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% [13] - Comprehensive income for the 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 [13][14] - 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% [8] 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 [11] - The direct-to-consumer (DTC) platform funded $94 million in first and second liens, a 90% increase from the third quarter [11] Market Data and Key Metrics Changes - The mortgage finance landscape shifted in 2025, emphasizing the need for scale in origination efforts [5][6] - 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 declining interest rate volatility [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, positioning the combined company for accelerated growth [6][12] - The company aims to leverage UWM's expertise in capital markets and asset management while enhancing servicing capabilities through RoundPoint [6] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence that the merger with UWM will yield significant benefits and enhance competitive positioning in the market [12] - The administration's commitment to lower mortgage rates is anticipated to stimulate increased mortgage and origination activity in 2026 [8] Other Important Information - The company ended the quarter with over $800 million in cash and repaid $261.9 million of convertible senior notes on their maturity date [15] - The portfolio at December 31, 2025, was valued at $13.2 billion, with $9 billion in settled positions and $4.2 billion in TBAs [17] Q&A Session Summary Question: How is the merger affecting portfolio construction? - Management confirmed that they are operating as an independent company and managing the portfolio as usual, with changes driven by market assessments [30] Question: What is the current book value? - The book value is up about 1.5%-2% as of January 30, 2026 [31] Question: How is leverage being managed in the current market? - The company has become more defensive and reduced leverage slightly due to current market conditions and spread movements [36] Question: What are the chances of an LLPA or guarantee fee reduction at the GSEs? - There is a reasonable chance for changes in the LLPA grid, but the market is still digesting the potential impacts [39] Question: How is the MSR market performing? - The interest in the MSR market remains strong, with no notable changes in bank activity observed [40] Question: What is the prospective return outlook? - Spreads have tightened since the end of December, which may marginally affect return potential [44]