Two Harbors Investment (TWO) ZACKS·2024-11-19 18:11Core Viewpoint - Two Harbors Investment Corp. (TWO) has experienced a significant decline in share price, losing 10.9% over the past month, which is notably worse than the industry's decline of 2.8% [1] Price Performance - TWO is a Real Estate Investment Trust (REIT) that invests in residential mortgage-backed securities (RMBS) and mortgage loans, offering attractive long-term returns with a high dividend yield of 15.50%, compared to the industry average of 10.13% [2][9] Financial Impact of Interest Rates - The company's financials have been negatively affected by high interest rates, leading to increased borrowing costs and a net interest loss for the nine months ending September 30, 2024 [4] - The book value per share decreased from 14.93 in 2024 due to spread risk associated with high rates [5] Rate Cuts and Market Conditions - The Federal Reserve's recent interest rate cuts, including a 25 basis point reduction, are expected to lower mortgage rates, which could improve housing affordability and increase demand in the mortgage market [5][6][7] - More interest rate cuts are anticipated in 2025, which should enhance TWO's net interest spread and portfolio book value [8] Investment Portfolio - TWO's investment portfolio is primarily composed of RMBS with mortgage servicing rights (MSR), providing less exposure to mortgage spread changes while benefiting from spread tightening [12] - The company focuses on maximizing value from MSR assets and is enhancing its portfolio with additional revenue and hedging options [13] Valuation Metrics - From a valuation perspective, TWO's stock is trading at a 12-month trailing price-to-book (P/B) ratio of 0.77, which is below the industry average of 0.86 and lower than peers NLY and AGNC [16] Dividend Considerations - The company has a history of reducing dividends during challenging times, with a 13.33% decline in payouts over the past five years [18]