Two Harbors Investment Corp

Good day and welcome to the Two Harbors Investment Core third quarter 2020 financial results conference call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Corey Stolhammer. I apologize. Please go ahead, sir.

Good morning, everyone. Thank you for joining our call to discuss Two Harbors third quarter 2020 financial results. With me on the call this morning are Bill Greenberg, our president and CEO, Mary Riske, our Chief Financial Officer, and Matt Kepin, our Chief Investment Officer. The press release and financial tables associated with today's call were filed yesterday with the SEC. If you do not have a copy, you may find them on our website or on the SEC's website at sec.gov. In our earnings release and slides, we have provided a reconciliation of GAAP to non-GAAP financial measures. We urge you to review this information in conjunction with today's call. I would also like to mention that this call is being webcast and may be accessed in the investor relations section of our website. I would like to remind you that remarks made by management during this conference call and the supporting slides may include forward-looking statements. Forward-looking statements are based on the current beliefs and expectations of management. and actual results may be materially different because of a variety of risks and other factors. We caution investors not to rely unduly on forward-looking statements. Except as may be wired by law, Two Harbors does not update forward-looking statements and expressly disclaims any obligation to do so. I will now turn the call over to Bill.

Thank you, Corey, and good morning, everyone. I'd like to welcome you all to our third quarter 2020 earnings call. The drop-off will be as follows. I will go over quarterly results at a high level. Then Mary Riske, our chief financial officer, will give more details on our financial results. And then Matt Kappen, our chief investment officer, will discuss our portfolio composition, activity, and risk profile. And then I will make some comments about our forward outlook. Finally, we will be happy to take any questions. Three of our results is shown on page three. Our book value at September 30th was $7.37, compared to $6.70 per share on June 30th. This represents a 12.1% return on book value for the quarter. Included in these results, reversal of the previously accrued termination fee of $0.51 per share, attributable to the non-renewal of the management agreement, which reflects the fact that there is no longer any payment due as a result of the four-cause termination. On a purely economic basis, excluding that reversal, our total return on book value would have been 4.5%. This favorable return is generally due to strong performance in lower coupon RMBS, tempered somewhat by the volatility-reducing presence of MSR in the portfolio. This result validates our agency plus MSR strategy in which MSR is intended to mute the effects of mortgage spread widening and tightening in RMBS and produce more stable risk adjusted results over the long term in a variety of economic cycles. Our core income for the quarter was $0.28 per share, which is far in excess of the declared dividend for the quarter of $0.14 per share. As we have discussed many times past, we believe that core earnings is not necessarily the best measure of the expected economic returns in the portfolio. Although the dividend represents roughly an 8% return on book value for the quarter, we expect to monthly increase the dividend next quarter, which will be more in line with what the portfolio is expected to economically earn netted expenses. The core number of 28 cents depends, as it is designed to do, on historic yields and costs, and in this environment, is higher than what we think current market returns are. Our ability to source MSR at attractive levels has been very encouraging. Low mortgage rates have resulted in record amounts of originations in the market, and we have been able to procure significant amounts of MSR from our flow seller relationships. During the quarter, we settled on approximately 14.5 billion UPB of MSR, which was our biggest quarter ever, though the fourth quarter is already shaping up to be even better. Post-quarter end, we settled on an additional 14.5 billion UPB in three separate bulk transactions. Current flow volumes with recent bulk settlements exceed our projected runoff, and our MSR portfolio has begun to grow again. I am also pleased to tell you that we closed on a $200 million servicing advance facility with a large bank counterparty. Since the level of current forbearance in the portfolio has come in lower than we initially anticipated, we reduced the size of this facility in order to be more in line with our expected needs. Indeed, as of September 30th, only 5.0% of our portfolio by loan count was in forbearance, of which 28% of borrowers had made their September payments. so that the delinquent forbearant loans were only 0.6% of our MSR portfolio. Despite the fact that forbearances have been manageable, we feel that this facility expands our risk management toolkit and is a prudent addition to our funding mix. It also offers protection should forbearance numbers increase in the future. On August 15th, we completed our transition to self-management after the termination of the management agreement on August 14th. This transition occurred without interruption and was virtually seamless. This is not to say that there was not a lot of work involved, because there certainly was. The board hired 100% of the employees who had previously supported Two Harbors, and all of our business operations have continued without interruption. We are excited about this new beginning for Two Harbors, and we are looking forward to the positive impact it will have on the company and its stockholders. The litigation with Pine River continues, and we expect it to continue for the foreseeable future. Unfortunately, I can't say much more than that at this time. Please turn to slide four. Looking ahead, we are very optimistic about our strategy as an agency plus MSR REITs. Our business model of pairing MSR with the agency RMBS, with the size and scale of MSR that we have, is unique in the market. We continue to believe that this paired construction will deliver high adjusted returns with lower mortgage spread risk than other portfolios without MSR. In the current environment, we expect to be able to grow our position in conventional MSR, which will lower our mortgage spread risk further. Today, margins have tightened, The presence of MSR has tempered returns, but in general, when the direction of MBS spreads are uncertain, our portfolio construction should provide a less volatile profile over time. I will now turn the call over to Mary to discuss the details of our financial results.