Two Harbors Investment Corp. Q3 FY2024 earnings call

• New branding as Two, focusing on MSR as core of investment strategy. • Acquisition of RoundPoint one year ago, on track for cost savings. • Direct-to-consumer loan origination channel started in December, closed and funded $22.4 million UPB of first mortgages with $35 million in pipeline. • Partnership with large originator of second liens, acted as broker on $7.5 million UPB. • Book value at $14.93 per share, 1.3% quarterly economic return. • Fed rate expectations changed, yield curve steepened with 10-year and 2-year rates moving post-quarter end.

At September 30th, book value was $14.93 per common share. Net servicing income was $172 million, minus $4 million of third-party subservicing fees and other MSR-related servicing costs. RMBS portfolio performance had uneven coupon outperformance with lower coupons outperforming. MSR portfolio was $203 billion UPB at September 30th, prepayment speed unchanged at 5.3% CPR. RMBS funding markets were stable with ample balance sheet, and MSR market had $40 billion UPB supply in Q3, with traded prices steady.

• Prospective quarterly static return per share for common equity falls in the range of $0.39 to $0.58. • Since quarter end, rates reversed, mortgage spreads widened, leading to moving TBA exposure higher and increasing spread exposure. • Added $2.1 billion UPB of MSR through bulk purchase.

• Market volatility, including rapid reversal of rates and changing Fed expectations. • Uncertainty in funding markets, such as year-end funding pressures. • Prepayment risks affecting MSR portfolio performance, especially with low percentage of MSR in the money.

Q: Talk about the move lower in the static return for the securities portfolio.

A: Nick Letica said it was mostly due to spreads tightening and portfolio composition changes, with servicing percentage of capital and leverage impacts.

Q: Thoughts on swap spreads relative to treasuries?

A: Nick Letica discussed swap spreads being tight, supply concerns priced in, and using swaps and treasury futures for hedging.

Q: Outlook on prepays and servicing capacity?

A: Nick Letica expects prepays to pick up in the next report but then decline, with winter months affecting turnover, and Bill Greenberg noted MSR supply returning to historical norms.

Q: Impact of MSR sales and bulk purchases on characteristics?

A: Nick Letica said MSR is nuanced, with mix of different gross WACC packages and flow MSR, depending on value assessment.

Q: Convertible debt and refinancing?

A: Bill Greenberg mentioned convertible debt maturing in early 2026 and being on radar for refinancing, with consideration of multiple risk metrics.