TWO-PC — Two Harbors Investment Corp.

Two Harbors Investment Corp. Q4 2025 Earnings Call Summary

1. Key Financial Results and Metrics:

• Book Value: Increased to $11.13 per share from $11.04 in Q3 2025.
• Economic Return: Generated a quarterly economic return of 3.9%. For the full year, the total economic return on book value was -12.6%, but a positive 12.1% when excluding a litigation settlement expense.
• Comprehensive Income: Reported at $50.4 million, or 48¢ per share.
• Net Interest and Servicing Income: Declined due to MSR sales and lower float income, offset by reduced financing costs.
• Cash Position: Ended the quarter with over $800 million in cash and repaid $261.9 million in convertible senior notes.

2. Strategic Updates and Business Highlights:

• Merger Announcement: The company announced a merger with United Wholesale Mortgage (UWM), which is expected to double the size of its MSR portfolio to a pro forma $400 billion. This merger aims to enhance competitive positioning and growth potential.
• Performance of Mortgage Assets: Mortgage assets outperformed their hedges, with low coupon MSR performing as expected.
• MSR Sales: Settled on an additional $10 billion of MSR, increasing total third-party subservicing to $40 billion.
• Direct-to-Consumer Platform: The DTC platform had a record quarter, funding $94 million in loans, a 90% increase from Q3.

3. Forward Guidance and Outlook:

• Market Conditions: Anticipated continued demand for MSR driven by government policies aimed at stimulating the housing market and increasing homeownership.
• Return Projections: Estimated static returns for the portfolio between 5.8% to 11.1%, with potential quarterly returns per share of $0.16 to $0.31.
• Interest Rate Environment: Expectation of increased mortgage and origination activity in 2026 due to government support for lower mortgage rates.

4. Bad News, Challenges, or Points of Concern:

• Economic Return Decline: The full-year economic return was notably negative, raising concerns about overall performance.
• Market Volatility: The potential for increased volatility due to upcoming changes in the Federal Reserve's leadership and economic conditions could impact funding markets and MSR valuations.
• Leverage Reduction: The company has slightly reduced its leverage and mortgage risk, indicating a more defensive stance in the current market environment.
• Spread Tightening: Recent tightening of RMBS spreads could negatively affect return potential and dividend levels.

5. Notable Q&A Insights:

• Portfolio Construction: Management confirmed that portfolio decisions remain aligned with historical practices, despite the merger.
• Leverage Strategy: The company is adopting a more defensive approach due to market conditions, with reduced leverage and mortgage risk.
• GSE Activity: There is speculation about potential changes to GSE policies that could impact market dynamics, but current demand for MSR remains strong.
• Dividend Outlook: While there may be a marginal impact on return potential due to spread tightening, the decision on dividends will be made later in the quarter.

Overall, Two Harbors Investment Corp. is navigating a complex market landscape with a significant merger on the horizon, while also addressing challenges related to economic returns and market volatility.