TWO-PC — Two Harbors Investment Corp.

Summary of TWO-PC Q3 2025 Earnings Call

1. Key Financial Results and Metrics

• Litigation Settlement: The company recorded a litigation settlement expense of $175.1 million, or $1.68 per share, related to a settlement with its former external manager, impacting overall financial results.
• Total Economic Return: Reported a total economic return of -6.3% for Q3 2025, with a positive return of 7.6% excluding the settlement expense. For the first nine months, total economic return was -15.6% and 9.3% excluding the expense.
• Comprehensive Loss: The company incurred a comprehensive loss of $80.2 million, or $0.77 per share, but would have generated a comprehensive income of $94.9 million, or $0.91 per share, without the litigation expense.
• Cash Position: Ended the quarter with $770.5 million in cash, with plans to redeem $262 million in convertible notes due in January 2026.
• Portfolio Adjustments: The RMBS portfolio decreased from $11.4 billion to $10.9 billion, while MSR sales totaled $19.1 billion in UPB, with an additional $10 billion expected to settle shortly.

2. Strategic Updates and Business Highlights

• Subservicing Growth: Established a significant relationship with a new subservicing client, bringing total subservicing UPB to approximately $40 billion. The company is optimistic about growth in its subservicing business, particularly in light of recent market consolidations.
• Direct-to-Consumer (DTC) Platform: The DTC origination platform showed robust growth, with record locks in September and $49 million in funded UPB during Q3. The platform is expected to enhance portfolio recapture and economic returns.
• Technology Investments: Continued improvements in technology at RoundPoint are aimed at enhancing customer experience and achieving economies of scale.

3. Forward Guidance and Outlook

• Optimism for MSR and MBS: The company believes it is well-positioned to capitalize on investment opportunities in its MSR and MBS portfolios. They project attractive risk-adjusted returns, with static return estimates for the portfolio between 9.1% to 12.6% before leverage.
• Market Conditions: The management expects continued demand for MSRs despite recent rate cuts, with a focus on maintaining a balanced portfolio that includes both MSRs and agency RMBS.

4. Bad News, Challenges, or Points of Concern

• Increased Expense Ratio: The reduction in capital base has led to an increased expense ratio, which the company is actively working to address.
• Market Risks: While the company sees attractive spreads, there are concerns about the symmetrical risks associated with MBS performance and potential volatility in the market.
• Valuation Pressures: The MSR portfolio remains significantly out of the money, with only 3% considered refinanceable at current mortgage rates, which could limit growth opportunities in a declining rate environment.

5. Notable Q&A Insights

• Economic Debt to Equity: The economic debt-to-equity ratio increased to 7.2 times, but management expressed comfort with this level while noting a reduction in spread risk.
• Cost Savings: Management indicated that current cost structures do not reflect potential savings from ongoing efficiency efforts, suggesting upside to future financial performance.
• MSR Valuations: MSR valuations are expected to remain stable despite interest rate fluctuations, with strong demand from various market participants for low gross WACC MSRs.
• Subservicing Strategy: The company is focused on attracting new clients in the subservicing space, leveraging its expertise as both investors and servicers.

Overall, TWO-PC demonstrated resilience in navigating recent challenges while positioning itself for future growth through strategic portfolio adjustments and investments in technology. However, it faces headwinds related to increased expenses and market volatility.