NEW YORK CITY— Two Harbors Investment Corp., a hybrid mortgage REIT, and CYS Investments, Inc. an agency mortgage REIT, announced on April 26, that they have entered into a definitive merger agreement dated April 25, under which Two Harbors will acquire CYS. The transaction is expected close in the third quarter of 2018.

Two Harbors is headquartered in New York City and CYS is based in Waltham, MA.

CYS stockholders will exchange their shares of CYS common stock for newly issued shares of Two Harbors common stock as well as $15 million cash payable to CYS stockholders on a pro rata basis. More specifically, CYS shareholders will receive $7.79 of combined cash and Two Harbors stock for each CYS share they own. This amounts to a 17.7% premium to the April 25 closing price of $6.62. MarketWatch reports the deal would value CYS at $1.5 billion.

With the merger, PRCM Advisers LLC, Two Harbors' external manager, a subsidiary of Pine River Capital Management L.P., will reduce the base management fee it charges Two Harbors with respect to the additional equity under management resulting from the merger from 1.5% of stockholders' equity on an annualized basis to .75% through the anniversary of the closing.

PRCM will make a one-time downward adjustment of $15 million to the management fees payable to Two Harbors for the quarter in which the merger closes. PRCM will also make a downward adjustment of up to $3.3 million to reimburse Two Harbors for transaction-related expenses.

Two Harbors expects its currently quarterly dividend of $.47 to be sustained through 2018, subject to market conditions. All senior management positions will continue to be led by Two Harbors' personnel. Two independent directors for CYS's current board, James Stern and Karen Hammond, will join the Two Harbors board of directors.

“This transaction offers Two Harbors stockholders the opportunity to benefit from additional capital, supporting continued growth in our target assets, as well as an improved cost structure,” says Thomas Siering, Two Harbors' president and CEO.

Kevin Grant, CYS investments' chairman, CEO, president and CIO states he believes that CYS stockholders will benefit from the increased scale, diversification and liquidity of the combined companies. “Two Harbors has a long history of being strong stewards of capital and we believe this transaction should enhance value for our stockholders over the long term,” says Grant.

MarketWatch notes that CYS shares rose over 10% on Thursday after the announcement of the merger.

JMP Securities LLC is the financial advisor and Sidley Austin LLP is serving as legal advisor to Two Harbors. Barclays Capital Inc. and Credit Suisse Securities (USA) LLC are serving as financial advisors and Vinson & Elkins LLP is serving as legal advisor to CYS.

Instant Insights /

REITs Two Harbors and CYS Merge

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