Total Economic Return: 4.4% for the first quarter. Book Value: Increased to $14.66 per share at March 31, from $14.47 on December 31. Comprehensive Income: $64.9 million or $0.62 per weighted average common share. Net Interest and Servicing Income: Increased by $5.2 million in the first quarter. Operating Expenses: Increased due to higher noncash equity compensation expenses. Portfolio Size: $14.6 billion, including $11.6 billion in settled positions and $3 billion in TBAs. Economic Debt-to-Equity: Decreased to 6.2 times. Prepayment Rates: 30-year Agency RMBS universe decreased to 5.6% CPR. MSR Portfolio Prepayment Speed: 4.2 CPR for the first quarter, down 0.7% quarter-over-quarter. MSR Price Multiple: Unchanged at 5.9 times. Static Return Potential: Estimated between 8.7% to 12.3% before leverage. Prospective Static Return on Common Equity: Estimated between 9.1% to 14.7%.

Warning! GuruFocus has detected 5 Warning Signs with TWO.

Release Date: April 29, 2025

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

Two Harbors Investment Corp (NYSE:TWO) generated a total economic return of 4.4% for the first quarter, with both RMBS and MSR contributing positively. The company's book value increased to $14.66 per share at the end of March, up from $14.47 at the end of December. Comprehensive income for the first quarter was $64.9 million, or $0.62 per weighted average common share. The company maintained high liquidity levels, with $950 million in unused MSR asset financing capacity and $47 million in unused capacity for servicing advances. Two Harbors Investment Corp (NYSE:TWO) is actively managing its portfolio to take advantage of market dislocations and attractive return opportunities.

Negative Points

The macroeconomic environment remains uncertain, with volatility in interest rates and spreads impacting the market. Operating expenses increased due to higher noncash equity compensation expenses, which typically occur in the first quarter. The company experienced mark-to-market losses on swaps and futures, offsetting some of the gains from RMBS and TBA positions. The MSR market faces limited bulk acquisition opportunities, which could impact growth potential. The company's direct-to-consumer channel for loan recapture is still in its nascent stages, limiting its ability to offset portfolio runoff.

Q & A Highlights

Q: Given the volatility, can you give us an update on book value through April and any changes you might have made in the portfolio to adjust for the current environment? A: William Greenberg, CEO: It's been a volatile April, but we've managed it well, and through last Friday, we were down about 3.5%. Nicholas Letica, CIO: We've modulated the portfolio since early April, lowering risk initially and then raising it slightly as market conditions evolved. We're now back up to a debt-to-equity ratio approaching 6.

Story Continues

Q: Can you discuss the impact of the merger between Rocket and Mr. Cooper on the servicing market and the bulk MSR purchase market? A: William Greenberg, CEO: The merger is significant, but its real-life impacts may be more muted. Both companies were active MSR buyers, so demand should remain consistent. The merger might make the market slightly more competitive, but it doesn't fundamentally change the servicing market dynamics.

Q: Can you clarify the impact of wider spreads on return potential? A: Nicholas Letica, CIO: Yes, wider spreads have increased the return potential by about $0.03 on both the high and low ends of our estimates.

Q: How comfortable are you with the dividend given the new target range and current spreads? A: Nicholas Letica, CIO: We are comfortable with the dividend given the current spreads and portfolio composition. With spreads having widened this quarter, we feel confident about supporting the dividend.

Q: Can you explain the static return estimate changes and how varying leverage impacts this measure? A: William Greenberg, CEO: We've added a dimension of changing portfolio leverage to reflect dynamic management. The static return estimate now includes leverage ranges, providing a more reflective view of the portfolio's potential returns.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.

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