Summary

• Two Harbors Investment Corp. has just disclosed that it is planning to diversify into commercial real estate, marking a major shift in asset allocation for the company starting with $500,000,000.
• I previously called out its lack of real diversification, which would hamper its competitiveness and ability to adapt to a changing interest rate environment, but did not predict this move.
• This move is very exciting for the company and is very bullish for the stock in my opinion, reinforcing my prior bullish stance.

Two Harbors Investment Corp. (NYSE:TWO ) has disclosed that it is planning to diversify into commercial real estate, marking a major shift in asset allocation for the company. The news comes as a huge surprise, as its parent company has hired several individuals to already serve in the new commercial real estate endeavor. Pine River Capital Management L.P. has hired Jack Taylor to serve as Global Head of the Commercial Real Estate Division and has also brought on Stephen Alpart and Steven Plust to each serve as Managing Directors. Further and perhaps more striking is that Two Harbors also announced that it is planning an initial allocation of approximately $500 million of equity capital to this commercial real estate initiative. This is a critical move for the company.

Thomas Siering, Two Harbors’ President and Chief Executive Officer, stated,

The addition of Jack, Stephen and Steven to the Pine River team will enable Two Harbors to diversify our portfolio into commercial real estate assets. We believe the opportunity in the commercial real estate market is attractive and will drive total stockholder return over the long term.

All three of these individuals have extensive experience in the field and should help drive Two Harbors into the next era of its successful investing history.

When I last covered Two Harbors, I demonstrated that Two Harbors had several strengths and weaknesses. The largest issue I identified with the company was its lack of real diversification, which will hamper its competitiveness and ability to adapt to a changing interest rate environment going forward. I discussed that the residential portfolio was strong; however, without more diversification, the company was vulnerable. While I noted that diversification would help the company thrive, I did not predict that the company would move half a billion dollars into commercial real estate here in 2014 into 2015.

This news is unexpected and is incredibly bullish. Why do I think this is such good news? Well, take Annaly Capital (NYSE:NLY ) as an example. Just last year Annaly began diversifying into commercial real estate and although it remains a small portion of the portfolio, this diversification helped protect the company during the rout of 2013 when interest rates spiked sending mREITS into a tailspin. I also covered this when I stated that NLY had bottomed and there was multiple reasons to buy. In all this time that the real estate market has come back on, it has mostly been residential. We are still waiting for the boom in commercial real estate. Two Harbors will now be well positioned to move forward into 2015 with this move. While it remains to be seen exactly how much the company will put into commercial (beyond the initial $500 million allocation), I suspect that the company will follow the path of Annaly and keep a small section of the portfolio (10%-20%) dedicated to commercial. I like this move and think shareholders should be thrilled with this news.

Disclosure: The author is long NLY. (More. ) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.