Two Harbors Investment Corp

to the Two Harbors Investment Corp. Fourth 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 Paulina Sims. Please go ahead.

Good morning, everyone. I'm excited to join the Two Harbors team and look forward to working with all of you. I'd like to welcome you to our call to discuss Two Harbors Fourth Quarter 2020 Financial Results. With me on the call this morning are Bill Greenberg, our President and CEO, Mary Whiskey, 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. These 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 required by law, Two Harbors does not update forward-looking statements and expressly disclaims any obligation to do so. With that, I will now turn the call over to Bill.

Thank you, Paulina. Good morning, everyone, and welcome to our fourth quarter earnings call. Before I begin, I'd like to publicly welcome Paulina to our team on this, her first earnings call with Two Harbors. Paulina brings with her more than a decade of financial services and investor relations experience, and we are very excited to have her here with us. This morning, I will go over our quarterly results at a high level and share some thoughts on our forward outlook. Mary will give more details on our financial results, and Matt will discuss our portfolio composition, activity, and risk profile. Turning to slide three, we are very pleased with our fourth quarter performance and book value of $7.63, which represents a 5.8% quarterly return on book value. The results were driven primarily by continued outperformance of lower coupon TBAs, some improvement in specified pool pay-ups, and some marginal tightening in MSR spreads. We have spent a significant amount of resources over the years building out our MSR acquisition and oversight platform, and we reaped some benefits this quarter as we added over $40 billion of unpaid principal balance of MSR through both our flow sale channel and bulk purchases. Finally, as a reflection of all of these trends and with the confidence in our forward outlook, we also raised the common stock dividend this quarter by 21% to 17 cents per share. We have also been very focused on our liability structure. Subsequent to quarter end, we issued $287 million of a new convertible note maturing in 2026 and whose proceeds were primarily used to refinance the existing convertible note that is maturing in January 2022. We felt it was important to execute this exchange sooner rather than later, as it provides uncertainty for us in our capital structure for the intermediate future without having this maturity looming for the next year. Additionally, we wanted to have as many potential opportunities as possible to execute, and this window was available, and so we were pleased to access it. With the certainty provided by the exchange and maturity extension of the convertible note, we also felt it was the right time to call our Series D and E preferred stock. As a consequence of the events of the first quarter, our ratio of preferred stock to total equity had increased from 20% to about 32%. While we have stated that we felt this amount was manageable, we did recognize that this was not only high compared to our peers, but more importantly, it is not what we would write down on a blank piece of paper for our capital structure. During 2020, we built up a very sizable liquidity position to protect us against further market stress. As time has passed and as the markets have stabilized, we have come to recognize this amount of available liquidity as overly conservative. Furthermore, the primary measure by which we manage our portfolio is potential loss to stockholder equity and not nominal leverage, and we have stated many times that we are comfortable with our portfolio risk profile. Further deploying all of this excess liquidity into our target assets would increase our risk to uncomfortable levels. Those two ideas together led us to the conclusion that we had a certain amount of capital that was essentially fallow and that its best use was to call the series D&E preferred stock. After the call is completed on March 15th, our new ratio of preferred stock to total equity will be about 26%, which we think is appropriate for our agency plus MSR portfolio. The convertible note exchange and the call of the preferred stock will result in a mix of common, preferred, and unsecured debt that is the right size for our portfolio composition and risk appetite for the foreseeable future. It is also accretive to earnings, as Mary will discuss in a few moments. We continue to see good momentum in our MSR purchase program, which has helped to offset the impact of high prepayment speeds we have been seeing. Purchases in our MSR flow program grew by over 136% year-over-year, reflecting the strength of the platform and relationships we've built to source and manage the asset. On the RMBS side, there are still several tailwinds, the most important of which are very low funding rates and continued Fed involvement, which they have indicated will persist for some time. However, spreads on RMBS are at very tight levels, as Matt will discuss later, and we think some caution is warranted. While unsure of the timing of any potential spread widening, we believe that an environment with uncertainty in the direction of RMBS spreads is one where our portfolio, with its lower exposure to those spreads because of the MSR offset, is especially attractive. Turning now to some comments about the full year performance, results for 2020 as a whole were disappointing, to be sure, as book value declined to $7.68 from $14.54. a result of the market volatility and dislocation induced by the pandemic. The decisive and proactive actions we took in the first quarter to sell our non-agency portfolio de-risked the balance sheet and generated a strong liquidity position. We took control of our own destiny, and we met every single margin call during the period. Apart from portfolio returns, 2020 has been a transformational year for Two Harbors as we transitioned to self-management. Our stakeholders continue to benefit from the collective investment, risk management, governance, and operations expertise from those who have been supporting the company for many years. At the same time, we have the opportunity to deliver additional value through significant annual cost savings and enhanced returns on any future capital growth. Importantly, the internalized management structure enhances transparency and further aligns our goals with that of our stakeholders. In many ways, we think of our newly internalized company as Two Harbors 2.0, and we are really excited for 2021 and the years ahead. I'll now turn the call over to Mary to discuss the details of our financial results.