Assessing Two Harbors' Performance For Q2 2025

Core Viewpoint - Two Harbors Investment (TWO) experienced a significant decline in book value (BV) during Q2 2025, attributed to legal losses and hedging decisions, leading to a recommendation of "hold" on shares [1][8][10]. Performance Summary - The actual quarterly BV decrease for TWO was 17.2%, which was worse than the projected 14.8% decline, indicating a severe underperformance [2][8]. - A unique legal dispute with the previous external manager negatively impacted TWO's BV during the quarter [2][10]. - Hedging decisions made by TWO had a negative effect on BV but positively influenced core earnings/EAD [3][7]. Portfolio Management - TWO maintained the size of its on-balance sheet fixed-rate agency MBS/investment portfolio, contrary to expectations of asset shedding due to legal issues [4][10]. - The company made bulk purchases of $6.4 billion in MSRs, resulting in a $2.0 billion increase in UPB, which was contrary to the anticipated decrease [5][10]. - The derivatives sub-portfolio underperformed expectations, primarily due to the lack of asset sales and an increase in the hedging coverage ratio from 77% to 85% [6][14]. Earnings Performance - Core earnings/EAD for TWO modestly outperformed expectations, driven by lower net interest expenses and higher net servicing income [7][8]. - The reported core earnings were $29.594 million, exceeding the projected $24 million, marking a 23.48% beat [18]. Valuation and Recommendations - TWO's current valuation is deemed appropriate, with a hold recommendation due to the ongoing legal matters and the need for spread stabilization [22][23]. - The company’s dividend yield stands at 15.45%, with a payout ratio of 107% [20].