Another Fixed-to-Floating Preferred Sold by a Mortgage REIT

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Two Harbors Investment Corp (NYSE:TWO) becomes the 3rd mREIT in as many weeks to sell a fixed to floating rate preferred issue.  Interestingly all 3 issues have very similar terms.


TWO has sold 5,000,000 shares of 8.125% fixed-to-floating rate preferreds with the typical preferred stock terms. Shares are cumulative in respect to dividends,  redeemable at the issuer’s option and dividends are non qualified for preferential income tax treatment (all dividends from REIT preferred stocks are non qualified). 1 twist with the new shares from TWO is the “call protected” term is a full 10 years, meaning they are not allowed to call the issue until 2027.  The coupon will be fixed until 8.125% until April of 2027 and then will float at 3 month Libor plus 5.66%

Recall that last week PennyMac Mortgage (NYSE:PMT) sold a 8.125% fixed-to-floating rate preferred issue.   The terms of this issue are very similar to the TWO issue, except the call protection period ends in 2024 (3 years shorter than the Two Harbors issue) and the base coupon rate that is added to 3 month Libor is slightly higher at 5.831%.


A couple of weeks previous Chimera Investment Group (NYSE:CIM)  sold a 8% fixed-to-floating rate issue with a base coupon rate of 5.791% that will be added to 3 month Libor starting in 2024.

It should be noted by investors that neither the PennyMac issue nor the Chimera issue are trading very strongly. Both have been bouncing around the $24.50 – $24.65 area and I have a suspicion that even when the issues move from the OTC Grey Market to the NYSE they are going to be stuck in the $24’s as there is now anticipation of a Fed rate hike next week and income issues are pausing to ponder the future.

We will not be buying anything at all for the next week as it doesn’t make sense to move before we get the rate hike behind us.  We think that if the Fed raises rates next week it won’t be the hike that will be painful, as the market is now anticipating a raise, but it could be the Fed statement that hurts.  A post meeting statement that sounds too bullish could spook the market and send everyone off to talk about maybe a ½% hike mid year–and talk like that would send markets lower quickly.  So why buy now?  We will revisit potential purchases later next week,

Details on the new issue from Two Harbors can be found here.   The issue will begin trading on the OTC Grey market soon under the temporary ticker TWHBP.                                                                                                                  
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Tim McPartland

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Tim McPartland
Tim McPartland is a private investor with over 45 years of investing experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.
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