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Two Harbors Investment Corp. Message Board

  • sonnenwayne sonnenwayne Jun 11, 2013 1:50 PM Flag

    Not all mREITs are the same

    I understand the sell off in many mREITs, but these are not all the same and some won't see hits to their BVs, nor will they be cutting dividends. TWO is one such mREIT. It was one of the few that reported higher BVs and its 32 cent dividend looks safe. There's no reason for this to trade at 10% discount to BV.

    Per Credit Suisse:

    The key to the mortgage real-estate-investment-trust sector right now is book-value preservation.

    Given the relative strength of the non-Agency mortgage-backed-securities (MBS) market (recent weakness notwithstanding), hybrid mortgage real-estate investment trusts (REITs) have been able to withstand the volatility of the market better. This protection of book value leaves the hybrid mortgage REITs in a better position to continue to deliver returns and potentially take advantage of the better spread environment on Agency MBS today.

    Two Harbors Investment (ticker: TWO) remains our top pick among residential-mortgage REITs.

    Interest rates and the Agency MBS market continue to be volatile; this is leading to continued book-value volatility for the mortgage REITs. On average book values are down an additional 2.6% from our May 28 update. While there has been some recent softness in non-Agency prices, the hybrid mortgage REITs continue to fare better than the Agency-focused REITs.

    Our book-value estimates referenced above represent a status quo assumption of portfolios from the end of the first quarter. The mortgage REITs could have reduced leverage (most effective) or added hedges to help mitigate the book-value impact during the quarter. Along these lines, Two Harbors disclosed recently that it had gone from over $2 billion long to-be-announced (TBA) position to over $2 billion short TBA position during the second quarter. This action, coupled with its hedges, is why we feel comfortable that Two Harbors has protected book value better than its peers.

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