Shares of investment REIT Two Harbors Investment (TWO 1.38%) jumped as much as 18.6% in trading on Tuesday after reporting financial results. Shares closed the day up 15.5%.
Two Harbors' impressive quarter
Comprehensive income fell from $31.5 million a quarter ago to $56.8 million, but on a generally accepted accounting principles (GAAP) net income basis, the company generated a profit of $294.1 million. Book value fell from $16.39 per share just a quarter ago to $15.36 per share, but was still above today's closing price of $11.61.
Management has been adjusting the mortgage portfolio to increase coupon payments and adjust for lost cash flow in older assets. This has been successful, and they expect the acquisition of RoundPoint Mortgage Servicing will save an additional $25 million to $30 million annually.
Volatility in mortgages continues
The rise in interest rates recently has led to a reduction in the value of mortgages, which is what you see in these results. The decline in book value in just the last three months is what's spooking investors and causing the stock to trade at a discount to book value.
Investors are taking a big risk buying a company like Two Harbors Investment because it's fundamentally a bet that rates will go lower and people will continue paying their mortgages. I don't think rates are going to come down anytime soon, so despite today's pop in shares, this is not a risk I'm willing to take.