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TWO HARBORS INVESTMENT CORP. (TWO)·Q2 2025 Earnings Summary

Executive Summary

  • Q2 2025 was dominated by a $199.9M loss contingency accrual related to the PRCM/Pine River litigation, driving comprehensive loss of $(221.8)M and book value per share down to $12.14; excluding the accrual, economic return was a modest (1.4)% and comprehensive loss $(21.9)M .
  • Non-GAAP EAD was $0.28 per share, below S&P Global consensus of $0.36; GAAP EPS of $(2.62) missed consensus of $(0.44), largely due to the litigation accrual; dividend was cut to $0.39, consistent with the accrual’s impact on book value and static returns .
  • Portfolio positioned for attractive levered returns: Agency RMBS spreads remained historically wide while MSR prepayments stayed slow; economic debt-to-equity rose to 7.0x (inclusive of the accrual), still within the 5–8x target range discussed by management .
  • Management highlighted AI-driven operational efficiencies at RoundPoint and incremental growth in first-lien and second-lien originations; post-quarter, litigation was settled for $375M, and the Q3 common dividend was set at $0.34 (a key follow-up catalyst) .

What Went Well and What Went Wrong

What Went Well

  • Agency RMBS spreads to swaps remained historically attractive; specified pools (4.5% and 5.0%) outperformed TBAs, and exposure was shifted up-in-coupon, aiding relative performance positioning .
  • MSR market stayed well supported with bulk bid volume normalizing; only ~0.7% of MSR UPB was in-the-money at ~6.75% rates, supporting slow prepayments and stable cash flows .
  • Operational progress at RoundPoint: first-lien originations increased to $48.6M UPB and second-lien brokered to $44.0M; management is deploying generative AI and conversational AI to improve contact center efficiency and homeowner experience .

Management quotes:

  • “Spreads for Agency RMBS remain historically wide, and offer good relative value… Our core strategy of low coupon MSR paired with Agency RMBS is well positioned…” — CIO Nick Letica .
  • “We are confident in our ability to navigate through changing market cycles…” — CEO Bill Greenberg .

What Went Wrong

  • The $199.9M litigation loss contingency (probable and estimable under ASC 450) drove GAAP net loss and comprehensive loss, compressing book value and economic return in the quarter .
  • Mark-to-market headwinds: unfavorable movements on MSR, swaps, TBAs and futures offset positive—albeit muted—Agency RMBS marks, pressuring comprehensive results .
  • Financing optics and leverage: economic debt-to-equity rose to 7.0x due to the accrual’s impact on equity; while within target, it elevated perceived leverage risk until settlement clarity (achieved post-quarter) .

Financial Results

MetricQ4 2024Q1 2025Q2 2025
Book Value per Share ($)$14.47 $14.66 $12.14
Dividend per Common Share ($)$0.45 $0.45 $0.39
Comprehensive Income (Loss) per Share ($)$(0.03) $0.62 $(2.13)
GAAP Net Income (Loss) to Common ($MM)$264.9 $(92.2) $(270.8)
EAD per Share (Non-GAAP) ($)$0.20 $0.24 $0.28
Economic Return on Book Value (%)0.0% 4.4% (14.5)%
Net Spread on Total Portfolio (Non-GAAP) (%)0.78% 1.09% 1.29%
Annualized Cost of Financing incl. swaps/futures/TBAs (%)4.58% 4.49% 4.43%

Estimate vs. Actual (Q2 2025):

MetricConsensusActualSurprise
Primary EPS (Quarter) ($)0.3555*0.28 Miss (litigation accrual impact)
EPS (GAAP) (Quarter) ($)(0.439)*(2.62) Miss (accrual drove GAAP loss)
Revenue (Quarter) ($MM)(24.0)*23.6*N/M (estimate definition vs mREIT reporting)

Values retrieved from S&P Global.*
Note: TWO reports interest income, net servicing income, and other income rather than a single “Revenue” line; consensus “Revenue” may not be directly comparable.

Segment/Portfolio Composition:

Portfolio Composition ($MM)Q4 2024Q1 2025Q2 2025
Agency RMBS$7,376.97 $8,627.71 $8,387.07
Mortgage Servicing Rights (MSR)$2,994.27 $2,959.77 $3,015.64
Other$3.73 $3.61 $3.45
Net TBA Position (Bond Equivalent)$4,468.90 $3,001.06 $3,025.10
Total Portfolio (Agency RMBS + MSR + Other + Net TBA)$14,843.87 $14,592.16 $14,431.26

KPIs and Risk:

KPIQ4 2024Q1 2025Q2 2025
RMBS Weighted Avg Experienced 3-month CPR (%)7.5% 7.0% 8.4%
MSR 3-month CPR (%)4.9% 4.2% 5.8%
MSR UPB ($MM)200,317 196,773 198,823
60+ Day Delinquencies (MSR) (%)0.9% 0.8% 0.8%
Economic Debt-to-Equity (x)6.5x 6.2x 7.0x
Repo Outstanding ($MM)7,805.06 9,740.83 8,782.62

