Two Harbors Investment Corp

Good morning. My name is John and I will be your conference facilitator. At this time, I would like to welcome everyone to Two Harbors Third Quarter 2021 Financial Results Conference Call. All participants will be on a listen-only mode. After the speaker's remarks, there will be a question and answer period. I would now like to turn the call over to Paulina Sims, Head of Investor Relations. You may begin.

Good morning, everyone, and welcome to our call to discuss Two Harbors third quarter 2021 financial results. With me on the call this morning are Bill Greenberg, our president, chief executive officer, and chief investment officer, and Mary Riske, our chief financial officer. The press release and financial tables associated with today's call were filed yesterday with the SEC and are available on both the Two Harbors and SEC websites. 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. As a reminder, 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. I will now turn the call over to Bill.

Thank you, Paulina. Good morning, everyone, and welcome to our third quarter earnings call. Please turn to slide three. At quarter end, book value was $6.40 per share, representing a 2.3% total economic quarterly return. The performance, which was largely in line with the dividend, reflected the partial retracement titer of high coupon spreads as recent data pointed to early signs of burnout and slower prepayment speeds. Earnings available for distribution, formerly known as core earnings, were $0.24 per share. Elevated activity in the MSR market continued in the third quarter and into the fourth. We saw 120 billion UPB in bulk deals come to market in Q3 and another 100 billion in October, bringing the year-to-date volumes to approximately 400 billion. This is more than double the volume that we might typically see for a full year, and we expect this heightened activity to continue for the rest of the fourth quarter. In the third quarter, we acquired 15 billion UPB through bulk transactions and have committed to add another 21 billion over the next two quarters. Additionally, we settled on $14 billion through our flow program. Lastly, post-quarter end, we issued common equity for net proceeds of approximately $194 million in a transaction that was accretive to book value. We are seeing attractive opportunities in the MSR market and have already committed additional capital in that area. Furthermore, with the Fed taper upon us, we expect we will be able to increase leverage and deploy more capital in RMBS and attractive spreads in the near to intermediate term. Please turn to slide four and I will briefly discuss the overall market environment. The 10-year swap rate fell from 1.44% on June 30th to a low of 1.16% in the middle of July and then subsequently rose 40 basis points to end the quarter at 1.55% as the market considered increased inflationary pressures and more precise communication on tapering from the Federal Reserve. Indeed, as announced last Wednesday, the Federal Reserve will reduce its monthly purchases of U.S. Treasury securities by $10 billion and agency RMBS by $5 billion beginning this month and expects to complete the process by mid-2022. Although the last taper in 2013 resulted in a tantrum of high market volatility, we expect the market reaction to be more orderly this time, all else being equal. the Fed is expected to continue to be a source of demand for some time as paydowns from its RMBS portfolio are reinvested, as shown by the blue bars in Figure 1. Secondly, the Fed has clearly communicated the timing and pace of its tapering and has clearly dissociated the decision to taper from the decision to raise rates. Lastly, even while banks have significantly reduced their purchases of agency RMBS, as long as loan growth is tepid and deposit balances remain high, banks will also likely be a source of demand when spreads become more attractive. Current coupon spreads have widened out somewhat as shown in Figure 2, but remain at very tight levels, with current coupon OAS currently sitting at minus 7.6 basis points as of October 29th. This spread is more than 15 basis points rich to past periods of quantitative easing where the Fed was buying mortgages, and about 35 basis points lower compared to periods where the Fed was not actively buying mortgages. While we don't expect these spreads to normalize immediately, we do expect spreads to gradually widen over the course of the tapering process. Turning to Figure 3, we show the effect that the refinancing wave has had on the distribution of conventional mortgages by rate. By comparing the gray bars, which show the coupon distribution at the end of March, and the blue bars, which show the coupon distribution at the end of September, we can see that the distribution has shifted significantly to the left, indicating that a meaningful number of mortgages have already refinanced into lower coupons. The gray and blue lines show the cumulative distributions of mortgages from March and September, respectively. At the end of March, the percentage of mortgages that were refinanceable with at least 25 basis points of incentive had declined from about 85% at the end of 2020 to about 64%, as shown by the light gray circle. At the end of September, although mortgage rates were eight basis points lower than in March, there were actually fewer refinanceable mortgages, 56%, as shown by the dark gray circle, as a result of this restriking of the mortgage universe. With the current mortgage rate at 3.14, the amount of refinanceable mortgages falls further to 54%, as shown by the green circle. Taken all together, this chart points to overall slower prepayment speeds which should be beneficial to our agency plus MSR strategy. Now, I will turn it over to Mary to discuss our financial results in more detail.