13%-Yielding Two Harbors Investment Corp Stock Crushing S&P 500 in 2025
February 20, 2025
Great Long-Term Growth Potential with This mREIT
Mortgage real estate investment trusts (mREITs), like Two Harbors Investment Corp (NYSE:TWO), represent a great way for everyday investors to become landlords without actually having to own properties and deal with tenants.
mREITs are specialized financial vehicles that provide capital for real estate though the purchase of mortgages and mortgage-backed securities. Whereas equity REITs own and manage physical real estate, mREITs invest in the debt tied into real estate properties.
And that’s a big reason why investors need to pay attention to interest rates. mREITs make money on the difference between the interest rates they charge on mortgage loans and the interest they pay on what they borrowed.
mREITs are especially attractive when the housing market is strong and interest rates are attractive. And that’s the environment we’re in right now.
In 2024, the median national home price rose 4.7% to a record high of $407,500. (Source: “2024 U.S. home sales fell to the lowest level in nearly 30 years as prices and mortgages soared,” PBS, January 24, 2025.)
In 2025, the average U.S. home value is up 2.6% on an annual basis.
Over the last nine years, the average value of U.S. homes has risen 73%. (Source: “United States Housing Market,” Zillow, last accessed February 18, 2025.)
Now, about those mortgage rates. Sure, interest rates have come down a little over the last number of months, but the popular 30-year fixed rate is still hovering above seven percent. More broadly, mortgage rates are higher today than they were when the Federal Reserve began to cut its key lending rate in September 2024. (Source: “Mortgage rates dip, remain above 7%,” Bankrate, February 5, 2025.)
For shareholders, mREITs are one of the best dividend vehicles on Wall Street. That’s because they legally have to distribute at least 90% of their taxable income to shareholders as dividends.
And that brings us to Two Harbors. The company invests in, finances, and manages mortgage service rights (MSRs), agency residential mortgage-backed securities (RMBS), and other financial assets through RoundPoint Servicing here in the U.S. RoundPoint is one of the largest servicers of conventional loans in the country. (Source: “Company Overview,” Two Harbors Investment Corp, last accessed February 18, 2025.)
The mREIT’s investment strategy is primarily focused on MSR investments, which are designed to produce positive returns across different market environments. In fact, over 60% of its capital is allocated to hedged MSR with the remaining capital in hedged RMBS.
What does all that mean?
Two Harbors’ portfolio has less exposure to fluctuations in mortgage spreads than mREITs with RMBS portfolios without MSR.
A Solid Q4 for Two Harbors Investment Corp
Two Harbors reported solid fourth-quarter results despite fluctuating interest rates, reporting a book value of $14.47 per share. (Source: “TWO Reports Fourth Quarter 2024 Financial Results,” Two Harbors Investment Corp, January 29, 2025.)
The mREIT reported a comprehensive loss of $1.6 million, or $0.03 per share, and net income of $264.9 million, or $2.54 per share. Earnings available for distribution were $21.1 million, or $0.20 per share.
As of December 31, 2024, Two Harbors’ portfolio consisted of $10.4 billion in agency RMBS, MSR, and other investment securities. On top of that, the mREIT held $4.4 billion in bond equivalent value of net long to-be-announced securities (TBAs).
Commenting on the fourth-quarter results, William Greenberg, Two Harbors Investment’s president and chief executive officer, said, “With two-thirds of our capital allocated to low coupon MSR, our portfolio generated stable and positive cashflows, despite large fluctuations in short-term interest rates.”
Fourth-Quarter Dividend of $0.45/Share
As an mREIT, Two Harbors has to distribute at least 90% of its taxable income to shareholders in the form of dividends. In the fourth quarter, it returned $0.45 to shareholders, or $1.80 on an annual basis, for a forward yield of 13.31%.
Now, typically, an ultra-high-yield dividend is a result of a lower share price, because the share price and yield have an inverse relationship. Fortunately, this isn’t the case with Two Harbors.
On February 18, TWO stock hit a fresh 52-week high of $13.67.
Since Two Harbors reported its fourth-quarter results on January 29, TWO has rallied an impressive 14%. The stock is also up:
- 21.6% over the last three months
- 19.1% year to date
- 21.6% year over year
The outlook for TWO stock remains solid, with Wall Street analysts providing a 12-month share price target of $13.75 to $15.00 per share. This points to potential gains of up to 10.6%.
Why the optimism?
Well, analysts expect Two Harbors’ earnings per share to jump to $1.70 per share in 2025 and $1.74 per share in 2026. (Source: “Two Harbors Investment Corp. (TWO),” Yahoo! Finance, last accessed February 18, 2025.)
Chart courtesy of StockCharts.com
The Lowdown on Two Harbors Investment Corp
Two Harbors Investment Corp is an mREIT with a diversified portfolio. It reported solid fourth-quarter and full-year results, and the outlook is even better.
Mortgage spread volatility has decreased significantly, further enhancing Two Harbors’ portfolio’s return outlook. Mortgage rates are hovering near seven percent and prepayment rates are expected to remain slow in 2025, providing a strong positive tailwind for the mREIT’s MSR portfolio.
Management also noted that these tailwinds, combined with historically wide nominal current coupon spreads and the company’s unique hedged MSR-centric strategy, should continue to generate attractive leveraged returns in 2025 and beyond.
That’s great news for common shareholders of TWO stock and the 272 institutions that hold a 71.4% stake of all outstanding shares. Three of the biggest institutional investors are BlackRock Inc, with 17.58 million shares (16.96% of outstanding shares), Vanguard Group Inc, with 11.49 million shares (11.09%), and Allspring Global Investments, with 5.35 million shares (5.16%). (Source: Two Harbors Investment Corp, op. cit.)
