Two Harbors Earnings Call: Merger Certainty Amid Volatility

Two Harbors Investment Corp. ((TWO)) has held its Q1 earnings call. Read on for the main highlights of the call.

Two Harbors Investment Corp.’s latest earnings call carried a cautious but ultimately constructive tone. Management acknowledged a tough quarter marked by mark-to-market losses, a $24.7 million comprehensive loss, and a 5.1% drop in book value, yet stressed the strength of its MSR platform, ample liquidity, and the strategic certainty of its cash merger with CrossCountry Mortgage.

CrossCountry Cash Merger Anchors Shareholder Value

Two Harbors’ Board detailed a definitive merger agreement with CrossCountry Mortgage, lifting the cash consideration from $10.80 to $11.30 per share. The deal, unanimously recommended by the Board and not subject to a financing condition, is slated to close in the second half of 2026, with shareholders set to vote at a special meeting on May 19.

MSR Strategy Delivers Standout Performance

The company’s hedged MSR book was a clear bright spot, with management describing performance as “extremely well” against a volatile backdrop. Two Harbors added $152 million in UPB through flow and recapture, lifted its MSR price multiple to 5.9 times, and kept 60+ day delinquencies under 1%, supported by a robust secondary market that saw $93 billion in servicing transfers in Q1.

Origination Platform Builds Momentum Ahead of Merger

The direct-to-consumer platform continued to gain traction, funding $92 million in first and second lien loans, roughly in line with the prior quarter. It also brokered $38 million of second liens and carried a $57 million pipeline into quarter-end, reinforcing management’s narrative that origination capabilities are steadily improving in advance of the CrossCountry combination.

Liquidity Cushion and Debt Repayment Enhance Stability

Two Harbors ended the quarter with over $500 million of cash, underscoring a solid liquidity position amid market turbulence. The firm also repaid $261.9 million of convertible senior notes at maturity, while RMBS funding remained accessible, with repo spreads around SOFR plus 15–18 basis points and an average repo maturity of 71 days.

Risk Profile Improves as Leverage Edges Down

The total portfolio stood at $11.9 billion, split between $8.9 billion of settled holdings and $3.0 billion of TBAs. Economic debt-to-equity fell to 6.4 times, and portfolio sensitivity to a 25 basis point spread tightening eased to 3.2%, signaling more measured interest rate and spread risk positioning than in prior periods.

Static Return Outlook Remains Attractive

Despite near-term volatility, management highlighted compelling static return estimates across the platform. Servicing capital, which represents about 65% of the portfolio, is expected to generate 11%–14% returns, while securities are projected at 11%–15%, implying an 8%–11.4% pre-leverage portfolio return and a 7.3%–12.9% expected static return on common equity.

Early Signs of Book Value Recovery

After the quarter’s decline, management reported that book value performance quarter-to-date has turned positive. They estimated book value to be up about 2% since March 31, suggesting that some of the mark-to-market pressure seen in the first quarter has already started to retrace.

Book Value Drop Drives Negative Economic Return

Book value per share fell to $10.57 at March 31 from $11.13 at year-end, a 5.1% decline that overshadowed the quarter’s common dividend of $0.34 per share. Including the dividend, the company posted a negative economic return of 2.0% for the quarter, underscoring the impact of spread volatility on reported equity.

Comprehensive Loss Reflects Securities Volatility

Two Harbors recorded a comprehensive loss of $24.7 million, or $0.24 per share, largely due to mark-to-market losses on Agency RMBS and TBAs. These non-cash hits to value did not reflect credit deterioration but rather rapid shifts in interest rates and spreads that weighed on market pricing of the securities portfolio.

RMBS Spreads Widen as Benchmark Index Stumbles

Mark-to-market pressure stemmed from higher rates and wider mortgage spreads, with current coupon spreads widening by roughly 26 basis points nominal and 15 basis points on an option-adjusted basis. The Bloomberg MBS Index delivered a negative excess cumulative return of 36 basis points during February and March, mirroring the drag felt in Two Harbors’ securities sleeve.

Geopolitics and Volatility Hurt Hedged Securities

The onset of Middle East tensions in late February triggered a sharp risk-off move that lifted realized and implied volatility. This environment contributed to wider spreads and underperformance in the company’s hedged securities book, even as the MSR portfolio benefitted from the same rate and spread dynamics.

MSR Strength Offset by Costly Convexity Hedging

While MSRs thrived, the hedged securities portion acted as a counterweight, with convexity hedging costs rising alongside volatility. Management emphasized that the securities sleeve was a quarterly drag, effectively offsetting some of the strong performance coming out of the servicing assets.

Faster Prepayments Pressure Higher-Coupon Securities

Aggregate pool speeds rose to 9.8% CPR from 8.6% CPR, driven mainly by faster prepayments in higher-coupon collateral. Higher-coupon TBAs saw especially quick speeds, pressuring returns, though specified pools offered relatively better call protection, moderating the impact on the overall securities portfolio.

Servicing Model Elevates Expense Base

Management noted that the firm’s operating expenses run higher than many mortgage REIT peers because of the infrastructure required for the servicing business. While this cost base supports long-term MSR economics, it can dampen relative earnings in periods when peers benefit from lower overhead or accretion from new equity issuance.

Guidance and Outlook: Merger Certainty, Solid Returns

Looking ahead, management reiterated expectations that the CrossCountry cash merger, at $11.30 per share, will close in the second half of 2026, with regular quarterly dividends continuing in the interim. They see MSR and securities static returns both in the low-double-digit range and project portfolio-level pre-leverage returns of 8%–11.4%, which translate into an estimated 7.3%–12.9% static return on common equity.

Two Harbors’ call painted a picture of a company navigating short-term valuation hits while leaning on durable MSR economics, strong liquidity, and a definitive cash exit path via the CrossCountry deal. For investors, the key trade-off is between near-term mark-to-market noise in RMBS and the longer-term promise of stable servicing income and an agreed cash value for the shares.