/30/2016 2:42 PM
TWO $8.58 Up +0.01 +0.06%
Two Harbors Invest… CAPS Rating: ****
NSM $14.81 Up +0.48 +3.35%
Nationstar Mortgag… CAPS Rating: ***
RWT $14.23 Up +0.20 +1.45%
Redwood Trust CAPS Rating: *****