Two Harbors Investment Corp. TWO is scheduled to report third-quarter 2024 results on Oct. 28, after market close.
 
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In the last reported quarter, this real estate investment trust (REIT), which focuses on investing in financing, and managing residential mortgage-backed securities and mortgage loans posted earnings available for distribution per share of 17 cents, significantly beating the Zacks Consensus Estimate of 2 cents. Net interest income was negative $38.3 million in the quarter compared with Zacks Consensus Estimate of negative $45.9 million.  

Two Harbors Investment has a decent earnings surprise history. Its earnings beat the Zacks Consensus Estimate in three of the trailing four quarters and missed on one occasion, the average surprise being 220.73%.

Two Harbors Investments Corp Price and EPS Surprise

Two Harbors Investments Corp price-eps-surprise | Two Harbors Investments Corp Quote

Key Factors to Influence TWO in Q3

The mREIT sector witnessed higher volatility in the fixed-income markets during the third quarter, which is likely to have increased asset impairment risks and hedging mismatches in the quarter under review. 

Nonetheless, a positively sloped yield curve is anticipated to have supported mortgage REITs’ valuations. With a steeper yield curve, mortgage REITs are likely to have witnessed a tangible book value increase as spreads on benchmark indices have tightened in the quarter. This is likely to have increased TWO’s book value per share in the quarter under review.

Modest new Agency loan originations in the quarter under review are expected to have supported the company’s fee-based servicing portfolio. The Zacks Consensus Estimate for TWO's servicing income is pegged at $175.6 million in the third quarter, remaining stable from the previous quarter.

The 30-year fixed mortgage rates decreased to 6.2% at the end of the third quarter from 6.86% in second-quarter 2024 and from the high of 7.31% in third-quarter 2023. This is likely to have resulted in a rise in mortgage demand. Supported by the lower mortgage rates, refinancing activities witnessed a significant surge. Amid this, a significant portion of TWO’s mortgage-backed securities holdings are anticipated to have witnessed elevated levels of constant prepayment rates. This is expected to have positively impacted net premium amortization in the third quarter, thereby supporting growth in interest income and average asset yield.

The Zacks Consensus Estimate for total interest income is pegged at  $115 million, indicating a marginal decline from the prior quarter.

On Sept. 18, the Federal Reserve cut interest rates by 50 basis points to 4.75-5% for the first time since March 2020. However, the Fed kept the interest rates at a 23-year high of 5.25-5.5% during a major part of the quarter. Given this, the company is expected to have seen higher funding costs. This is likely to have affected net interest income (NII) growth of TWO in the to-be-reported quarter. The Zacks Consensus Estimate for NII is pegged at negative $39 million compared with negative $38.3 million reported in the prior quarter. 

The company’s activities in the third quarter were sufficient to gain analysts’ confidence. As a result, the Zacks Consensus Estimate for third-quarter earnings has significantly increased, rising to 35 cents from 11 cents over the past seven days. The metric indicates a significant year-over-year improvement.