Valuation Almost Full, Two Harbors Investment Gets Downgrade

In a report published Friday, Keefe, Bruyette & Woods analysts downgraded the rating on

from Outperform to Market Perform, with a price target of $11, even after the company reported robust 1Q results. The company reported its 1Q15 core EPS at 26c, marginally ahead of the 24c estimate. Two Harbors Investment's interest income came in a penny higher than the estimate. The beat was driven by lower net swap expenses than the analysts had modeled. In the report Keefe, Bruyette & Woods noted, "We continue to find a lot to like about the company, including the well-hedged and well-diversified portfolio, high allocation to credit, and the loan sourcing capabilities. TWO is an active jumbo securitizer and has a growing commercial mortgage origination business. These are good things and things we think warrant some valuation premium vs. the more stereotypical "bond fund" mREIT." For the larger part of 2014, the company's stock traded at a discount to the hybrid mREIT average. Over time the share price has risen. Although Two Harbors Investment has done "an excellent job of managing in a volatile environment" and has "delivered more stable performance than peers," the company's stock is now "fairly valued," the analysts added.