Two Harbors Investment (TWO) - 2025 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company recorded a comprehensive loss of $80.2 million, or $0.77 per share, including a litigation settlement expense of $175.1 million, which equates to $1.68 per share [14][15] - Excluding the litigation expense, the company would have generated comprehensive income of $94.9 million, or $0.91 per share [14] - The total economic return for the third quarter was negative 6.3%, while it would have been positive 7.6% without the litigation expense [8][14] - For the first nine months of the year, the total economic return on book value was negative 15.6% and positive 9.3% excluding the expense [9] Business Line Data and Key Metrics Changes - The RMBS portfolio decreased from $11.4 billion to $10.9 billion due to sales of agency securities [5] - The company sold $19.1 billion UPB of MSR and an additional $10 billion UPB expected to settle soon, both slightly above marks [5] - The direct-to-consumer originations platform funded $49 million of UPB in first and second liens, with an additional $52 million UPB in the origination pipeline at quarter-end [11] Market Data and Key Metrics Changes - The Fed cut rates by 25 basis points in September, marking the first cut since November 2024, which positively impacted equity markets, with the S&P 500 up almost 8% by quarter-end [9][10] - The nominal spread for current coupon RMBS tightened by 26 basis points to 145 basis points to the swap curve [21] - The market for MSR remains competitive, with only about 3% of the MSR portfolio considered in the money at current mortgage rates [24] Company Strategy and Development Direction - The company aims to enhance and grow its servicing and origination activities, focusing on a MSR-focused investment strategy [7][12] - The company plans to redeem $262 million UPB of outstanding convertible notes to reduce structural leverage to historical levels [6] - The company is optimistic about the growth of its sub-servicing business, establishing significant relationships with third-party clients [5][56] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the portfolio adjustments and the ability to capitalize on opportunities in the MSR and MBS portfolio [12][30] - The company views mortgage spreads as attractive despite recent tightening and believes risks to MBS performance are symmetric, supporting their strategy [13] - Management highlighted the importance of technology investments to maintain growth in the direct-to-consumer origination business [63] Other Important Information - The company has approximately $770.5 million in cash on the balance sheet after the litigation settlement payment [17] - The weighted average days to maturity for agency RMBS repo was 88 days at quarter-end [18] - The company is focused on improving efficiencies and lowering costs, with significant savings already identified [7] Q&A Session Summary Question: Key drivers of the increase in EAD in Q3 - The increase in EAD was driven by a decrease in financing costs, allowing asset yields to remain constant [32][34] Question: Update on book value quarter to date - The book value was up about 1% as of the last Friday [36] Question: Discussion on various risk metrics post-settlement - The company looks at multiple risk metrics, balancing returns available on asset classes with overall leverage and liquidity [40][42] Question: Cost savings impact on return potential - Current return potential estimates do not factor in potential cost savings, indicating upside potential as those savings are realized [43] Question: Strategy behind coupon exposure - The coupon exposure is managed based on how rates move and the current coupon's risk relative to the MSR portfolio [47][50] Question: Growth opportunities in the sub-servicing business - The company is focused on developing relationships and attracting clients dissatisfied with their current sub-servicers [54][56] Question: Valuation of flow MSRs versus existing portfolio - The valuation of flow MSRs is marked to market prices, and recapture cash flows do not impact the mark but affect yield [82]