Two Harbors Investment (TWO) - 2025 Q2 - Quarterly Results

Quarterly Summary Overview of TWO's Q2 2025 financial and operational performance, key metrics, and management commentary Key Financial and Operational Highlights TWO reported a significant Q2 2025 comprehensive loss and negative economic return, driven by a large contingency liability, while issuing senior notes and improving MSR metrics Q2 2025 Key Financial Highlights | Metric | Value | | :------------------------------------------------ | :---------- | | Book value per common share | $12.14 | | Second quarter common stock dividend per share | $0.39 | | Quarterly economic return on book value | (14.5)% | | Comprehensive Loss | $(221.8) million | | Comprehensive Loss per weighted average basic common share | $(2.13) | | Contingency liability and related expense | $199.9 million | | Contingency liability per weighted average basic common share | $1.92 | | Quarterly economic return on book value (excluding loss contingency) | (1.4)% | | Comprehensive Loss (excluding loss contingency) | $(21.9) million | | Comprehensive Loss per weighted average basic common share (excluding loss contingency) | $(0.21) | - Issued $115.0 million aggregate principal amount of 9.375% Senior Notes due 2030 for net proceeds of $110.8 million[5] - Settled $6.6 billion in unpaid principal balance (UPB) of MSR through bulk purchases, flow-sale acquisitions, and recapture[5] MSR Portfolio Metrics (QoQ) | Metric | June 30, 2025 | March 31, 2025 | Change | | :-------------------------------- | :------------ | :------------- | :----- | | Weighted average gross coupon rate | 3.53% | 3.53% | Stable | | 60+ day delinquency rate | 0.82% | 0.85% | Down | | 3-month CPR | 5.8% | 5.3% | Up | - Funded $48.6 million UPB in first lien loans and brokered $44.0 million UPB in second lien loans[5] Management Commentary Management expressed confidence in TWO's dynamic portfolio and core MSR-Agency RMBS strategy to navigate market cycles and create long-term value - CEO Bill Greenberg emphasized the company's ability to be dynamic and responsive to opportunities in the mortgage finance space, confident in navigating changing market cycles and creating long-term value[3] - CIO Nick Letica noted resilient fixed-income and equity markets, historically wide spreads for Agency RMBS offering good relative value, and a well-positioned core strategy of low coupon MSR paired with Agency RMBS to benefit from stable prepayments and wide spreads[6] Operating Performance Details TWO's Q2 2025 operating performance, including key financial metrics and the impact of a loss contingency accrual Operating Performance Metrics Q2 2025 saw significant declines in comprehensive and GAAP net income for TWO due to a loss contingency, despite increased EAD and decreased book value per share Operating Performance (QoQ) | Metric | Three Months Ended June 30, 2025 | Three Months Ended March 31, 2025 | Change (QoQ) | | :---------------------------------------------------------------- | :------------------------------- | :-------------------------------- | :------------- | | Comprehensive (Loss) Income | $(221,807) | $64,931 | Down | | Per weighted average basic share | $(2.13) | $0.62 | Down | | GAAP Net Loss | $(272,280) | $(92,241) | Down | | Per weighted average basic share | $(2.62) | $(0.89) | Down | | Earnings Available for Distribution | $29,545 | $25,092 | Up | | Per weighted average basic share | $0.28 | $0.24 | Up | | Dividend per common share | $0.39 | $0.45 | Down | | Annualized dividend yield | 14.5% | 13.5% | Up | | Book value per common share at period end | $12.14 | $14.66 | Down | | Economic return on book value | (14.5)% | 4.4% | Down | | Operating expenses (excl. non-cash LTIP & certain operating expenses) | $38,090 | $40,465 | Down | | Operating expenses as a percentage of average equity | 7.6% | 7.5% | Up | - The significant decline in comprehensive income and GAAP net loss is primarily attributed to the $199.9 million loss contingency accrual recognized during the quarter[5][7] Investment Portfolio Analysis of TWO's investment portfolio composition, including Agency RMBS, MSR, other investments, and risk management strategies Portfolio Composition TWO's total investment portfolio slightly decreased to $14.4 billion as of June 30, 2025, primarily composed of Agency RMBS (73.5%) and MSR (26.5%) Investment Portfolio Composition (QoQ) | Portfolio Composition | As of June 30, 2025 | As of March 31, 2025 | | :-------------------- | :------------------ | :------------------- | | Agency RMBS | $8,387,068 (73.5%) | $8,627,708 (74.4%) | | Mortgage servicing rights | $3,015,643 (26.5%) | $2,959,773 (25.6%) | | Other | $3,449 (—%) | $3,613 (—%) | | Aggregate Portfolio | $11,406,160 | $11,591,094 | | Net TBA position | $3,025,099 | $3,001,064 | | Total Portfolio | $14,431,259 | $14,592,158 | - The company's portfolio was comprised of $11.4 billion of Agency RMBS, MSR, and other investment securities, plus $3.0 billion bond equivalent value of net long to-be-announced securities (TBAs) as of June 30, 2025[10][11] Agency RMBS Metrics Agency RMBS weighted average cost basis slightly decreased, while three-month CPR increased from 7.0% to 8.4%, with a stable gross weighted average coupon rate of 6.1% Agency RMBS Portfolio Metrics (QoQ) | Metric | As of June 30, 2025 | As of March 31, 2025 | | :--------------------------------- | :------------------ | :------------------- | | Weighted average cost basis | $101.24 | $101.50 | | Weighted average experienced three-month CPR | 8.4% | 7.0% | | Gross weighted average coupon rate | 6.1% | 6.1% | | Weighted average loan age (months) | 27 | 28 | - The increase in the weighted average experienced three-month CPR suggests a faster prepayment rate on the underlying mortgages[13] MSR Metrics MSR portfolio UPB increased slightly, with stable key metrics; fair value losses were consistent, while servicing income increased and costs decreased MSR Portfolio Metrics (QoQ) | Metric | As of June 30, 2025 | As of March 31, 2025 | | :------------------------ | :------------------ | :------------------- | | Unpaid principal balance | $198,822,611 | $196,773,345 | | Gross coupon rate | 3.5% | 3.5% | | Current loan size | $330 | $330 | | Original FICO | 760 | 760 | | Original LTV | 73% | 72% | | 60+ day delinquencies | 0.8% | 0.8% | | Net servicing fee | 25.4 basis points | 25.3 basis points | MSR Financial Performance (QoQ) | Metric | Three Months Ended June 30, 2025 | Three Months Ended March 31, 2025 | | :------------------------ | :------------------------------- | :-------------------------------- | | Fair value losses | $(35,902) | $(36,221) | | Servicing income | $147,961 | $146,870 | | Servicing costs | $2,322 | $3,302 | | Change in servicing reserves | $64 | $(105) | Other Investments and Risk Management Net long TBA notional slightly decreased, while futures notional significantly increased (more negative), and interest rate swaps notional substantially increased, reflecting active risk management Other Investments and Risk Management Metrics (QoQ) | Metric | As of June 30, 2025 ($ thousands) | As of March 31, 2025 ($ thousands) | | :------------------------ | :-------------------------- | :--------------------------- | | Net long TBA notional | $3,040,382 | $3,070,552 | | Futures notional | $(3,398,092) | $(2,930,590) | | Interest rate swaps notional | $19,526,559 | $14,755,568 | - The increase in interest rate swaps notional suggests an expansion of hedging activities to mitigate interest rate risk[16] Financing Overview This section outlines TWO's financing structure, including borrowing types, collateral, and the overall cost of financing Borrowing Structure and Terms Total borrowings decreased from $10.9 billion to $10.2 billion; repurchase agreements remained largest with stable rates, and new unsecured senior notes were issued Borrowing Structure (June 30, 2025) | Type of Borrowing | Balance ($ thousands) | Weighted Average Borrowing Rate | Weighted Average Months to Maturity | Number of Distinct Counterparties | | :---------------------------------------------------------------- | :-------------------- | :------------------------------ | :-------------------------------- | :-------------------------------- | | Repurchase agreements collateralized by securities | $7,992,622 | 4.48% | 1.96 | 18 | | Repurchase agreements collateralized by MSR | $790,000 | 7.39% | 10.54 | 3 | | Total repurchase agreements | $8,782,622 | 4.74% | 2.73 | 19 | | Revolving credit facilities collateralized by MSR and related servicing advance obligations | $1,011,871 | 7.36% | 19.96 | 3 | | Warehouse lines of credit collateralized by mortgage loans | $9,275 | 6.31% | 2.47 | 1 | | Unsecured senior notes | $110,867 | 9.38% | 61.55 | n/a | | Unsecured convertible senior notes | $260,944 | 6.25% | 6.54 | n/a | | Total borrowings | $10,175,579 | | | | - Total borrowings decreased from $10,942,563 thousand as of March 31, 2025, to $10,175,579 thousand as of June 30, 2025[17] - The company introduced unsecured senior notes with a balance of $110,867 thousand and a weighted average borrowing rate of 9.38% due in 61.55 months[17] Borrowings by Collateral Type Agency RMBS collateralized borrowings decreased, while MSR and unsecured borrowings increased due to senior notes, raising both debt-to-equity and economic debt-to-equity ratios Borrowings by Collateral Type (QoQ) | Collateral Type | As of June 30, 2025 ($ thousands) | As