Two Harbors Investment Corp. Q4 FY2024 earnings call

Board Remembrance

• Remembered Board member Reid Sanders who passed away, having served since the company's inception in 2009.

Financial Metrics

• Book value at Dec 31 was $14.47 per common share, with a 0.0% quarterly economic return including the $0.45 per share dividend. Full-year 2024 generated a 7.0% total economic return on book value.

Integration and Platform

• RoundPoint integration with Two largely went according to plan, benefiting from economies of scale and increased cash flows from servicing. Launched a direct-to-consumer origination platform as a hedge to the MSR portfolio.

Origination and Servicing

• Funded $42 million UPB of first mortgages in the quarter with another $21 million UPB in the pipeline. Focus at RoundPoint in 2025 on cost efficiencies in servicing using technology and AI, and providing a comprehensive platform for mortgage and home equity needs.

At year-end, Two serviced $212 billion UPB of MSR across 861,000 loans, with $11.2 billion UPB serviced for third-party clients. In the fourth quarter, net servicing income was $168 million, minus $5 million of non-operating MSR-related servicing costs. Net interest expense was $35 million, lower by $7.4 million due to lower RMBS borrowing balances. Investment securities gains and changes in OCI swung from a $270 million gain in Q3 to a $267 million loss in Q4. The servicing assets showed a $82.5 million gain in Q4 after a $133.4 million loss in Q3.

MSR Market

• Expect ample opportunities in 2025 to add MSR at attractive spreads. ### RMBS Outlook
• RMBS spreads outlook in 2025 is attractive but risks are more balanced. ### Strategy
• Unique hedged MSR-centric strategy expected to continue generating attractive levered returns in 2025 and beyond.

• Interest rate volatility likely to remain high with the biggest risk being inflation reemerging and the Fed pausing or reversing rate cutting cycle. - Uncertainty around GSE reform, including implications for existing and prospective securities with guarantees.

Q: Could you give an update on how book has performed so far in the quarter?

A: It's been a reasonably quiet quarter, although early in the quarter. Total return is estimated to be up between about 1.5% and 2%, as of last night.

Q: How does the lower leverage level impact your view on earnings power? And what would the normalized range for earnings be?

A: The overall debt-to-economic ratio is but one measure. The central tendency of returns and range is still supportive of dividend and in range of prior quarters. The leverage is just one component of risks managed, and over 60% of capital in MSR is supportive of stable returns.

Q: Could you expound a bit on your outlook for Agency MBS spreads for this year? And how do you guys see the allocation to MSRs versus MBS evolving throughout the year?

A: Mortgages should continue to be constructive for return. We don't expect a material change in MSR allocation. ### Q: Can you discuss the main differences between the EAD and the static return range you provide on slide 14?

A: The return potential on slide 14 is actual portfolio at quarter end, mark-to-market basis projecting return potential. EAD is asynchronous, reflecting purchase price etc.

Q: Are you guys seeing any new financing counterparties or sources of leverage to support the MSR portfolio?

A: We've been working with traditional lenders and there are new entrants trying to gain traction in the market. The depth of MSR financing market continues to grow and expand.

Q: Can you share how much the costs have changed in response to the first 100 bps of rate cuts that we've seen?

A: MSR asset financing costs are floating rates indexed to short-term funding rates and SOFR, so as Fed cuts rates, funding costs go down. Float income from MSR asset partially offsets the effect.