Two Harbors Investment Corp. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Merger with UWM: Rationale tied to being first mortgage REIT to invest in MSR, acquiring Roundpoint in 2023, spinning up DTC lending platform in 2024. Merger with UWM doubles MSR portfolio to pro forma $400 billion, benefits both companies.
• Financial Results: Book value increased to $11.13 per share at Dec 31 vs $11.04 at Sep 30. Comprehensive income $50.4 million or 48¢ per share. Net interest and servicing income decreased due to MSR sales and lower float income. Mark to market gains/losses lower in Q4 due to MSR runoff and rate steepening.
• Balance Sheet: Ended Q4 with over $800 million cash. Repaid convertible senior notes of $261.9 million. RMBS funding markets stable, repurchase spreads around SOFR +23 bps. MSR financing across 5 lenders, $1.1 billion unused capacity.
• Portfolio Performance: MSR and RMBS returns benefited from lower interest rate volatility and strong demand for spread assets. Yield curve steepened, RMBS spreads tightened, current coupon RMBS at tightest since 2022. Prepayment speeds for refinanceable coupons increased, but CPR increases on pools small and in line with expectations.

Segment Performance

• Investment Portfolio: In the fourth quarter, total economic return was positive 3.9%. For the full 2025 calendar year, total economic return on book value was negative 12.6%, but excluding litigation settlement expense, it was positive 12.1%. Mortgage assets outperformed hedges, and low coupon MSR earned carry.
• Fixed Income: Performance was positive in Q4. Fed delivered two 25 basis point cuts in Oct and Dec. Yield curve steepened, with two-year treasury yields down 14 bps to 3.47% and ten-year up 2 bps to 4.17%. Equity markets up, S&P 500 up 2.3% at quarter end.
• MSR Portfolio: Settled ~$400 million UPB of MSR from flow acquisitions and recapture, sold $9.6 billion UPB on servicing retained basis. Price multiple consistent at 5.8 times, delinquency low under 1%. Prepayment rates in MSR portfolio had minor 0.4 percentage point pickup to 6.4%, but below projections.
• Securities Portfolio: Short term, intend to manage business normally. Long term, no decisions made yet on liquidation; paths include selling some assets or needing more TBA positions.

Guidance

• Forward-Looking: Estimate 65% of capital allocated to servicing with static return 10-13%, remaining to securities with 10-14% static return. Static return on portfolio between 6.9%-10.2% before leverage. Potential static return on common equity 5.8%-11.1% or $0.16-$0.31 per share quarterly. Spreads tightened since Dec, affecting dividend marginally. Continued GSE buying could keep spreads tight, favoring paired portfolio construction of MSR and Agency RMBS.

Risks

• Market Volatility: Interest rate volatility could impact portfolio performance.
• Merger Uncertainties: Details of merger execution and future portfolio direction still early, uncertainties exist.
• Regulatory Changes: Changes in GSE policies or regulations could affect MSR and RMBS markets.
• Economic Factors: Macroeconomic conditions, inflation, and Fed policy changes could impact mortgage rates and spreads.

Question and Answer

• Q: How does portfolio construction shift tactically post-merger? A: Managing portfolio normally in ordinary course, decisions based on risk-reward assessments, in line with historical management.
• Q: Update on book value recent mark? A: Up about 1.5%-2% as of Jan 30.
• Q: Leverage and risk-reward view on MBS market? A: More defensive due to administration actions and spread movement; reduced leverage and mortgage risk; paired construction focuses on hedged portfolio extracting spread of combined assets.
• Q: Chances of LLPA reduction at GSEs? A: Reasonable chance, somewhat priced in but not entirely; policy actions like raising GSE portfolio caps could affect.
• Q: MSR market bank interest and capital rules? A: Interest in MSR market strong, no notable changes seen regarding bank interest due to capital rules.
• Q: Return outlook and dividend post-Jan spread tightening? A: Spreads tighter, return potential marginally lower; dividend decision later in quarter, too early to say trend.
• Q: GSE buying impact on coupon exposures? A: Lowered mortgage exposure; GSE buying focused on current coupons, lower coupons most affected, higher coupons widened; coupon stack contracted with lower coupons benefiting more.
• Q: Volatility and funding markets impact from Fed changes? A: Likely mild increase in volatility due to new Fed chair; funding markets stable, no disturbance seen.
• Q: MSR portfolio channel mix and prepayment behavior? A: No specific numbers on broker vs retail vs correspondent; prepayment characteristics reflected in acquisition prices; MSR market diversified, volumes lower than recent years.
• Q: GSE cash window impact on MSR valuations? A: No reflection of MSR valuations; MSR market robust, volumes lower in changing regime.