TWO — Two Harbors Investment Corp.

TWO Q3 2025 Earnings Call Summary

1. Key Financial Results and Metrics

• Litigation Settlement Expense: Recorded a one-time expense of $175.1 million ($1.68 per share) related to a settlement with a former external manager, impacting overall financial results.
• Total Economic Return: Reported a total economic return of -6.3% for Q3, with a positive return of 7.6% when excluding the litigation expense. Year-to-date returns were -15.6% and +9.3%, respectively, excluding the expense.
• Comprehensive Loss: The company incurred a comprehensive loss of $80.2 million ($0.77 per share) for the quarter, which would have been a comprehensive income of $94.9 million ($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 in January 2026.

2. Strategic Updates and Business Highlights

• Portfolio Adjustments: Reduced RMBS portfolio from $11.4 billion to $10.9 billion and sold $19.1 billion UPB of MSR, establishing a new subservicing relationship. Another $10 billion UPB is set to settle shortly.
• Subservicing Growth: The company is expanding its third-party subservicing business, now servicing approximately $40 billion in UPB, and is positioned to service Ginnie Mae loans.
• Direct-to-Consumer (DTC) Originations: Achieved record locks in September, with $49 million UPB funded in first and second liens, indicating a successful growth strategy in this area.

3. Forward Guidance and Outlook

• Optimism for Growth: Management expressed confidence in capitalizing on opportunities in the MSR and MBS portfolio, particularly as interest rates trend lower. They believe their stock is undervalued compared to peers.
• Return Projections: Estimated static returns for the portfolio between 9.1% to 12.6% before leverage, with potential quarterly returns per share of $0.26 to $0.42.
• Cost Reduction Initiatives: Plans to implement cost-saving measures to improve efficiency and lower the expense ratio, with potential upside to future return estimates.

4. Bad News, Challenges, or Points of Concern

• Increased Expense Ratio: The reduction in capital base has led to a higher expense ratio, which management is actively addressing.
• Market Risks: Concerns about mortgage spread performance and the potential impact of further interest rate cuts on MSR valuations were noted. The company remains cautious about the symmetrical risks associated with MBS performance.
• Litigation Impact: The significant one-time litigation expense has negatively affected current financial results and may impact investor sentiment.

5. Notable Q&A Insights

• EAD Increase Drivers: The increase in Economic Asset Debt (EAD) was attributed to lower financing costs rather than changes in asset yields.
• MSR Valuation: Management clarified that the valuation of originated MSRs does not include specific recapture assumptions but reflects broader cash flow expectations.
• Subservicing Opportunities: Management highlighted the potential for growth in subservicing, particularly as other firms consolidate, and emphasized the importance of maintaining strong relationships with clients.
• Coupon Positioning Strategy: The company’s strategy of managing coupon exposure was discussed, indicating a focus on balancing risks associated with MSR and mortgage-backed securities.

This summary encapsulates the key aspects of TWO's Q3 2025 earnings call, providing a balanced view of financial performance, strategic initiatives, and challenges faced by the company.