Two Harbors Ends Management Agreement, Citing Material Breaches

Two Harbors Investment Corp (TWO) has announced that it has provided PRCM Advisers LLC with a notice of termination of their Management Agreement, citing material breaches and gross negligence in PRCM’s duties.

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Shares in TWO are rising 2% in Wednesday’s pre-market trading.

The notice specifies that the agreement will terminate on August 14, 2020. No termination fee will be payable to PRCM in connection with the termination says Two Harbors.

Previously TWO had decided not to renew the Management Agreement on the basis of unfair compensation payable to PRCM, which meant that the agreement should have terminated on September 19, 2020, with a $144 million termination fee.

Because the Management Agreement is now being terminated for cause, however, no termination fee will be payable to PRCM says Two Harbors.

Following the termination, Two Harbors will become a self-managed company. “We expect to continue to be managed by our strong and experienced senior management team… The Board anticipates a smooth and timely transition of all functions necessary” the company stated.

An Independent Committee had reviewed and evaluated possible breaches of the Management Agreement and acts of gross negligence on the part of PRCM. Based on its review, the committee approved the termination of the Management Agreement ‘for cause.’

According to TWO, the committee “unanimously determined that there had occurred certain material breaches of the Management Agreement by the Manager… that are incapable of being cured within the time period set forth therein and certain events of gross negligence on the part of the Manager in the performance of its duties.”

Shares in Two Harbors have plunged 64% year-to-date, but the stock has a cautiously optimistic Moderate Buy consensus. That’s with an average analyst price target of $6 (16% upside potential). (See TWO stock analysis on TipRanks).

RBC Capital’s Kenneth Lee maintained a buy rating on the stock and $6 price target after the company declared a $0.14 per share common dividend for 2Q 2020, payable on July 29.

“We maintain our view that TWO’s strong liquidity position should help it manage through advance requirements related to mortgage forbearance… While current returns could be somewhat dampened from a conservatively-positioned portfolio, we see potential for improving returns over time and internalization as a positive catalyst” he commented.