of March 31, 2025 ($ thousands) | | :------------------------------------------------ | :-------------------------- | :--------------------------- | | Agency RMBS | $7,992,427 | $8,970,635 | | Mortgage servicing rights and related servicing advance obligations | $1,801,871 | $1,703,171 | | Other - secured | $9,470 | $8,166 | | Other - unsecured | $371,811 | $260,591 | | Total | $10,175,579 | $10,942,563 | Debt-to-Equity Ratios (QoQ) | Ratio | As of June 30, 2025 | As of March 31, 2025 | | :-------------------------- | :------------------ | :------------------- | | Debt-to-equity ratio | 5.4:1.0 | 5.1:1.0 | | Economic debt-to-equity ratio | 7.0:1.0 | 6.2:1.0 | - The increase in both debt-to-equity ratios indicates higher leverage at the end of Q2 2025 compared to Q1 2025[18] Cost of Financing Annualized cost of financing, including swaps, U.S. Treasury futures, and TBAs, slightly decreased from 4.49% to 4.43%, with varied changes across collateral types Annualized Cost of Financing (QoQ) | Cost of Financing by Collateral Type | Three Months Ended June 30, 2025 | Three Months Ended March 31, 2025 | | :------------------------------------------------ | :------------------------------- | :-------------------------------- | | Agency RMBS | 4.54% | 4.62% | | Mortgage servicing rights and related servicing advance obligations | 7.87% | 7.81% | | Other - secured | 6.68% | 6.93% | | Other - unsecured | 7.44% | 6.84% | | Annualized cost of financing | 5.18% | 5.27% | | Interest rate swaps | (0.20)% | (0.18)% | | U.S. Treasury futures | (0.10)% | (0.04)% | | TBAs | 2.65% | 2.89% | | Annualized cost of financing, including swaps, U.S. Treasury futures and TBAs | 4.43% | 4.49% | - The overall decrease in the annualized cost of financing, including hedging instruments, suggests improved efficiency in managing funding costs[18] Corporate Information Corporate details including conference call, company profile, forward-looking statements, non-GAAP measures, and contact information Conference Call TWO will host a conference call on July 29, 2025, at 9:00 a.m. ET to discuss Q2 2025 financial results, with access details provided - Conference call to discuss Q2 2025 financial results scheduled for July 29, 2025, at 9:00 a.m. ET[24] - Participants can join via toll-free call (888) 394-8218 with Conference Code 3889089 or through a live webcast on www.twoinv.com[24](index=24&type=chunk) About TWO Two Harbors Investment Corp. (TWO) is an MSR-focused REIT investing in mortgage servicing rights, residential mortgage-backed securities, and other financial assets, headquartered in St. Louis Park, MN - Two Harbors Investment Corp. (TWO) is an MSR-focused real estate investment trust (REIT)[1][25] - The company invests in mortgage servicing rights, residential mortgage-backed securities, and other financial assets[25] - TWO is headquartered in St. Louis Park, MN[25] Forward-Looking Statements The release contains forward-looking statements subject to various risks and uncertainties, including market conditions, interest rates, prepayment rates, litigation, and REIT qualification, with readers cautioned against undue reliance - The release includes "forward-looking statements" under the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995[26] - Significant risks and uncertainties include changes in interest rates, market value of assets, prepayment rates, defaults, home prices, hedging, financing costs, competition, strategic initiatives, ongoing litigation with PRCM Advisers LLC, operational risks, MSR acquisition/maintenance, legal/regulatory claims, and REIT qualification[26] - Readers are cautioned not to place undue reliance on forward-looking statements, and TWO does not undertake any obligation to publicly release updates or revisions[27] Non-GAAP Financial Measures Non-GAAP financial measures like EAD are included to supplement GAAP results and aid peer comparison, but should not be considered substitutes and require careful evaluation with GAAP reconciliations - Non-GAAP financial measures, such as Earnings Available for Distribution (EAD), are presented to provide supplemental information for investors and facilitate comparisons to industry peers[28][40] - These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP[28] - A reconciliation of GAAP to non-GAAP financial information is provided on page 11 of the release[28] Additional Information & Contact Additional company information is available on its website, the SEC's website, or by direct request, with investor relations contact details provided - Additional information is available at www.twoinv.com or the SEC's internet site at www.sec.gov[29](index=29&type=chunk) - Investor Relations contact: Margaret