Two Harbors Investment (TWO) - 2025 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company's book value increased to $11.13 per share at December 31, 2025, compared to $11.04 per share at September 30, 2025, resulting in a quarterly economic return of +3.9% [12] - Comprehensive income for the fourth quarter was $50.4 million or $0.48 per share, with net interest and servicing income decreasing due to MSR sales and lower float income [12][13] - The total economic return on book value for the full year 2025 was -12.6%, but excluding a litigation settlement expense, the return was +12.1% [7] Business Line Data and Key Metrics Changes - The company settled on the sale of an additional $10 billion UPB of MSR, increasing total third-party subservicing to $40 billion at year-end compared to $30 billion at the end of the third quarter [10] - The direct-to-consumer (DTC) platform funded $94 million in first and second liens, a 90% increase from the third quarter [10] - The MSR portfolio experienced a minor increase in prepayment rates to 6.4% from 6.0% CPR, with 60-plus-day delinquencies remaining low at under 1% [22] Market Data and Key Metrics Changes - The yield curve steepened, with two-year Treasury yields down 14 basis points to 3.47%, while 10-year Treasury yields rose by 2 basis points to 4.17% [9] - The nominal spread for current coupon RMBS tightened by 30 basis points to 114 basis points of the swap curve, indicating a positive response to the decline in interest rate volatility [16] - The share of 30-year loans eligible for refinance returned to nearly 20%, with refinanceable coupon speeds increasing [18] Company Strategy and Development Direction - The merger with United Wholesale Mortgage (UWM) is expected to double the size of the MSR portfolio to a pro forma $400 billion and create a powerful strategic alignment for accelerated growth [6] - The company aims to leverage UWM's expertise in capital markets and asset management while enhancing its own servicing capabilities [6] - The focus remains on maintaining a paired portfolio construction of MSR and Agency RMBS to generate attractive risk-adjusted returns [25] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence that the merger with UWM will bring significant benefits and position the company for accelerated growth [11] - The administration's commitment to lower mortgage rates is expected to stimulate increased mortgage and origination activity in 2026 [7] - Management noted that while no decisions have been made regarding the securities portfolio post-merger, they will be thoughtful about future actions [8] Other Important Information - The company ended the quarter with over $800 million in cash and repaid $261.9 million in convertible senior notes on their maturity date [14] - The economic debt to equity ratio was slightly lower at 7 times, with portfolio sensitivity to spread changes marginally increasing [15] Q&A Session Summary Question: How is the merger impacting portfolio construction? - Management confirmed that they are operating as an independent company and managing the portfolio as usual, with changes reflecting market assessments of risk and reward [28] Question: What is the current book value? - The book value is up about 1.5%-2% as of January 30, 2026 [29] Question: How is leverage being considered in the current market? - Management has become more defensive due to the current spread environment and has reduced leverage and mortgage risk [34] Question: What are the chances of an LLPA or guarantee fee reduction at the GSEs? - There is a reasonable chance for changes on the LLPA grid, but the market is still digesting the potential impacts [38] Question: How is the MSR market performing? - The interest in the MSR market remains strong, with no notable changes in bank activity [39] Question: What is the prospective return outlook? - Spreads have tightened since the end of December, which may marginally affect dividend levels [43]