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CORRESP
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filename1.htm

 

December
11, 2023

 

United
States Securities and Exchange Commission

Division
of Corporation Finance

Office
of Real Estate & Construction

100
F. Street, N.E.

Washington,
D.C. 20549

Attention:
Babette Cooper and Jennifer Monick

 

  Re:
  Two Harbors Investment Corp.

Form
10-K for the Fiscal Year Ended December 31, 2022

Form
8-K filed July 31, 2023

Response dated November 3, 2023

File
No. 001-34506

 

Dear
Ms. Cooper and Ms. Monick:

 

We
refer to the comment letter dated November 20, 2023, from the Staff of the Securities and Exchange Commission concerning the Form 10-K
for the year ended December 31, 2022, filed on February 28, 2023 and the Form 8-K filed on July 31, 2023 for Two Harbors Investment Corp.
(the “Company”). We have set forth in boldface type the text of the Staff’s comments in the aforementioned comment
letter, followed by the Company’s responses in plain text.

 

Form
8-K filed July 31, 2023

 

Exhibit
99.1

Reconciliation
of GAAP to Non-GAAP Financial Information, page 11

 

1. We
                                            note your response to our comment 3 and your proposed revisions. Please address the following:

 • We
                                            refer you to your tables 1-3 within your response. Please tell us what consideration you
                                            gave to each such table representing a non-GAAP income statement. Reference is made to Questions
                                            102.10(b) and 102.10(c) of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations.

 • We
                                            refer you to your table 4 within your response. It appears that you intend to continue to
                                            present income excluding market-driven value changes to common stockholders within your earnings
                                            release. Please tell us what consideration you gave to such measure being a tailored accounting
                                            principle. Reference is made to Question 100.04 of the Non-GAAP Financial Measures Compliance
                                            and Disclosure Interpretations.

 

     

     

 

Response:

 

The
purpose of presenting the non-GAAP income excluding market-driven value changes (“IXM”) measure, including its various
adjustments related to market-driven value changes and certain operating expenses, is to provide analysts and investors with a
profit and loss attribution that allows them to enhance their understanding of the sources of returns from the Company’s
investment portfolio, operating expenses and tax expenses. This profit and loss attribution is supplemental to the information
required by GAAP. The presentation of an aggregate IXM figure is also useful to analysts and investors in that it illustrates the
Company’s total portfolio return prior to market-driven impacts and certain operating expenses (including for example expenses
related to the litigation with PRCM Advisors LLC and certain expenses related to the acquisition of RoundPoint Mortgage Servicing
LLC), all of which the Company believes are viewed by analysts and investors as unrelated to the Company’s long-term performance. Due to GAAP requiring the fair value treatment of the Company’s portfolio of RMBS, MSR and derivatives, the
Company’s GAAP financial results can be impacted significantly by actual market changes in interest rates, spreads and
volatility, and as a result may not in all cases be indicative of long-term capital market assumptions for the Company’s
investment portfolio. The disclosure of an aggregate IXM figure, which removes the impact of market changes
and certain operating expenses, allows readers to assess total portfolio performance in light of the operating costs and risks
associated with the Company’s actively managed portfolio approach to investing. As a mortgage REIT that considers the
long-term earnings potential of the portfolio when it sets its quarterly dividend, the aggregate IXM figure also provides the
Company’s board of directors and management, as well as analysts and investors, an additional data point as to such long-term
earnings potential. For the foregoing reasons, the disclosure of IXM for both target assets and derivatives individually and
in the aggregate, net of operating expenses and tax expenses, provides an important supplemental view of Company performance and is
a focus of analysts and investors.

 

The
Company has considered Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations and respectfully
submits that it does not believe that IXM has the effect of changing the recognition and measurement principles required to be
applied in accordance with GAAP. IXM is derived from GAAP comprehensive income by removing amounts that are recognized in the
Company’s GAAP financial statements (i.e., a portion of portfolio returns and certain operating expenses) rather than
adjusting the recognition and measurement of returns. As defined, IXM includes adjustments for market-driven value changes for RMBS,
MSR, swaps and TBAs that represent the portion of the GAAP comprehensive income for these instruments that is attributable to
unexpected price changes. The Company’s computations of unexpected price changes are determined by using the “realized
forwards” methodology, a commonly understood and utilized performance attribution approach within the industry for evaluating
fixed income and fixed income-like investments. The disclosure of unexpected price changes pursuant to the realized forwards
methodology allows for the quantification of certain total return drivers, such as unexpected changes in interest rates and spreads,
that may impact the fair value for each respective item. As defined, IXM also includes adjustments to remove certain portfolio and
portfolio-related items calculated in accordance with GAAP, which management views as being driven by market impacts, and certain
operating expenses unrelated to the continued long-term performance of the portfolio. Given this methodology, the Company’s
presentation of IXM shows a bifurcation of GAAP comprehensive income that is split between and equal to the sum of (a) IXM and (b)
market-driven value changes and certain operating expenses. Because the calculation of IXM represents a portion of GAAP
comprehensive income and does not change the GAAP measurement principles, the Company does not view IXM as being a tailored
accounting principle.

