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TWO HARBORS INVESTMENT CORP. (TWO)·Q4 2024 Earnings Summary

Executive Summary

  • Book value per common share fell to $14.47, with a flat quarterly economic return on book value given the $0.45 dividend; comprehensive loss was $(1.6) million (−$0.03 per share), while GAAP EPS printed $2.54 on OCI swings and MSR gains .
  • Earnings Available for Distribution (EAD) improved to $0.20 per share from $0.13 in Q3, as net interest expense eased and servicing fee collections/subservicing income increased; the common dividend was maintained at $0.45 .
  • MSR fair value rose $82.5 million on higher rates and slower projected prepayments; RoundPoint scaling continues with $42.0 million UPB first-lien originations and $32.8 million UPB brokered second liens in Q4 .
  • Funding backdrop normalized: repo spreads reverted to near SOFR +15–20 bps and weighted average repo maturity shortened for year-end positioning, supporting 2025 outlook; management reiterated stable MSR allocation and constructive mortgage spread view .

What Went Well and What Went Wrong

  • What Went Well

    • EAD momentum: $21.2 million ($0.20 per share) vs. $13.2 million ($0.13) in Q3, reflecting lower net interest expense and stronger servicing fee collections/subservicing income .
    • MSR tailwinds: $82.5 million MSR fair value gain as rates rose and prepay assumptions slowed; MSR CPR ticked down to ~4.9% with price multiple up to 5.9x .
    • Operating progress at RoundPoint: “We are already reaping the improved economics… from servicing the loans from our own MSR portfolio,” and direct-to-consumer origination platform ramped (second-lien brokering added) .

  • What Went Wrong

    • Book value compression: common BVPS moved from $14.93 to $14.47; comprehensive loss attributable to common was $(1.6) million (−$0.03 per share) on RMBS valuation decreases with higher market yields .
    • Lower float income: net servicing income dipped quarter-over-quarter due to seasonality and lower short-term deposit rates, partially offset by higher service fee collections and subservicing income .
    • Hedge/RMBS drag: RMBS valuation decreased; swaps/futures gains were partly offset by unfavorable TBA moves and slightly lower swap interest spread income, yielding net portfolio loss across RMBS/derivatives/MSR of $47.5 million (vs. $67.3 million loss in Q3) .

Financial Results

MetricQ4 2023Q2 2024Q3 2024Q4 2024
Book Value per Share ($)$15.21 $15.19 $14.93 $14.47
Economic Return on Book Value (%)2.0% 0.0% 1.3% 0.0%
Comprehensive Income per Share ($)$0.40 $0.00 $0.18 $(0.03)
GAAP Net Income attributable to common ($mm)$(444.7) $44.6 $(250.3) $264.9
GAAP Diluted EPS ($)$(4.56) $0.43 $(2.42) $2.37
EAD ($mm)$(10.5) $17.5 $13.2 $21.2
EAD per share ($)$(0.11) $0.17 $0.13 $0.20
Dividend per common share ($)$0.45 $0.45 $0.45 $0.45
Dividend Yield (%)12.9% 13.6% 13.0% 15.2%
Portfolio Composition ($mm unless noted)Q4 2023Q2 2024Q3 2024Q4 2024
Agency RMBS (MV)$8,335 $8,035 $8,514 $7,377
MSR (Fair Value)$3,052 $3,065 $2,884 $2,994
Net TBA Position (Bond Eq. Value)$3,222 $4,941 $5,044 $4,469
Total Portfolio (RMBS+MSR+Other+Net TBA)$14,613 $16,045 $16,446 $14,844
Economic Debt-to-Equity (x)6.0x 6.8x 7.0x 6.5x
Weighted Avg 3-mo CPR (Agency RMBS) (%)4.7 7.3 7.2 7.5
MSR UPB ($mm)$215,647 $209,390 $202,052 $200,317
MSR 60+ Day Delinquencies (%)0.7 0.7 0.8 0.9
Operating and Financing KPIsQ4 2023Q2 2024Q3 2024Q4 2024
Operating Expenses excl. non-cash LTIP/certain items ($mm)$40.235 $37.924 $36.874 $39.236
Repo Outstanding ($mm)$7,747.6 $8,434.9 $8,763.4 $7,805.1
Repo Wtd Avg Months to Maturity1.59 2.78 2.55 1.60
Total Borrowings ($mm)$9,913.2 $9,973.6 $10,025.4 $9,087.5
Annualized Cost of Financing incl. swaps/futures/TBAs (%)5.62 4.76 4.73 4.58

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Prospective quarterly static return per share ($)Forward (quarterly)$0.39–$0.58 (Q3 2024) $0.39–$0.52 (Q4 2024) Lower range midpoint (narrowed)
Capital allocation to servicing (MSR) (%)Forward~65% (Q3 2024) ~61% (Q4 2024) Slightly lowered
Dividend per common share ($)Q4 2024$0.45 (Q3 2024) $0.45 (Q4 2024) Maintained
Formal revenue/margin/OpEx guidanceN/ANot provided [press releases do not include formal guidance] Not provided N/A

