Two Harbors Investment Corp. recorded costs from its recently closed acquisition of RoundPoint Servicing in the third quarter but expects it'll pay off in incremental pretax income gains next year.
The company generated $194.1 million in net income during the period but other closely watched earnings metrics for real estate investment trusts were negative.
Two Harbors took a $56.9 million comprehensive loss and its earnings available for distribution were a negative $776,000 for the third quarter. It recorded $187.8 million in net earnings, $31.5 million in comprehensive income and a negative $3.7 million in EAD for the second quarter.
A year ago, Two Harbors reported nearly $263.9 million in net income, a comprehensive loss of more than $287.8 million and $55.2 million in earnings available for distribution.
Overall, based on an estimated final purchase price of $44.7 million as recorded at quarter-end, the RoundPoint deal resulted in goodwill and other intangibles of $28.4 million, Chief Financial Officer Mary Riskey said during the earnings call.
"In addition, we expect to pay a total of $16 million in deboarding fees to move our loans from our subservicers to RoundPoint," she added, noting that $10 million of these have already been realized. Two Harbors had a line item for $3.3 million in deboarding fees in the third quarter.
Bringing servicing in-house could incrementally offset some of those costs by adding anywhere from $25 million to $30 million in pretax income next year, according to President and CEO Bill Greenberg. Those gains only become possible with scale, he noted in an earnings call.
"The addition of RoundPoint improves our outlook and we expect to realize further operational and cost efficiencies as it becomes fully integrated," Greenberg told analysts during the call.
Subservicing is effective for less sizable players, but with 500,000 loans from RoundPoint, the decision on whether to outsource or not becomes a breakeven proposition, with the scales tipping in favor of in-house operations thereafter, he said. Two Harbors owns servicing from over 850,000 loans.
The effect of ongoing market volatility on mortgage assets, in addition to expenses associated with the RoundPoint acquisition, contributed to negative numbers in the company's earnings. The company invests in mortgage servicing rights and securitizations.
There's some hope that volatility could diminish due to the growing belief in the market that Federal Reserve officials on Wednesday will put monetary policy actions on hold, Greenberg said, noting that has been reflected in some normalization of the yield curve.
The first read on the company's earnings by equity investors was relatively positive. At the time of this writing, its stock was trading just under $12 per share, up from closer to $10 the previous day.
Keefe, Bruyette & Woods described the company's results as competitive with its 6.3% decline in book value around half of that reported by some of its contenders.
"Performance has come in better than peers," Bose George, Alexander Bond and Thomas McJoynt Griffith, analysts at KBW, said in a report published Tuesday.
