Two's Q3 Results Show Steady Progress with a Strategic MSR Focus

image

Two's Q3 Results Show Steady Progress with a Strategic MSR Focus

Two (NYSE: TWO), a company specialized in mortgage servicing rights, showcased stable performance during its Q3 2024 earnings call held on October 21, 2024, with a book value of $14.93 per share and comprehensive income of $19.3 million. The call, led by executives Maggie Karr, Bill Greenberg, Nick Letica, and William Dellal, revealed a new branding strategy and emphasized the company's focus on mortgage servicing rights (MSR) as its core investment strategy.

Key Points:

  • Two reported a 1.3% economic return for the quarter and a 7.0% total economic return for the first nine months of the year.
  • The company's investment portfolio reached $16.4 billion, of which $11.4 billion consists of completed positions.
  • Two's direct-to-consumer lending channel produced $22.4 million in first mortgage origination and has an additional $35 million in transaction volume.
  • Market conditions reflected significant changes in Fed rate expectations and a decline in Treasury yields.
  • Executives discussed the company's proactive approach to managing interest rate risks and the stability of RMBS funding markets.

Company Outlook:

  • Two forecasts a static yield ranging between 9.5% and 12.7%.
  • The company relies on a long-term strategy focused on the stability of MSRs with low mortgage rates.
  • Executives highlighted the importance of the direct-to-consumer channel in managing prepayment speeds and recapture opportunities.

Negative Aspects:

  • The company recorded a 1.5% to 3% decline in MSR valuations as of October 18.
  • Executives acknowledged that recent market volatility has led to widening in mortgage spreads.

Positive Aspects:

  • The MSR market continues to show resilience with stable prices and strong demand from banks and non-bank institutions.
  • The portfolio is performing well with slow prepayments and cash flow.
  • Current swap spreads provide good hedging opportunities.

Areas Lacking:

  • The company's net interest expense was reported at $42 million.
  • Direct-to-consumer operations have not yet scaled, and a limited number of loan officers affects current recapture rates.

Highlights from the Q&A Section:

  • The gross weighted average cost of capital for the MSR portfolio stands at 3.5%.
  • The company uses a mix of swaps and Treasury futures to hedge against interest rate risks.
  • It is too early to predict recapture rates for RoundPoint operations, which have recently scaled.

By continuing to focus on its MSR investment strategy with a proactive management approach, Two navigates the current financial landscape. Strategic initiatives like its direct-to-consumer lending channel and partnerships for second mortgages are designed to enhance shareholder returns and position Two for future growth. Despite market uncertainties, Two's executives express a positive long-term outlook on MSR assets and their commitment to strategic portfolio management.

InvestingPro Forecasts: Two's recent earnings call paints a picture of stable performance, but InvestingPro data and insights provide additional context for investors. According to the latest data, Two has a market cap of $1.23 billion, reflecting its significant presence in the mortgage servicing rights sector.

One of the most striking InvestingPro insights is that Two has "made substantial dividend payments to shareholders," which aligns with the reported dividend yield of 15.04%. This figure is notably high and may appeal to income-focused investors. Additionally, Two has "maintained uninterrupted dividend payments for 16 years," demonstrating its commitment to shareholder returns that complement the long-term strategy and portfolio management discussed during the earnings call.

However, investors should note that Two's P/E ratio stands at -2.45, indicating that the company is currently not profitable. This is confirmed by another InvestingPro Insight stating that the company has "not been profitable in the last twelve months." This information adds nuance to the reported economic returns and portfolio performance.

On a more positive note, analysts forecast that Two will be "profitable this year," which may signal a potential turnaround in financial performance. This projection aligns with the optimistic outlook regarding the MSR investment strategy and the expected static yield forecasts mentioned during the company's earnings call.

For investors seeking a deeper understanding of Two's financial health and market position, InvestingPro provides 8 additional insights that could offer valuable perspectives for investment decisions.