Two Harbors Investment Corp

Good morning. My name is Taryn, and I will be your conference facilitator. At this time, I would like to welcome everyone to the two third quarter 2025 earnings call. All participants will be in a listen-only mode. After the speaker's remarks, there will be a question and answer period. I would now like to turn the call over to Maggie Carr.

Good morning, everyone, and welcome to our call to discuss two third quarter 2025 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer, Nick Letica, our Chief Investment Officer, and William DeLall, our Chief Financial Officer. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website, as well as the investor relations page of our website at 2imv.com. In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are described on page two of the presentation and in our Form 10-K and subsequent reports filed with the SEC. except as may be required by law to does not update forward-looking statements and disclaims any obligation to do so. I will now turn the call over to Bill.

Thank you, Maggie. Good morning, everyone, and welcome to our third quarter earnings call. In August, we reached a settlement in the litigation with our former external manager arising from our internalization in 2020. In particular, we agreed to make a one-time payment of $375 million in exchange for a release of all claims, including ownership claims related to our intellectual property. The settlement payment was funded through a combination of portfolio sales, cash on hand, and available borrowing capacity. Importantly, we continue to have ample liquidity following the payment, and our risk metrics are in line with how we have managed the portfolio historically. With this matter now fully behind us, we are glad to move forward with clarity and certainty of purpose. During the quarter, we took a number of steps to adjust our portfolio largely on a pro-rata basis to address our lower capital base and higher structural leverage. We sold some agency securities, bringing the RMBS portfolio to $10.9 billion from $11.4 billion. We also sold $19.1 billion UPB of MSR and another approximately $10 billion of UPB that will settle at the end of this month, in both cases slightly above our marks. Furthermore, these sales were done on a servicing-retained basis with a new subservicing client, establishing a significant and important relationship. These transactions validate our efforts to meaningfully grow our third-party subservicing business and confirm the thesis that we envisioned when we first acquired RoundPoint, specifically that Given our history as MSR investors, we are an ideal subservicing partner for other MSR owners. With those additions, we will have roughly $40 billion of true third-party clients using Roundpoint as a subservicer. In addition, Roundpoint will soon be set up to service Ginnie Mae loans too, allowing further growth in our subservicing business. Additionally, we intend to redeem the full $262 million UPB of our outstanding convertible notes when they mature in January 2026, which will reduce our structural leverage to be in line with historical levels. We plan to fund this redemption with cash on hand and by drawing down our MSR facilities. If we were to pay down the convertible note today, we would still have in excess of $500 million of cash on our balance sheet. Lastly, the reduction in our capital base has also had the effect of increasing our expense ratio. While we are always intently focused on improving efficiencies and lowering costs, we are acutely aware of the impact today. We have already undertaken efforts to reduce our cost structure in light of the settlement payment, and we have line of sight into significant amounts of savings already. We will have more to say about this in coming quarters. We are confident that after all of our portfolio adjustments, we will continue to be well positioned to execute on our MSR-focused investment strategy to enhance and grow our servicing and origination activities and to deliver long-term value for our stockholders. Please turn to slide three. For the third quarter, including the litigation settlement expense of $1.68 per share, we experienced a total economic return of negative 6.3% and a positive 7.6% without the expense. For the first nine months of the year, this results in a total economic return on book value of negative 15.6% and positive 9.3% excluding the expense.