Release Date: October 29, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Two Harbors Investment Corp (TWO, Financial) reported a 1.3% quarterly economic return on book value, demonstrating resilience in a volatile market.
- The company achieved a 7.0% total economic return on book value for the first nine months of 2024, indicating strong performance across varying market conditions.
- The acquisition of RoundPoint is on track to achieve the anticipated cost savings, enhancing the economics of their MSR investments.
- Two Harbors Investment Corp (TWO) successfully launched a direct-to-consumer loan origination channel, closing and funding $22.4 million UPB of first mortgages in its first full quarter.
- The company has built a robust investment portfolio with RMBS, reducing exposure to changes in mortgage spreads while preserving upside potential.
Negative Points
- The book value per share decreased from $15.19 on June 30 to $14.93 on September 30, reflecting a decline in economic return.
- Net interest expense increased to $42 million in the third quarter due to higher average borrowing balances.
- Servicing asset losses were $133 million in the quarter, driven by declining rates that decreased the servicing asset value.
- The company experienced hedging losses of $225 million due to a rally in rates, impacting overall financial performance.
- Market volatility in October led to a further decline in book value, estimated to be down between 1.5% and 3% as of October 18.
Q & A Highlights
Q: Can you discuss the move lower in the static return for the securities portfolio and how much of that was due to the move lower in coupon?
A: Nicholas Letica, Chief Investment Officer, explained that the lower static return was primarily due to tighter spreads over the quarter. The composition of the portfolio, with an increased percentage of capital in servicing and a slight increase in leverage, also impacted the return potential.
Q: How have quarter-to-date spreads impacted book value and incremental returns?
A: William Greenberg, CEO, noted that due to market volatility in October, book value was down between 1.5% and 3% as of October 18. Nicholas Letica added that the return potential has shifted back to higher leverage due to widened mortgage spreads since quarter-end.
Q: What factors contribute to the wider range in return potential this quarter?
A: Nicholas Letica stated that the variance in returns is driven by prepayment expectations and funding rates. The assumptions used for highs and lows in these factors affect the return range. Recent volatility in funding rates has also contributed to the wider range.
Q: What is your outlook for prepayments and servicing capacity given current mortgage rates?
A: Nicholas Letica expects prepayments to decrease as rates have reversed and winter months approach, leading to slower turnover rates. William Greenberg added that MSR supply has returned to historical norms, with the market remaining healthy and well-supported.
Q: How do swap spreads relative to treasuries influence your choice of hedging instruments?
A: Nicholas Letica mentioned that swap spreads are currently at tight levels relative to treasuries, presenting a good hedging opportunity. The choice of hedging instruments is influenced by market directionality and budgetary expectations, with swaps offering better carry from a hedge perspective.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
