Two Harbors Investment Corp. Q2 FY2025 earnings call

1. Market: Fixed income and equity markets rebounded in the second quarter after early April's poor performance due to tariff and trade policy uncertainties. The macro environment recovered steadily, with the S&P reaching a record high and Agency RMBS spreads recovering. 2. Business initiatives: Strengthened the direct-to-consumer originations platform at RoundPoint. Invested significantly in AI technologies in the contact center and origination side to enhance efficiencies. 3. Financial: Took a $1.92 per share loss contingency accrual related to litigation from the termination of the management agreement with PRCM Advisers in 2020.

In the second quarter, RMBS funding saw $48 million UPB in first liens funded, up from $29 million UPB in the first quarter, a 68% increase. For MSR, $6.4 billion UPB of MSR was purchased through 3 bulk purchases. The price multiple of MSR remained unchanged at 5.9x, and prepayment rates on MSR increased by 1.6 percentage points to 5.8% quarter-over-quarter.

1. Anticipate the Federal Reserve may cut rates in the latter half of 2025, and expect RMBS and MSR portfolios to respond positively if rates are cut. 2. Projected portfolio returns, considering the loss contingency accrual, with estimates of returns on assets and potential static return on common equity.

1. Litigation risk: Uncertainty regarding the resolution of the PRCM litigation with no set trial date yet. 2. Market volatility risk: Ongoing tariff threats, trade negotiations, and geopolitical tensions posing risks to the market.

Q: So your leverage increased this quarter, I guess, as a result of the litigation reserve. Can you just talk about -- is that kind of the new level of leverage that we should be thinking about? Or are there still more portfolio actions to come to kind of bring it back to the prior leverage range?

A: Doug, this is Nick. Thank you for the question. So we ended the quarter at a leverage of 7x. And the range that we have discussed in these calls in the past has really been a range that we quote a range of about 5 to 8 as a leverage target...

Q: Can we talk about financing strategy and maybe the thought process behind moving part of the financing from repo to unsecured this quarter?

A: Harsh, it's William Dellal. The reason we did the unsecured baby bond was to start to prefinance the maturity of the convertible. And some of the warehouse lines that we used to use are now kind of warehouse repo. So that's why there is some change there. But basically, the big change is the issuance of the baby bond, which is to prefund part of the convert maturity.