 

     

     

 

Further,
the Company does not believe that its presentation of IXM is in violation of Rule 100(b) of Regulation G, which prohibits non-GAAP measures
that “taken together with the information accompanying that measure and any other accompanying discussion of that measure, contains
an untrue statement of a material fact or omits to state a material fact necessary in order to make the presentation of the non-GAAP
financial measure, in light of the circumstances under which it is presented, not misleading.” As a non-GAAP measure, the Company
has historically provided and expects to continue to provide a comprehensive explanation of the IXM measure along with a reconciliation
to its most comparable GAAP measure, comprehensive income (loss). The Company’s disclosure of IXM has come to be understood and
appreciated by analysts and investors as useful supplemental information in evaluating Company performance. As indicated in prior correspondence,
IXM is also used by management to evaluate period-over-period comparisons of operating performance as well as measuring performance versus
industry peers, which allows management to explain its rationale for portfolio asset allocation, financing and hedging decisions.

 

With
respect to the proposed tabular presentation of IXM, tables 1-3 in our letter dated November 3, 2023 were prepared in a manner
requested by analysts and investors to provide a comprehensive and clear presentation of the various components of IXM. The
reconciliation tables are not intended to constitute non-GAAP income statements, are not labeled or presented as income statements
and do not give undue prominence to non-GAAP financial measures. However, the Company respectfully acknowledges the Staff’s
comment on the appearance of these tabular presentations and proposes to modify the disclosure of and reconciliations related to IXM
provided in its quarterly earnings presentations as set forth below:

 

GAAP
and Non-GAAP Results and Return Contributions

 

    ($
    thousands,

    except for per

    common share data)
    RMBS
    and other

    Agency securities (1)
    MSR
    (2)
    Derivatives
    and

    other (3)
    Expenses,

    convertible notes

    and preferred

    stock (4)
    Return
    to common

    stockholders (5)
    Return
    to common

    stockholders per

    weighted average

    basic common

    share
    Annualized
    return to

    common

    stockholders per

    weighted average

    basic common

    share

    GAAP
     
     
     
     
     
     
     

    Q3
    - 2023
     $                    (368,529)
     $               170,552
     $               218,849
     $                  77,717
     $                 (56,845)
     $                       (0.61)
    (14.5)%

    Q2
    - 2023
    (163,935)
    128,160
    122,140
    54,887
    31,478
    $                          0.31
    8.1%

    Variance
     $                    (204,594)
     $                  42,392
     $                  96,709
     $                  22,830
     $                 (88,323)
     
     

    IXM
    (6)
     
     
     
     
     
     
     

    Q3
    - 2023
     $                          22,630
     $                  36,700
     $                  24,877
     $                  34,919
     $                    49,288
     $                          0.51
    12.6%

    Q2
    - 2023
    31,408
    36,055
    23,731
    33,693
    57,501
     $                          0.60
    14.8%

    Variance
     $                         (8,778)
     $                         645
     $                     1,146
     $                     1,226
     $                   (8,213)
     
     

1.
See Appendix slide "GAAP to Non-GAAP Reconciliations – RMBS and Other Agency Securities" for a reconciliation of GAAP
to non-GAAP financial information.

2.
See Appendix slide "GAAP to Non-GAAP Reconciliations – MSR" for a reconciliation of GAAP to non-GAAP financial information.

3.
See Appendix slide "GAAP to Non-GAAP Reconciliations – Derivatives and Other" for a reconciliation of GAAP to non-GAAP
financial information.

4.
See Appendix slide "GAAP to Non-GAAP Reconciliations – Expenses, Convertible Notes and Preferred Stock" for a reconciliation
of GAAP to non-GAAP financial information.

