Two Harbors Investment Corp. Reports Strong First Quarter Results

Two Harbors Investment Corp., a leading real estate investment trust (REIT), has released its financial results for the first quarter of 2025. The company, which invests in mortgage-backed securities and mortgage servicing rights (MSR), delivered solid performance despite a volatile market environment.

Financial Highlights

• Book value per common share increased to $14.66 at March 31, 2025, up from $14.47 at the end of 2024.
• Comprehensive income attributable to common stockholders was $64.9 million for the quarter, compared to $89.4 million in the same period last year.
• The company’s debt-to-equity ratio, which measures its leverage, stood at 5.1 to 1 at the end of the quarter, up from 4.3 to 1 at the end of 2024.
• Two Harbors held $573.9 million in cash and cash equivalents as of March 31, 2025, providing ample liquidity to support its operations.

Resilient Mortgage Servicing Rights Portfolio

A key driver of Two Harbors’ performance is its investment in mortgage servicing rights (MSR). MSR represent the right to service residential mortgage loans, and can provide valuable diversification and risk-mitigation benefits when paired with the company’s Agency mortgage-backed securities (RMBS) portfolio.

As of March 31, 2025, Two Harbors’ MSR portfolio had a fair value of $3.0 billion, covering 794,466 loans with an unpaid principal balance of $196.8 billion. The portfolio experienced a 4.2% constant prepayment rate (CPR) during the quarter, down from 4.9% in the prior quarter, as many borrowers remained content with their low mortgage rates.

The relatively slow prepayment speeds on Two Harbors’ MSR have been a tailwind for the strategy, as faster-than-expected prepayments can erode the value of these assets. Management believes the MSR portfolio’s risk profile complements the company’s Agency RMBS holdings, helping to generate more stable performance across changing market environments.

Navigating a Volatile Rate Environment

The first quarter of 2025 was marked by economic uncertainty and volatility in interest rates. U.S. Treasury yields declined modestly, with the 2-year and 10-year notes finishing the quarter at 3.88% and 4.21%, respectively.

This backdrop impacted Two Harbors’ investment portfolio. The company’s Agency RMBS experienced net positive performance for the quarter, outperforming interest rate hedges in January and February before underperforming in March as equities and other spread products weakened.

Prepayment speeds on the company’s Agency RMBS portfolio decreased to 7.0% during the quarter, down from 7.5% in the prior quarter, as seasonal factors and higher mortgage rates dampened refinancing activity. Two Harbors’ active portfolio management approach, including its focus on prepayment-protected securities, helped mitigate the impact of these market dynamics.

Balanced Financing Strategy

Two Harbors funds its investments through a diversified mix of financing sources, including repurchase agreements, revolving credit facilities, warehouse facilities, and convertible senior notes. As of March 31, 2025, the company had total borrowings of $10.9 billion, with a weighted average borrowing rate of 4.99%.

The company’s financing is collateralized by its Agency RMBS, non-Agency securities, MSR, servicing advances, and mortgage loans held-for-sale. Two Harbors maintains ample unused borrowing capacity, with approximately $6.5 million available on its unpledged securities, $950.1 million on its MSR and servicing advance facilities, and $19.1 million on its warehouse facilities.

Management believes the current degree of leverage in the portfolio supports the company’s liquidity and balance sheet strength, while providing flexibility to respond to changing market conditions.

Outlook: Cautious Optimism Amid Economic Uncertainty

Looking ahead, Two Harbors expects the markets to remain choppy as the U.S. government implements its trade and economic policies. The company plans to maintain a cautious approach, keeping portfolio leverage and risk at muted levels until there is more clarity on the economic path forward.

Despite the high levels of volatility in the first quarter, the company continues to anticipate attractive levered returns on its portfolio. With MSR at the core of its investment strategy, Two Harbors believes it has designed a portfolio that can deliver attractive risk-adjusted returns for shareholders across a variety of market environments.

Strengths and Weaknesses

Strengths:

• Diversified investment portfolio, with MSR providing valuable diversification and risk-mitigation benefits
• Prudent financing strategy, with ample liquidity and unused borrowing capacity
• Experienced management team with a track record of navigating challenging market conditions

Weaknesses:

• Exposure to interest rate and prepayment risk, which can impact the value of the company’s assets
• Reliance on the performance of the mortgage market and housing sector, which can be influenced by macroeconomic factors
• Potential regulatory changes or legal/compliance issues related to the company’s mortgage servicing and origination activities

Conclusion

Two Harbors’ first quarter results demonstrate the company’s ability to navigate a volatile market environment. The resilience of its MSR portfolio, combined with a balanced financing strategy and ample liquidity, position the company to continue delivering value for shareholders. While economic uncertainty remains, Two Harbors’ management team is cautiously optimistic about the company’s prospects, leveraging its core competencies to generate stable performance across changing market conditions.