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Two Harbors Investment (TWO) Initiated As 'Buy' By Deutsche Bank; PT $12.75

 December 21, 2012 02:33 PM


(By Balachander) Two Harbors Investment Corp. (NYSE: TWO) shares were initiated with a "Buy" rating and price target of $12.75 by Deutsche Bank (DB), given the attractive valuation and return expectations.

The bank expects TWO to continue generating attractive ROEs and post earnings growth in 2013 as it benefits from less prepayment-sensitive agency assets, an increasing mix of non-agency assets, income from Silver Bay, and new investments in whole loans.

This, DB believes, is likely to lead to securitizations next year.

The bank said 98 percent of TWO's agency RMBS are backed by low balance, high LTV, HECM, seasoned, low FICO and otherwise prepayment protected pools.

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Given TWO's deeply discounted non-agency securities, accretion of purchase discounts may offset some of the premium amortization expense should higher-than-expected prepayments occur, DB said.

Silver Bay is a newly organized REIT focused on acquiring, renovating, leasing, and managing undervalued single-family residential properties for rental income and resale. TWO will own 48 percent of Silver Bay shares after contributing its existing portfolio of about 2,200 properties and $50 million in cash, DB noted.

The stock, which has been trading in the 52-week range of $9.03 to $12.20, traded flat at $11.59 on Friday.

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