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Two Harbors Investment Corp. @TWO reported a minor book value (BV) gain in Q1 2025 - making it the first agency mREIT this earnings season to post an increase. The result slightly outperformed expectations, largely due to management sharply reducing the hedging coverage ratio from 111% to 77%. That aggressive move paid off, helping TWO sidestep March’s spread volatility.

Core earnings/EAD also came in modestly ahead of forecasts, helped by the termination of some higher-cost interest rate payer swaps and a shift into more favorable derivatives. This added to hedging income, while servicing income slipped a bit due to a smaller MSR sub-portfolio - a factor that was already anticipated.

TWO’s results were a net positive. The beat was modest, but real. However, it’s not enough to trigger a rating upgrade just yet. The company still carries more risk (in our opinion) when compared to strong agency-focused mREIT peers like @AGNC, @DX, and @NLY.

That said, this was a well-executed quarter. Whether this marks the beginning of a turnaround or a one-off remains to be seen. For now, we’ll be watching closely if momentum continues into next quarter.

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This article was compiled by my assistant. If there are any mistakes, blame him - I certainly will.

Disclosure: Currently no position in AGNC, DX, NLY, TWO or their preferred shares. I may frequently trade in the preferred shares of any mortgage REIT and occasionally in the common shares.