8-K: Two Harbors Investment Corp. Announces Fourth Quarter 2024 Financial Results

Two Harbors Investment Corp. reports a book value of $14.47 per common share and a flat quarterly economic return on book value for Q4 2024, driven by its hedged MSR strategy.

Summary

• Two Harbors Investment Corp. (TWO) announced its Q4 2024 financial results, reporting a book value of $14.47 per common share.
• The company declared a fourth-quarter common stock dividend of $0.45 per share.
• TWO incurred a Comprehensive Loss of $(1.6) million, or $(0.03) per weighted average basic common share.
• The company settled $2.5 billion in UPB of MSR through bulk and flow-sale acquisitions and recapture.
• The MSR portfolio had a 3-month CPR of 4.93%, a weighted average gross coupon rate of 3.46%, and a 60+ day delinquency rate of 0.90%.
• TWO funded $42.0 million UPB in first lien loans and brokered $32.8 million UPB in second lien loans.
• For the full year 2024, TWO declared dividends of $1.80 per common share and generated a total economic return on book value of 7.0%.
• The company settled $9.2 billion in UPB of MSR, or 28,093 loans, through bulk and flow-sale acquisitions and recapture in 2024.
• TWO actively managed its capital structure by repurchasing 485,609 shares of preferred stock and $10.0 million principal amount of convertible senior notes due 2026.
• As of December 31, 2024, the company's portfolio comprised $10.4 billion of Agency RMBS, MSR, and other investment securities, along with $4.4 billion bond equivalent value of net long TBAs.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While there's a comprehensive loss for the quarter, the company highlights positive aspects like the hedged MSR strategy, stable cash flows, and active capital management. The outlook for 2025 is also presented optimistically.

Positives

• The company's hedged MSR strategy generated stable and positive cash flows despite fluctuations in short-term interest rates.
• Mortgage spread volatility has decreased, enhancing the portfolio's return outlook.
• Prepayment rates are expected to remain slow in 2025, providing a positive tailwind for MSR.
• The company actively managed its capital structure through share repurchases and debt reduction.
• The company's direct-to-consumer recapture originations platform is funding first lien loans and brokering second lien loans.

Negatives

• The company incurred a Comprehensive Loss of $(1.6) million, or $(0.03) per weighted average basic common share for Q4 2024.
• Book value per common share decreased from $14.93 to $14.47 during the quarter.
• Net interest expense was $(34.894) million for the quarter ended December 31, 2024, compared to $(45.679) million for the same period in 2023.
• The company's economic debt-to-equity ratio increased from 4.3:1.0 to 4.6:1.0 at period-end.

Risks

• Changes in interest rates and the market value of assets could impact financial results.
• Changes in prepayment rates of mortgages underlying target assets could affect performance.
• The availability and cost of target assets and financing could pose challenges.
• The company faces ongoing litigation related to the termination of its management agreement with PRCM Advisers LLC.
• Interruptions in or impairments to communications and information technology systems could disrupt business operations.

Future Outlook

Management believes that high mortgage rates and slow prepayment rates will provide a strong positive tailwind for MSR in 2025, and that their hedged MSR-centric strategy will continue to generate attractive levered returns.

Management Comments

• Bill Greenberg, TWO's President and CEO, stated that the 2024 results highlight the benefits of their hedged MSR strategy.
• Nick Letica, TWO's Chief Investment Officer, stated that mortgage spread volatility has significantly decreased, enhancing the portfolio's return outlook.

Industry Context

The announcement reflects the ongoing trends in the REIT sector, particularly those focused on mortgage servicing rights and mortgage-backed securities, in a market influenced by interest rate fluctuations and prepayment speeds.

Comparison to Industry Standards

• The company's focus on MSR and hedging strategies is common among REITs seeking to manage interest rate risk.
• The reported economic return on book value and dividend yield can be compared to peers like Annaly Capital Management (NLY) and AGNC Investment Corp. (AGNC), which also invest in mortgage-related assets.
• The MSR portfolio metrics, such as CPR and delinquency rates, can be benchmarked against industry averages to assess the quality and performance of the underlying mortgage loans.

Stakeholder Impact

• Shareholders will receive a dividend of $0.45 per share.
• Employees are subject to the operational risks and costs associated with the business.
• Customers of RoundPoint Mortgage Servicing LLC may be impacted by the company's ability to manage the risks associated with operating a mortgage loan servicer and originator.

Next Steps

• TWO will host a conference call on January 30, 2025, to discuss its fourth-quarter 2024 financial results and related information.

Key Dates