Two settles litigation with former advisor for $375M

Real estate investment trust Two settled its long-running litigation with its former external manager Pine River for a one-time payment of $375 million.

The dispute escalated in July 2020, when Pine River and affiliated entities dismissed a state court legal filing and instead pursued the case in federal court.

At the same time, Two, the business name of Two Harbors Investment, accelerated its termination of the management agreement from the original expiration date in September of that year to Aug. 14. Two claimed it was removing Pine River for cause and thus did not have to pay a termination fee.

The Pine River suit also accused Two of attempting to appropriate its intellectual property.

On May 23, following the recommendations of a magistrate judge, the federal court ruled in favor of Pine River that Two did not have a basis to terminate the management agreement; all other requests for summary judgement on both sides were dismissed.

At the time, Two took a $198.9 million contingency litigation expense, inclusive of a $139.8 million termination fee it believed it would owe Pine River. The charge impacted Two's second quarter results.

The settlement addresses both points. The one-time cash payment to Pine River is due 30 days after the settlement agreement was signed, which was on Aug. 20.

Two plans to use cash on hand as well as draw from its available borrowing capacity.

The agreement also calls for Pine River to relinquish all ownership claims to any intellectual property involved.

"The resolution of this matter is an important development for our company that allows us to move forward with clarity and certainty of purpose," said Bill Greenberg, Two's president and CEO.

Taking the settlement agreement into account, Two's common stock book value falls to $11.06 per share from $12.73 per share.

"We estimate that the decline in book value should result in pro forma leverage of approximately 7.8 times, which is well above the recent average of closer to 6.5 times, so we would assume some level of balance sheet reduction," a post-settlement report from Bose George of Keefe, Bruyette & Woods, said.

In addition to announcing the settlement, Two, the parent of Roundpoint, said it sold $20 billion of mortgage servicing rights to an undisclosed buyer; the price was also not released. But it retained the servicing function on those MSRs, bringing Roundpoint's subservicing business to handling $31 billion of unpaid principal balance or approximately 138,000 loans.

The MSR sale should support Two's liquidity and reduce its leverage, George said.

"The carrying [value] of the company's MSR was 5.9 times the 25.4 basis point servicing fee, suggesting a carrying value of approximately 1.5%," George said. "Assuming the same multiple on the sold MSR, the company should have generated roughly $300 million of cash (before netting out any asset-level financing)."