Shares of TWO HARBORS INVESTMENT CORP (NYSE: TWO), a real estate investment trust (REIT) focused on mortgage-backed securities and mortgage servicing rights, plummeted by around 6.56% on Monday, October 29, 2024, after the company reported disappointing financial results for the third quarter of 2024.
TWO reported a net loss of $2.42 per diluted share for the quarter ended September 30, 2024, a significant swing from earnings of $2.81 per share in the same period last year. The company's net loss widely missed analysts' expectations of $0.44 earnings per share. TWO's interest income, a key revenue source for the REIT, fell to $112.6 million in Q3 2024, down from $123.6 million a year earlier.
TWO HARBORS INVESTMENT CORP is highly sensitive to interest rate changes, and its strategy has been to focus on mortgage servicing rights (MSRs) to reduce exposure to fluctuations in mortgage spreads. However, the company's earnings results indicate that there are underlying issues, despite the emphasis on MSRs. While MSR valuations remain well supported by strong demand, the company believes there will continue to be opportunities to add MSRs at attractive levels.
The company's underperformance in Q3 2024 extends a streak of missed earnings estimates in 2024, raising concerns among investors about its profitability and growth prospects. Moreover, there are growing doubts about the sustainability of TWO's dividend, as the company's earnings available for distribution were just $0.13 per share, while the dividend paid was $0.45 per share. This discrepancy has led to questions about where the dividend payment is coming from and whether the earnings power covers the payout.
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