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Common Dividend ($/share)Q2 2025$0.45 (Q1 actual) $0.39 Lowered (pro rata to accrual impact)
Common Dividend ($/share)Q3 2025N/A$0.34 (declared Aug 20) Initiated (post-quarter)
Prospective Quarterly Static Return per Share ($)Forward$0.33–$0.54 (Q1 deck) $0.28–$0.46 (Q2 deck) Lowered
Leverage Target (Economic D/E)Ongoing5–8x (prior calls)5–8x maintained; operating at 7x; ~6.3x excluding reserve Maintained range
Expense Run-Rate (Comp+OpEx+Servicing costs)2H25 outlookN/A“Around $45M” per quarter (ballpark) Informational

No explicit guidance was provided for revenue, margins, OI&E, tax rate; management emphasized return ranges and dividend policy alignment to static returns .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024, Q1 2025)Current Period (Q2 2025)Trend
AI/Technology initiativesRoundPoint enhancements to operations; platform evolution Deploying generative AI for call summaries, OCR validation, conversational AI; focus on efficiency and homeowner experience Accelerating deployment
Tariffs/Macro and ratesYield curve steepening; market focused on inflation and Fed path Volatility from fluctuating tariffs; yield curve steepened to 51 bps; markets resilient; Fed on hold with expected cuts in 2H25 Macro supportive for RMBS/MSR
Regulatory/LegalOngoing PRCM litigation noted in risk disclosures $199.9M accrual booked (probable and estimable) Resolved post-quarter (settlement)
Product performance (RMBS/MSR)Shift up in coupon; MSR price multiple 5.9x; slow prepayments TBAs/spec pools mixed; higher coupons outperformed; MSR CPR up seasonally to 5.8% Positioning up-in-coupon; steady MSR tailwinds
Financing strategyReduced RMBS borrowing balances; diversified financing Issued $115M 9.375% senior notes due 2030; repo spreads ~SOFR +20 bps Prefunding convert maturity; diversified

Management Commentary

  • CEO: “Fixed-income and equity markets proved resilient… Our core strategy of low coupon MSR paired with Agency RMBS is well positioned to benefit from both stable prepayments and wide Agency RMBS spreads.” .
  • CFO (loss contingency): “We determined the loss was probable and estimable under ASC 450… $199.9M or $1.92 per share… including statutory prejudgment interest at 9%.” .
  • CIO: “We like where spreads are… mortgage spread volatility has declined to the lowest levels since pre-COVID… hedged Agency RMBS looks attractive vs swaps.” .
  • Technology: “We are implementing AI across the platform… generative AI call summaries… conversational AI to allow customers to interact with customized interfaces.” .

Q&A Highlights

  • Leverage and capital: Operating at 7x economic D/E (inclusive of accrual); comfortable within 5–8x range; excluding reserve leverage ~6.3x .
  • Performance cadence: July economic return up ~1.5% month-to-date (post quarter start) .
  • Financing: Issued “baby bond” to pre-fund part of the convert maturity; financing mix shifted from repo to unsecured .
  • Derivatives: Incremental focus on inverse IOs; ~$50M allocated, still <5% of securities capital .
  • Expenses and AI: Most AI spend is expensed, not capitalized; combined quarterly expense run-rate around $45M .

Estimates Context

  • Q2 2025 EAD/Primary EPS missed consensus (0.28 vs 0.36*), primarily due to the $199.9M litigation accrual impacting GAAP and overall comprehensive results; GAAP EPS miss was expected given accrual magnitude (actual $(2.62) vs consensus $(0.44)*) .
  • “Revenue” estimates are not directly comparable for mREITs that report interest income, net servicing income, and other income; treat revenue consensus cautiously when benchmarking TWO .
  • Forward EPS consensus indicates normalization post-accrual; monitor post-settlement trajectory and dividend coverage relative to EAD and static return targets .

Values retrieved from S&P Global.*

Key Takeaways for Investors

  • The litigation accrual was the dominant driver of Q2 GAAP losses and book value compression; with the $375M settlement announced post-quarter, legal overhang and leverage optics should improve as capital plan executes .
  • Core strategy remains intact: MSR prepayments are slow and spreads are wide, supporting attractive levered returns; positioning up-in-coupon and increased mortgage derivatives enhance relative value capture .
  • Dividend reset to $0.39 (then $0.34 for Q3) aligns with lower static return range ($0.28–$0.46 per quarter); watch EAD trajectory and payout sustainability against static returns .
  • Financing is diversified with new 2030 notes; repo markets stable; economic D/E at 7x within the 5–8x target, with flexibility to adjust leverage as spreads and opportunities evolve .
  • AI-enabled servicing and origination efficiencies at RoundPoint are scaling, offering potential OpEx leverage and better borrower experience—an underappreciated medium-term upside .
  • Near-term trading: Clearance of legal uncertainty (settlement) is a catalyst; monitor book value trajectory, spread/volatility regime, and MSR market bid depth for further re-rating .
  • Medium-term thesis: Hedged MSR + Agency RMBS pairing in a steeper curve/slow-prepay environment can deliver attractive risk-adjusted returns; governance on leverage and capital allocation remains key .
Notes:
- All document-based figures and quotes are cited inline.
- Asterisked consensus values are from S&P Global.

Citations:
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