Two Harbors Investment Corp. ((TWO)) has held its Q3 earnings call. Read on for the main highlights of the call.
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The recent earnings call of Two Harbors Investment Corp. presented a mixed sentiment, reflecting both significant achievements and challenges. While the company celebrated milestones such as growth in subservicing and strong performance in originations, these were overshadowed by the financial impacts of a litigation settlement expense and a comprehensive loss, which led to an increased expense ratio.
Settlement of Litigation with Former External Manager
The company reached a settlement in its litigation with a former external manager, agreeing to a one-time payment of $375 million. This resolution allows Two Harbors to move forward with clarity and certainty, although it significantly impacted the quarter’s financial results.
Growth in Subservicing Business
Two Harbors signed a term sheet with a new subservicing client, increasing the combined subservicing unpaid principal balance (UPB) to approximately $40 billion. This growth validates the company’s efforts to expand its third-party subservicing business.
Strong Performance in Direct-to-Consumer Originations
The company recorded its highest-ever locks for September and funded $49 million of UPB in first and second liens in Q3. An additional $52 million is in the origination pipeline, showcasing robust performance in direct-to-consumer originations.
Positive Impact of Fed Rate Cut
The Federal Reserve’s decision to cut rates by 25 basis points in September provided a boost to equity markets, with the S&P 500 rising nearly 8% by the end of the quarter.
Return Potential and Portfolio Optimism
Two Harbors projected a prospective quarterly static return per share of $0.26 to $0.42, with a potential static return on common equity ranging from 9.5% to 15.2%, indicating optimism about future returns.
Litigation Settlement Expense Impact
The $175.1 million litigation settlement expense resulted in a negative 6.3% total economic return for the quarter, highlighting the financial burden of resolving the litigation.
Increased Expense Ratio
The reduction in the capital base led to an increased expense ratio, prompting the company to focus on improving efficiencies and reducing costs.
Comprehensive Loss
The company incurred a comprehensive loss of $80.2 million, or $0.77 per share, including the litigation settlement expense. Without this expense, the company would have recorded a comprehensive income of $94.9 million.
Forward-Looking Guidance
Looking ahead, Two Harbors plans to redeem $262 million UPB of convertible notes by January 2026, maintaining a cash balance above $500 million post-redemption. The company remains focused on executing its MSR-focused investment strategy and is optimistic about future growth, supported by a significant pipeline of originations.
In conclusion, the earnings call of Two Harbors Investment Corp. reflected a cautious optimism. While the company faces challenges from litigation expenses and comprehensive losses, its growth in subservicing and originations, along with strategic adjustments, provide a foundation for future success. Investors will be keen to see how the company navigates these dynamics in the coming quarters.