Two Harbors Investment Corp (TWO) Reports Mixed Q4 Results Amid Market Volatility

Comprehensive Income Rises as Company Bolsters Mortgage Servicing Rights Portfolio

  • Book Value: Reported at $15.21 per common share.
  • Dividends: Declared a Q4 common stock dividend of $0.45 per share.
  • Comprehensive Income: Generated $38.9 million, or $0.40 per weighted average basic common share.
  • Income Excluding Market-Driven Value Changes (IXM): $0.39 per weighted average basic common share.
  • Capital Management: Issued 7.0 million shares and repurchased 221,806 preferred shares.
  • MSR Acquisitions: Settled $829.1 million UPB of MSR through flow-sale acquisitions.
  • Annual Performance: 2023 total economic return on book value of (3.2)%.
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On January 29, 2024, Two Harbors Investment Corp (TWO, Financial) released its 8-K filing, detailing its financial results for the fourth quarter ended December 31, 2023. The company, a real estate investment trust (REIT) specializing in residential mortgage-backed securities (RMBS), residential mortgage loans, mortgage servicing rights (MSR), and commercial real estate, reported a book value of $15.21 per common share and declared a fourth-quarter dividend of $0.45 per share. This represents a 2.0% quarterly economic return on book value.

Two Harbors' comprehensive income stood at $38.9 million, or $0.40 per weighted average basic common share, while its Income Excluding Market-Driven Value Changes (IXM) was $0.39 per share. The company also actively managed its capital structure, issuing 7.0 million shares of common stock for total proceeds of $97.8 million and repurchasing 221,806 shares of preferred stock.


Strategic Acquisitions and Portfolio Management

During the year, Two Harbors closed the acquisition of RoundPoint Mortgage Servicing LLC, which reinforced its commitment to MSR. The company settled $27.5 billion UPB of MSR through flow-sale acquisitions and bulk purchases. "We navigated extreme interest rate and spread volatility by actively managing our portfolio and increasing our allocation to MSR," stated Bill Greenberg, President and CEO of Two Harbors.

"Looking ahead to 2024, we believe that our portfolio, with less mortgage spread duration than portfolios without MSR, is very well positioned to benefit from the current and expected market environments," Greenberg added.

However, the company faced challenges in the fourth quarter, as mortgage spreads and implied volatility remained positively correlated to interest rates. Despite a decline in mortgage rates over the quarter, the company's MSR portfolio, with a weighted average coupon rate of only 3.45%, has less than 1% of its balances with a significant rate incentive to refinance, which should keep prepayment rates low.

Financial Highlights and Operating Performance

Two Harbors reported a GAAP net loss of $(444.7) million, or $(4.56) per weighted average basic common share, and an annualized return on average common equity of (120.4)%. The company's operating expenses, excluding non-cash LTIP amortization and certain operating expenses, were $40.2 million, representing 7.6% of average equity.

The company's investment portfolio was comprised of $11.4 billion of Agency RMBS, MSR, and other investment securities, as well as their associated notional debt hedges. The net long to-be-announced securities (TBAs) stood at $3.2 billion bond equivalent value. The portfolio's weighted average cost basis was $100.65, with a gross weighted average coupon rate of 5.5%.

Two Harbors' financing metrics showed total borrowings of $9.9 billion, with a weighted average borrowing rate of 5.74% and a weighted average months to maturity of 1.80.

Outlook and Management Commentary

Chief Investment Officer Nick Letica commented on the portfolio's performance and outlook, expressing optimism about the return potential. The company remains focused on managing its portfolio and capital structure to navigate market conditions and drive value for shareholders.

"Given the levered returns available in the market for our combined strategies, we remain optimistic about the return potential of our portfolio," Letica stated.

Two Harbors Investment Corp will host a conference call to further discuss its fourth-quarter financial results and related information. Investors and interested parties can access additional details on the company's website or through the SEC's website.

Two Harbors' performance in the fourth quarter of 2023 reflects a strategic emphasis on MSR and a cautious approach to market volatility. The company's ability to generate comprehensive income amidst challenging conditions demonstrates its resilience and adaptability. As Two Harbors looks ahead, its fortified MSR portfolio and prudent capital management are expected to position it favorably for potential market opportunities in 2024.

Explore the complete 8-K earnings release (here) from Two Harbors Investment Corp for further details.