TWO — Two Harbors Investment Corp.

Summary of Two Harbors Investment Corp. Q4 2025 Earnings Call

1. Key Financial Results and Metrics

• Book Value: Increased to $11.13 per share from $11.04 in Q3 2025.
• Economic Return: Generated a positive economic return of 3.9% for Q4 2025; however, the full year return was negative 12.6%, improving to 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: Decreased due to MSR sales and lower float income, offset by lower 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: Two Harbors announced a merger with United Wholesale Mortgage (UWM), which will double its MSR portfolio to a pro forma $400 billion. This merger aims to enhance scale and competitive positioning in the mortgage market.
• Performance of Mortgage Assets: The investment portfolio performed well, with mortgage assets outperforming hedges and low coupon MSR earning its carry.
• MSR Portfolio Management: Settled $10 billion in MSR sales, increasing third-party subservicing to $40 billion. The company continues to manage its portfolio actively while preparing for the merger.

3. Forward Guidance and Outlook

• Market Conditions: Anticipated increased mortgage origination activity in 2026 due to government support for lower mortgage rates.
• Return Projections: Expected static return on common equity between 5.8% to 11.1%, with quarterly returns projected at $0.16 to $0.31 per share.
• Dividend Outlook: While the dividend decision will be made later, recent spread tightening may marginally affect return potential.

4. Bad News, Challenges, or Points of Concern

• Full Year Performance: The negative total economic return for 2025 raises concerns about overall performance and market conditions.
• Market Volatility: There is potential for increased volatility due to upcoming changes in the Federal Reserve, which could impact funding markets and mortgage spreads.
• Interest Rate Environment: The company is navigating a complex interest rate landscape, with lower interest rates affecting float income and overall portfolio yields.

5. Notable Q&A Insights

• Portfolio Construction: Management confirmed that they are managing the portfolio as usual despite the merger, focusing on risk and reward.
• Leverage Strategy: The company has reduced leverage and mortgage risk in response to market conditions, indicating a more defensive posture.
• MSR Market Dynamics: Strong demand for MSRs persists, but the company has not seen significant changes in bank interest or activity regarding MSR holdings.
• GSE Activity: There is a reasonable chance of changes in the LLPA grid, which could impact spreads, but the market is still digesting potential policy actions.

This summary encapsulates the key points from the earnings call, highlighting both the positive developments and the challenges facing Two Harbors Investment Corp. as they move forward.