Karr, (612)-453-4080, Margaret.Karr@twoinv.com[30] Consolidated Financial Statements Presents TWO's consolidated financial statements, including balance sheets, comprehensive income, interest income/expense, and EAD reconciliation Consolidated Balance Sheets As of June 30, 2025, total assets increased to $12.96 billion, liabilities to $11.27 billion (due to repurchase agreements and a new loss contingency), while total stockholders' equity decreased Consolidated Balance Sheet Highlights (YoY) | Metric | June 30, 2025 ($ thousands) | December 31, 2024 ($ thousands) | Change | | :------------------------------------ | :-------------------------- | :---------------------------- | :----- | | Total Assets | $12,959,138 | $12,204,319 | Up | | Available-for-sale securities, at fair value | $8,320,757 | $7,371,711 | Up | | Mortgage servicing rights, at fair value | $3,015,643 | $2,994,271 | Up | | Cash and cash equivalents | $657,816 | $504,613 | Up | | Total Liabilities | $11,273,047 | $10,081,810 | Up | | Repurchase agreements | $8,782,622 | $7,805,057 | Up | | Loss contingency accrual | $199,935 | $0 | New | | Total Stockholders' Equity | $1,886,026 | $2,122,509 | Down | - The significant increase in liabilities is partly due to a new loss contingency accrual of $199.9 million related to ongoing litigation[32] Consolidated Statements of Comprehensive (Loss) Income Q2 2025 saw a significant net and comprehensive loss, a reversal from Q2 2024 income, primarily due to increased expenses, a substantial loss contingency accrual, and derivative losses, despite higher net servicing income Consolidated Statements of Comprehensive (Loss) Income Highlights (YoY) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net interest expense | $(18,123) | $(38,254) | $(38,455) | $(80,471) | | Net servicing income | $155,968 | $171,540 | $309,630 | $330,754 | | Total other (loss) income | $(151,018) | $(23,806) | $(315,878) | $122,337 | | Total expenses | $242,711 | $38,943 | $289,805 | $86,524 | | Loss contingency accrual | $199,935 | $0 | $199,935 | $0 | | Net (loss) income | $(257,545) | $56,336 | $(336,600) | $259,924 | | Comprehensive (loss) income | $(208,568) | $12,263 | $(130,451) | $112,773 | | Basic (loss) earnings per weighted average common share | $(2.62) | $0.43 | $(3.51) | $2.27 | - The shift from comprehensive income to a significant comprehensive loss is largely driven by the $199.9 million loss contingency accrual and substantial losses on interest rate swap and other derivative instruments[33] Interest Income and Interest Expense Total interest income remained stable QoQ and slightly decreased YoY, while total interest expense decreased both QoQ and YoY, resulting in a reduced net interest expense Interest Income and Expense (YoY) | Metric | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Total interest income | $117,082 | $115,953 | $228,464 | $233,736 | | Total interest expense | $136,701 | $154,207 | $268,415 | $314,207 | | Net interest expense | $(19,619) | $(38,254) | $(39,951) | $(80,471) | - The decrease in total interest expense was primarily due to lower expenses from repurchase agreements and revolving credit facilities[35] Reconciliation of GAAP to Non-GAAP Financial Information The reconciliation shows EAD for Q2 2025 was $29.5 million ($0.28 per share), an increase from Q1 2025, adjusting comprehensive loss by excluding various non-cash and non-recurring items EAD Reconciliation Highlights (QoQ) | Metric | Three Months Ended June 30, 2025 ($ thousands) | Three Months Ended March 31, 2025 ($ thousands) | | :---------------------------------------------------------------- | :--------------------------------------------- | :-------------------------------------------- | | Comprehensive (loss) income attributable to common stockholders | $(221,807) | $64,931 | | Net loss attributable to common stockholders | $(272,280) | $(92,241) | | Adjustments to exclude reported realized and unrealized (gains) losses (total) | $160,860 | $174,690 | | MSR amortization | $(73,983) | $(70,303) | | TBA dollar roll income (losses) | $6,181 | $8,178 | | U.S. Treasury futures income | $3,358 | $1,272 | | Loss contingency accrual | $199,935 | $0 | | Earnings available for distribution to common stockholders | $29,545 | $25,092 | | EAD per weighted average basic common share | $0.28 | $0.24 | - EAD is defined as comprehensive (loss) income attributable to common stockholders, adjusted for various non-cash and non-recurring items, including realized/unrealized gains/losses on the investment portfolio, MSR amortization, and the loss contingency accrual[40] - The increase in EAD from Q1 to Q2 2025 indicates improved operational cash flow generation when excluding certain volatile or non-cash items[38]