5.
See Appendix slide "GAAP to Non-GAAP Reconciliations – Return to Common Stockholders" for a reconciliation of GAAP to
non-GAAP financial information.

6.
Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure. See Appendix slides titled "GAAP to Non-GAAP Reconciliations"
for a definition of IXM and reconciliations of GAAP to non-GAAP financial information.

 

     

     

 

GAAP
to Non-GAAP Reconciliations (Appendix)

 

    RMBS
    and other Agency securities
     
     
     
     

    Reconciliation
    of GAAP to non-GAAP Information
    Three
    Months Ended
    Three
    Months Ended

    ($
    thousands, except for per common share data)
    30-Sep-23
    30-Jun-23

    GAAP
    measure:
     
     
     
     

    Interest
    income: available-for-sale securities
     
    $          107,827
     
     $         104,195

    Other
    income: (loss) gain on investment securities
     
    (471)
     
    2,172

    Other
    income: gain (loss) on other derivative instruments
    86,212
     
    47,161
     

    Portion
    of other income: gain (loss) on other derivative instruments unrelated to RMBS and other Agency securities
            (88,256)
     
            (49,840)
     

    Portion
    of other income: gain (loss) on other derivative instruments related to RMBS and other Agency securities
     
    (2,044)
     
    (2,679)

    Unrealized
    loss on available-for-sale securities recognized through other comprehensive loss
     
    (350,922)
     
    (156,306)

    Subtotal
    GAAP RMBS and other Agency securities income (loss)
     
    (245,610)
     
    (52,618)

    Interest
    expense: repurchase agreements
    129,298
     
    116,946
     

    Less
    portion of interest expense: repurchase agreements unrelated to RMBS and other Agency securities
    (6,379)
     
    (5,629)
     

    Portion
    of interest expense: repurchase agreements related to RMBS and other Agency securities
     
    122,919
     
    111,317

    GAAP
    RMBS and other Agency securities income (loss), net of RMBS funding expense
     
    $      (368,529)
     
     $      (163,935)

     
     
     
     
     

    Non-GAAP
    measure:
     
     
     
     

    GAAP
    RMBS and other Agency securities income, net of RMBS funding expense
     
    $      (368,529)
     
     $      (163,935)

    Portion
    of GAAP RMBS and other Agency securities income related to market-driven value changes (1)
     
    391,159
     
    195,343

    Income
    Excluding Market-Driven Value Changes RMBS and other Agency securities income, net of RMBS funding expense
     
    $             22,630
     
     $             31,408

 

1.
The market-driven value changes adjustment for RMBS and other Agency securities represents unexpected price changes for the referenced
period. As defined, the calculation of IXM includes modeled price changes that are measured daily based on a “Realized Forwards”
methodology, which includes the assumption that spreads, forward interest rates, shape of the term structure and volatility factored
into the previous day ending fair value are unchanged. Unexpected price changes represent the differences between (a) actual spreads,
forward interest rates, shape of the term structure and volatility, and (b) the spreads, forward interest rates, shape of the term structure
and volatility that were factored into the previous day ending fair value. Unexpected price changes are measured daily and used to determine
the portion of actual market price changes not attributable to modeled price changes. The reported market-driven value changes adjustment
for RMBS and other Agency securities is the sum of all daily unexpected price changes for the referenced period.

 

    MSR
     
     
     
     

    Reconciliation
    of GAAP to non-GAAP Information
    Three
    Months Ended
    Three
    Months Ended

    ($
    thousands, except for per common share data)
    30-Sep-23
    30-Jun-23

    GAAP
    measure:
     
     
     
     

    Other
    income: servicing income
     
     $              178,625
     
     $         175,223

    Other
    income: gain (loss) on servicing asset
     
    67,369
     
    21,679

    Expenses:
    servicing expenses
     
    29,903
     
    25,190

    Subtotal
    GAAP MSR income
     
    216,091
     
    171,712

    Interest
    expense: repurchase agreements
    129,298
     
    116,946
     

    Portion
    of interest expense: repurchase agreements unrelated to MSR
    (122,919)
     
    (111,317)
     

    Portion
    of interest expense: repurchase agreements related to MSR
     
    6,379
     
    5,629

    Interest
    expense: revolving credit facilities
     
    32,526
     
    29,684

    Interest
    expense: term notes payable
     
    6,634
     
    8,239

    Subtotal
    GAAP MSR funding expense
     
    45,539
     
    43,552

    GAAP
    MSR income, net of MSR funding expense
     
     $             170,552
     
     $         128,1