8-K: Two Harbors Investment Corp. Reports Positive Q3 2024 Results Driven by Mortgage Performance

Two Harbors Investment Corp. announced a positive third quarter with a 1.3% economic return on book value, driven by strong mortgage performance and strategic MSR acquisitions.

Summary

• Two Harbors Investment Corp. (TWO) reported its financial results for the quarter ended September 30, 2024.
• The company achieved a 1.3% quarterly economic return on book value, with a total economic return of 7.0% for the first nine months of 2024.
• Comprehensive income for the quarter was $19.3 million, or $0.18 per weighted average basic common share.
• TWO settled $3.3 billion in unpaid principal balance (UPB) of mortgage servicing rights (MSR) through bulk and flow-sale acquisitions and recapture.
• The company completed its first full quarter of direct-to-consumer originations, funding $22.4 million UPB in first lien loans and brokering $7.5 million UPB in second lien loans.
• Post quarter-end, TWO committed to purchase an additional $2.1 billion UPB of MSR through a bulk acquisition.
• The portfolio benefited from the net performance of mortgages, although performance was uneven across different mortgage types.
• MSR valuations remain well supported with strong demand, and the company believes there will be opportunities to add MSR at attractive levels.
• The company's portfolio included $11.4 billion of Agency RMBS, MSR, and other investment securities, as well as $5.0 billion bond equivalent value of net long to-be-announced securities (TBAs).
• The company's MSR portfolio had an unpaid principal balance of $202.1 billion with a gross coupon rate of 3.4%.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While the company highlights positive economic returns and strategic acquisitions, the GAAP net loss and decrease in book value temper the overall sentiment. The company is navigating a complex market environment with both opportunities and challenges.

Positives

• The company achieved a positive economic return on book value of 1.3% for the quarter.
• The company's MSR portfolio performed well with strong demand for bulk packages.
• The company successfully completed its first full quarter of direct-to-consumer originations.
• The company is actively managing its portfolio to take advantage of market opportunities.
• The company has a strong balance sheet and diversified financing for both MSR and Agency RMBS.

Negatives

• The company experienced a net loss of $250.3 million, or $2.42 per weighted average basic common share, according to GAAP.
• The book value per common share decreased from $15.19 to $14.93 during the quarter.
• The company experienced fair value losses on mortgage servicing rights of $133.3 million.
• The company experienced a net interest expense of $42.3 million.
• The company experienced a loss on interest rate swap and swaption agreements of $172.3 million.

Risks

• The company is exposed to changes in interest rates and the market value of its assets.
• Changes in prepayment rates of mortgages underlying the company's target assets could impact performance.
• The company faces risks related to the rates of default or decreased recovery on the mortgages underlying its target assets.
• The company is exposed to declines in home prices.
• The company's ability to manage various operational risks and costs associated with its business could impact results.
• The company is involved in ongoing litigation related to the termination of its management agreement with PRCM Advisers LLC.

Future Outlook

The company expects to continue to add MSR at attractive levels and is focused on providing high-quality investment returns. They are augmenting their investment portfolio with additional revenue and hedging opportunities to enhance their strategy.

Management Comments

• With MSR at our core, we have built an investment portfolio with RMBS that has less exposure to changes in mortgage spreads than portfolios without MSR, while still preserving upside to decreasing volatility and spread tightening, stated Bill Greenberg, TWOs President and Chief Executive Officer.
• We are intently focused on providing high-quality investment returns, and our combined strategy is designed to extract the most value that we can from our MSR asset for the benefit of our shareholders.
• We are thoughtfully augmenting our investment portfolio with additional revenue and hedging opportunities in order to further enhance a strategy that we expect will deliver attractive results for our shareholders through a variety of market environments.
• MSR valuations remain well supported with strong demand as the supply of bulk sales continues to normalize from the record levels of the past few years, stated Nick Letica, TWOs Chief Investment Officer.
• Nevertheless, we believe there will continue to be opportunities to add MSR at attractive levels, enhanced by our deep expertise coupled with the benefits of our in-house servicing and recapture operations.

Industry Context

The announcement reflects the current market environment where MSR assets are in demand and interest rate volatility is impacting mortgage-backed securities. The company's focus on MSR and its in-house servicing capabilities positions it to potentially capitalize on these trends.

Comparison to Industry Standards

• The company's economic return of 1.3% for the quarter is a key metric for REITs, and it is important to compare this to peers such as AGNC Investment Corp. and Annaly Capital Management, which also invest in mortgage-backed securities and MSR.
• The company's MSR portfolio size of $2.9 billion is significant and should be compared to other REITs with similar strategies, such as PennyMac Financial Services, Inc., which also has a large MSR portfolio.
• The company's direct-to-consumer origination activities are a relatively new initiative and should be compared to other mortgage originators to assess its competitiveness and efficiency.
• The company's debt-to-equity ratio of 4.6:1 and economic debt-to-equity ratio of 7.0:1 are important metrics to compare to industry averages and peers to assess the company's leverage and risk profile.
• The company's cost of financing of 4.73% including swaps, U.S. Treasury futures and TBAs should be compared to other REITs to assess the company's financing efficiency.

Legal Proceedings

• The company is involved in ongoing litigation related to the termination of its management agreement with PRCM Advisers LLC.

Stakeholder Impact

• Shareholders will be impacted by the decrease in book value per share and the net loss, but also by the dividend payment and the potential for future returns.
• Employees may be impacted by the company's strategic initiatives and operational changes.
• Customers of RoundPoint Mortgage Servicing LLC will be impacted by the company's direct-to-consumer originations activities.
• Creditors will be impacted by the company's financing activities and debt levels.

Next Steps

• The company will host a conference call on October 29, 2024, to discuss the third quarter 2024 financial results.
• The company will continue to focus on acquiring MSR at attractive levels.
• The company will continue to augment its investment portfolio with additional revenue and hedging opportunities.

Key Dates

Keywords

MSR, Mortgage Servicing Rights, REIT, Real Estate Investment Trust, RMBS, Agency RMBS, Mortgage-Backed Securities, TBA, To-Be-Announced Securities, Interest Rates, Prepayment Rates, Economic Return, Book Value, Originations, Servicing