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Don't Forget About mREITs...Here's A Top Pick From Some Very Smart Analysts

Don't Forget About mREITs...Here's A Top Pick From Some Very Smart Analysts

On Friday, Wells Fargo & Co (NYSE: WFC) released a research update on diversified mortgage REIT Two Harbors Investment Corp (NYSE: TWO) titled "Breaking Through The BV Ceiling."

Based on information shared by Two Harbors management at its Investor Day presentation held Thursday, the company remains Wells Fargo's top pick in the mREIT space.

Two Harbors is an mREIT that acquires and manages a diversified portfolio of assets including: Agency and Non-Agency MBS, Commercial Real Estate whole loans, prime nonconforming mortgage loans and MSRs.

Related Link: 3 High-Yield mREITs Wall Street Is Watching

Tale Of The Tape


Historically, mREIT share prices can be sensitive to interest rate hikes, which can negatively impact book value (BV) and dent the price of shares.

Dividends & Performance

two_-_q4_alpha_chart.jpg Source: TWO Q4 fact sheet

Investors looking for income often consider mREITs because of their high-yield business model. Two Harbors is no exception, as it currently pays shareholders a dividend yielding 9.66 percent.

Wells Fargo: Outperform, Top Sector Pick

Wells Fargo's Outperform rating "is based on (1) TWO having a strong management team, in our opinion, (2) superior asset selection and risk management, and (3) our expectation for industry-leading economic returns."

  • Two Harbors is managed by Pine River Capital Management L.P., which is paid a 1.5 percent on stockholders' equity, with no other performance or incentive fees.
  • Wells Fargo is raising its valuation range from $11.00 to $12.00 from $10.50 to $11.25 based upon Two Harbors' "diverse business model being better positioned to perform in a variety of housing and interest rate environments."
  • The Wells Fargo valuation range "is based on a 1.0x-1.05x p/b multiple on estimated Q1 intraquarter NAV of $11.20."
  • This is a premium compared with Two Harbors pure-play residential mREIT peers, "which trade at roughly 0.90x book value."

Related Link: Wunderlich Downgrades American Capital Mortgage On Dividend Cut Surprise

Wells Fargo Talks Two Harbors' Business Model

A major differentiator for Two Harbors is the diverse nature of its revenue streams, including:

  • Commercial Real Estate Lending – first mortgage, mezzanine lending, b-notes and preferred equity investments.
  • Mortgage Conduit – prime jumbo loans, with expansion into non-prime and high LTV markets.
  • Mortgage Servicing Rights (MSRs) – about 12 percent of TWO allocated capital; however, could represent from 10 to 20 percent in 2015 and 2016.
  • Agency RMBS – residential mortgage backed securities currently make up 44 percent, but are expected to moderate to 30 to 40 percent in 2015 and 2016.
  • Non-Agency (Legacy) Credit – Wells Fargo sees this as a liquidity source, with Two Harbors looking to reduce its allocation from 31 percent of capital down to 15 to 25 percent targets in 2015 and 2016.

Risk Factors

1. Interest rate risk  

2. Yield curve risk

3. Prepayment risk

4. Liquidity/financing risk

5. Margin call risk

Image credit: Public Domain

Latest Ratings for TWO

Jan 2021JMP SecuritiesMaintainsMarket Outperform
Dec 2020Keefe, Bruyette & WoodsDowngradesOutperformMarket Perform
Dec 2020BarclaysDowngradesOverweightEqual-Weight

View More Analyst Ratings for TWO
View the Latest Analyst Ratings


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