Notes: TWO does not issue traditional revenue/EPS guidance; management provides static return estimates and strategic allocation commentary .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q2 2024)Previous Mentions (Q3 2024)Current Period (Q4 2024)Trend
Mortgage spread volatility and outlookSpreads wide; potential tightening if volatility falls Spreads tightened with Fed cut; OAS to low end; still above LT averages Constructive on spreads; volatility moderated; demand balanced; positive RV vs other assets Improving stability
MSR demand/supply and prepaymentsStrong bids; supply normalizing; CPR rose seasonally to 5.3% Demand strong; price multiple 5.6x; CPR ~5.3% Price multiple 5.9x; CPR ~4.9%; prepay risk low with rates ~7% Slightly better (higher multiple, slower CPR)
RoundPoint servicing and DTC originationsPlatform launched; servicing transfers complete; pipeline >60 loans First full quarter DTC: $22.4m first-lien; $7.5m second-lien brokering $42.0m first-lien funded; $32.8m second-lien brokered; plan to scale and possibly originate seconds in own name Scaling up
Funding costs and repo marketsTerm notes matured; capacity increased; cost of financing improved Cost incl. hedges at 4.73%; repo spreads tracked SOFR Repo spreads normalized to SOFR +15–20 bps; WAM shortened at YE for positioning Normalizing/tighter
Rate path/macro (Fed, curve)Higher-for-longer shifted; first cut priced for Sep Fed cut 50 bps; yield curve turned positive; post-Q3 data removed two cuts Fed cut total 100 bps in 2024; hawkish tone; mortgage rates likely >6% intermediate term Hawkish moderation
Regulatory (GSE reform)——Management declines to speculate; frames analysis by privatization/guarantee questions Watchful/neutral
Technology and AI in servicing——Focus on cost efficiencies “through the use of technology and AI applications” Emerging initiative

Management Commentary

  • “With two-thirds of our capital allocated to low coupon MSR, our portfolio generated stable and positive cashflows, despite large fluctuations in short-term interest rates.” — Bill Greenberg, CEO .
  • “We are already reaping the improved economics… from servicing the loans from our own MSR portfolio.” — Bill Greenberg .
  • “We think of [DTC originations] primarily as being a hedge to our MSR portfolio… to protect our assets from faster-than-expected prepayment speeds.” — Bill Greenberg .
  • “Mortgage spread volatility has significantly decreased… we believe that our unique hedged MSR-centric strategy will continue to generate attractive levered returns in 2025 and beyond.” — Nick Letica, CIO .
  • “Repo spreads… have reverted back to more normal ranges around SOFR +15 to +20 bps.” — William Dellal, Interim CFO .

Q&A Highlights

  • Mortgage spread outlook and allocation: Management remains constructive on spreads and expects MSR allocation to remain steady; performance does not require further spread tightening given lowered volatility .
  • EAD vs. static return range: Static returns mark-to-market the whole portfolio contemporaneously; EAD is asynchronous and can distort timing vs. current economics .
  • MSR return range dip vs. prior quarter: As rates rose, the amount of RMBS hedge needed declined, reducing the paired strategy’s return potential on MSR side .
  • MSR financing depth: Traditional lenders remain active; new entrants are increasing market depth, supporting healthy financing markets .
  • Regulatory: GSE reform discussion intentionally non-speculative; implications viewed through privatization and guarantee status lenses .

Estimates Context

  • S&P Global consensus estimates for Q4 2024 were not retrievable due to API request limit constraints; as a result, we cannot provide a beat/miss analysis versus Wall Street consensus for EPS or revenue at this time [GetEstimates error].
  • Investors should note TWO’s non-GAAP EAD of $0.20 per share and GAAP diluted EPS of $2.37; absent consensus, directional estimate comparisons are unavailable this quarter .

Key Takeaways for Investors

  • MSR-centric strategy continues to anchor cash flows; slower CPRs and higher price multiples underpin book value resilience despite RMBS valuation sensitivity .
  • EAD improved quarter-over-quarter, supported by lower net interest expense and stronger servicing cash collections—an important dividend-support signal even as comprehensive results were modestly negative .
  • Funding markets are benign: repo spreads normalized and overall cost of financing declined to 4.58%, a constructive backdrop for levered returns in 2025 .
  • RoundPoint platform is scaling, with second-lien products adding ancillary revenue; continued build-out should hedge MSR prepayment risk and diversify income streams .
  • Near-term trading: narrative hinges on mortgage spread stability and MSR valuation tailwinds; watch implied volatility and bank demand for MBS as key spread drivers .
  • Medium-term thesis: with mortgage rates likely >6%, prepayments should remain slow, keeping MSR cash flows durable; static return guidance narrowed but remains attractive on common equity .
  • Monitor governance/leadership: CFO transition slated for May 2025; expect continuity in capital allocation and financing strategy .