Weekly Series: mREIT And BDC Recommendations (And Price Targets) As Of 5/25/2025

Summary

• More volatility in mortgage REITs. Most BV changes were relatively small, but share prices moved quite a bit.
• Two Harbors received a rating downgrade to reflect a probable loss in an ongoing court case. 

We aim to retain the same layout from week to week. I hope that makes it easier to find the parts that are most relevant to you.

Weekly Notes From Colorado Wealth Management Fund

Positions: 0 trades

Commentary: We moved the update article to Monday due to Memorial Day. In general, book values were down and prices were down further. 

What’s going on with Two Harbors?

TWO’s management did a bad job during the pandemic. The board felt they could terminate the management contract for cause, removing the requirement to pay a substantial amount of money to the external manager. That resulted in a legal battle spanning several years. It appears Two Harbors will lose. In this case, a loss for Two Harbors would be a loss for shareholders as it would allow the former external manager to collect a substantial amount of money. Who doesn’t love a story where the executive who participated in mismanaging the company wins a 9 figure payday? Possibly around $140 million, maybe a bit more. Remember, we have a legal system, not a justice system.

Note: Technically, the winner would be the external manager where the executive is or was a shareholder. After all, corporations are "people" and it isn't technically the executive winning. It is the corporation he owns / owned.

This loss is NOT currently factored into book value for Two Harbors. It may show up as early as Q2 2025, or it may show up later. However, given the likelihood of the loss, the risk rating and price target ranges for Two Harbors have been adjusted.

Here’s an image to summarize the impact of adjustments over the last few quarters: