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When it comes to mortgage reits (mREIT), it’s no doubt a competitive playing field, but right now with the worries of interest rates rising, there are investors following closely whether or not to buy on the dip, to hold or to sell before things get worse in the economy.
An mREIT which was formed in 2009 is Two Harbors Investment Corp. (NYSE: TWO) and their primary goal is to drive attractive risk-adjusted returns for our stockholders. And for dividend considerations, they take into account three main considerations in setting their dividend: (1) prospective economic returns; (2) taxable income; and (3) sustainability.
Headquartered in Minnesota, Two Harbors Investment Corp., like many in real estate, had a difficult 2020 due to the pandemic, Two Harbors Investment Corp., sold out its non-agency holdings and took on a unique strategy of pairing MSR with Agency RMBS.
Let’s take a quick look at this mREIT.
Source: Schwab.com
As you can see frrom the 11 year chart, while the country was still in recovery mode after the market crash of 2008, the share price hovered over $14 and for the most part, has kept afloat and even peaked at over $20 in 2013.
But while Two Harbors Investment Corp.remained consistent of keeping their stock over $14, let alone keeping it over $12, the pandemic sent shares tumbling to under $3.75 and many bought shares on the dip in hopes that the would go back to over $12 once again. Unfortunately, while the stock did look like it would go past $8.00, with yesterday’s market reaction to the Delta variant, it sent the stock to drop around $6.34.
But also could be a reaction from the July 13th on the pricing public offering of 40M common stock for a total gross proceeds of $260 M. Underwriters’ over-allotment is an additional 6M shares of common stock.
The net processes would be used to purchase target assets including residential mortgage-backed securities, mortgage servicing rights and other financial assets and for general corporate purposes.
Currently the stock closed at $6.34 and the 52-week range was $4.75 – $8.15 and the market cap is $2.0B and the enterprise value $14.5B with shares outstanding of 313.7M and the stock held by 54% by institutions.
CFRA has the company at “BUY” as of July 17th and a Hold rating since December 2020.
Quarterly Dividend is $.07 (annual dividend of $.68) and a dividend yield of 11.00%., with Orchid Island Capital Inc. (NYSE: ORC) is $.065 and is a monthly paying stock at a dividend yield of 15.69%. And with a low share price, both have attracted investors for its dividend but a big question is whether or not both companies can continue their dividend without a major cut.
Credit Suisse cut TWO to Neutral from Underperform, saying it sees limited return at current price levels.
For the most part, it’s going to be interesting to see how Two Harbors Investment Corp. (and other mREITs) do for the next quarter, but the company is deleveraging and doesn’t have a high risk profile compared to other mReits. But analysis expecting rates to increase, with Two Harbors Investment Corp., still not having recovery and is selling half of the price of what they have been more than consistent for from 2013 to early 2020.
But while I appreciate management taking a defensive position, one should best observe all similar mREITs and whether or not they want to buy, hold or sell.
It’s important to be transparent and say that I do not currently own any shares of TWO. Not to say that I will never jump back in because I really do like TWO.
But right now, it seems the Federal Reserve is sending mix messages, with financial analysts talking about the risks of inflation while the Feds are ignoring the risks of inflation and keeping its target rate near zero. Investors arms are up in the air.
Agency mREITs are not directly impacted by inflation but they are impacted by changes in interest rates and that is my concern.
As always, perform your due diligence and do a lot of research before investing. Talk to a financial advisor and find out if Two Harbors Investment Corp. (NYSE: TWO) would be a good investment for you.
