Mortgage REIT Two Harbors Investment Sells a Fixed-to-Floating Preferred

By Tim McPartland

Two Harbors Investment (NYSE:TWO) has sold a large issue of fixed-to-floating-rate preferred stock with an initial coupon of 7.625%.

The issue is 10,000,000 shares ($25 per share) with an additional 1,500,000 shares reserved for broker overallotments. Like many fixed-to-floating-rate preferred issues, the coupon will be fixed at 7.625% for a period of 10 years, after which it will float at a coupon of the 3-month London Interbank Offered Rate (LIBOR), plus a spread of 5.352%.

The new issue shares are cumulative in respect to dividends, but dividends are not qualified for preferential income tax treatment. Shares are perpetual, meaning there is no stated maturity date.

Two Harbors Investment is a real estate investment trust which invests in residential mortgage-backed securities, as well as mortgage servicing rights. Additionally, TWO holds a portfolio of commercial mortgages in its TW Commercial Holdings business.

But recently, TWO struck a deal to spin this portion of the business off to a new REIT known as Granite Point Mortgage Trust. TWO will receive common shares representing 76% of the shares in Granite Point after the new REIT goes through an initial public offering (IPO). TWO will have to hold the shares for a 120-day “lock up” period, after which it plans to distribute the shares to its holders as a special dividend.

TWO completed a previous offering of fixed-to-floating-rate preferred stock on March 7, 2017. TWO-A, which carries an initial coupon of 8.125%, has traded very strongly since issuance and recently closed at $27.08/share. Fixed-to-floating-rate shares have been strongly desired by income investors in the last year as the threat of higher interest rates has grown. Investors believe that in case of higher interest rates, a floating rate will protect them from lower share values that come with fixed rate, perpetual preferreds.

Details of this new issue can be found here. This new issue is now trading on the OTC Grey Market under the temporary ticker of TWHBP and last traded at $25.39.

Many investors in preferred stocks like to see a substantial distribution on the common shares of the issuers. The reduction or elimination of distributions on the common shares provides an early warning that preferred share payments could be coming closer to being at risk. Two Harbors pays a current distribution of 26 cents/share quarterly, which offers a current yield of 10.57% on a share price of $9.84.