Two Harbors Investment (US:TWO)2025-04-29 14:02Financial Data and Key Metrics Changes - The company generated a total economic return of 4.4% for Q1 2025, with both RMBS and MSR contributing positively [5] - Book value increased to $14.66 per share at March 31, compared to $14.47 at December 31 [10] - Comprehensive income for the first quarter was $64.9 million, or $0.62 per weighted average common share [11] Business Line Data and Key Metrics Changes - Net interest and servicing income increased by $5.2 million due to portfolio shifts into higher coupon agency RMBS and lower borrowing rates [11] - The company’s economic debt to equity decreased to 6.2 times, with a 30% reduction in mortgage exposure [16] - The MSR portfolio's prepayment speed was 4.2 CPR for Q1, down 0.7% quarter over quarter [25] Market Data and Key Metrics Changes - Interest rates across the US treasury yield curve ended the first quarter lower than at the end of 2024, with two-year and ten-year notes decreasing by 36 basis points [6] - Prepayment rates for the thirty-year agency RMBS universe decreased by 1.4 percentage points quarter over quarter to 5.6% CPR [21] Company Strategy and Development Direction - The company aims to scale its direct-to-consumer originations platform, increase offerings of second liens, and grow its presence in third-party subservicing [7][8] - The company is exploring opportunities in the Ginnie Mae market and diversifying its portfolio in response to the evolving mortgage finance landscape [8] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about economic uncertainty driven by trade policies and the Fed's response, indicating a cautious approach to portfolio risk [7][28] - The company sees attractive levered returns on Agency RMBS and expects stable cash flows from its low weighted average mortgage rate MSR portfolio [29] Other Important Information - The company maintained high liquidity levels with $950 million in unused MSR asset financing capacity [13] - The company is actively managing its portfolio to take advantage of market dislocations and attractive return opportunities [5][29] Q&A Session Summary Question: Update on book value through April and portfolio changes - Management reported a 3.5% decline in book value through early April and noted further risk reduction in the portfolio due to increased volatility [33][35] Question: Impact of Rocket and Mr. Cooper merger on competitive landscape - Management indicated that the merger may lead to slightly better bidding for MSR but does not represent a wholesale change in market dynamics [42][46] Question: Comfort level with the dividend - Management expressed confidence in supporting the dividend given the current portfolio composition and wider spreads [51] Question: Sensitivity of book value to spread changes - Management explained that the sensitivity to spread changes is lower due to the allocation of capital between servicing and securities [56][58] Question: Volatility and hedging activity impact on static return estimates - Management acknowledged higher convexity costs due to realized volatility but noted that wider spreads could mitigate some of these costs [67][68]