Two Harbors Investment Corp

Our performance has also moved around commensurately with that. I hesitate to give one number because it's been both higher than this and lower than this. But as of the end of July, we were up around 1.5% in book value.

Great. And then, so I guess based on that, do you still see the return environment as relatively consistent with what that outlook slide has?

Yeah. Generally, within the bounds of the volatility that we see on a daily basis, I do. I still see, well, in certain ways, I think the higher coupons are certainly still consistent with what we show, both on the ZV and OS graph earlier in the presentation, as well as the returns that are on page 16. The low coupons have tightened a lot, as you've probably noticed. and they look closer to what they did at the end of March, I'd say.

Great. That makes sense. Thank you.

Thank you. Our next questions come from the line of Aaron Zyganovich with Citi. Please proceed with your questions.

Thanks. I just wanted to dig into the acquisition a little bit more. Can you talk about the rationale? Is it more of a cost savings or a revenue opportunity that you see there? And maybe dig into some of the benefits of having your own servicer versus using a subservicer.

Yeah, sure. I think there's many benefits here, which is one of the reasons why we're so excited about it, actually. you know, over time as our portfolio has grown, you know, we've really just reached a scale where it makes sense for us to bring it in-house. The cost savings that we can achieve from bringing it in-house and not paying subservicers is significant. It gives us more control over the servicing of the portfolio, and it allows us to enter into the ancillary businesses, as I mentioned, such as subservicing and other ways to to partner with our existing seller network and other counterparties in more meaningful ways as well. So we think it has lots of benefits across our activities in the servicing and mortgage finance space, but really maybe the main issue is the extra revenue and cost savings that we're going to generate.

Okay, got it. And you had mentioned that it was a $10.5 million premium to a tangible book. Are you able to provide what the total sale price is, and will you have to raise any equity capital associated with the acquisition?

Hi, Aaron. This is Mary. So we can't disclose their book value. They're not a public company. However, we are acquiring the servicing platform, which is a capital-like business. we're not acquiring any MSR, and they're divesting of certain businesses that would have capital. So we don't expect the book value to be a material number. Okay.

Thank you.

Thank you. Our next questions come from the line of Trevor Cranston with JMP Securities. Please proceed with your questions.

Great. Thanks. Good morning. You mentioned the benefit of MSR being less rate sensitive and spread sensitive in the prepared remarks in terms of increasing your portfolio's spread exposure. I guess where you stand today, would it make sense potentially to sell more of the MSR portfolio in order to reallocate capital to MBS or, you know, given the lower sensitivities, that's not going to be as meaningful of a benefit where we are today.

Yeah, thanks for the question. You know, that's an ongoing relative value decision that we make all the time. Our MBS is attractive here, but, you know, MSR having very little spread exposure and interest rate exposure and cash flowing as much as us, is also attractive in a different way with a different risk profile. As I mentioned, prepayment speeds have fallen quite a bit already, as I said in my prepared remarks. We expect speed in our servicing portfolio to be around seven CPR for July. We expect them to go slower still in August. My own view, obviously everyone can have their own views, but my view is that there's probably more possibility of speed surprising to the slow side than to the fast side here. So we like having a bunch of servicing with low coupons and deep discounts and exposed to turnover speeds here. So it's a combination of, or the analysis is one of relative value and risk profiles. And we may sell more, we may buy more, it depends on the prices in the market.

Okay, got it. And then on leverage, I think the... the current leverage level was characterized as a neutral position in the opening remarks. Can you talk about how high you'd be willing to take leverage, you know, if you were to get more aggressive and maybe kind of more outright positive on the market?

Yeah, thanks. So, you know, when we talk about overall portfolio leverage, you know, it's important to incorporate the amount of MSR that we have in our portfolio at any given time. right, so more MSR, because the leverage in that asset is lower than the leverage in the MBS asset, will generally generate a lower overall portfolio leverage, right? And we have more MSR today than we've had in the past, if you compare our portfolio to what it was pre-COVID. But I would say, as I said, neutral is right around here, mid-high sixes. I would say full overweight is probably in the high sevens, low eights kind of area. but that would be like max overweight kind of thing. That's why I say if you say that's one and a half to two turns higher, go back one and a half to two turns lower, that's what we were when we thought we were maximum underweight. So that's why we say we're sort of in the midpoint here. Okay, that makes sense. Thank you. With today's portfolio, of course.

Thank you. Our next questions come from the line of Boze George with KBW. Please proceed with your questions.

Hey, everyone. Good morning. Actually, going back to Roundpoint, now that you'll have a servicer, I guess Recapture will be a growing part of the mix, et cetera, or at least part of the mix, will you potentially look at origination capacity as well as another way to sort of obtain MSR?

Yes. So it's not particularly our intention to compete in the origination space with retail companies. participants or wholesale participants, you know, as you point out, you know, we are interested in recapture and other portfolio defense strategies, right, and other ways in which to partner in a complementary way with our existing servicing seller network and other counterparties. And so we will be doing some things along that line, but we don't intend at this time to really compete in any meaningful way in the retail or wholesale origination space.

Okay, great. Thanks. And then actually just in terms of servicing technology, is there a decision to be made in terms of that? Is round point on MSP? Is there any sort of cost saves that could be done from a servicing technology standpoint?

That's something we're always going to be looking at over time as things unfold and as it develops.

Okay, great. Thanks. Thank you.

Thank you. Our next questions come from the line of Rick Shane with JPMorgan. Please proceed with your questions.

Thanks, guys, for taking my questions. So a couple things on the acquisition. You know, there was a question trying to dimensionalize the size of the acquisition, and it sounds like de minimis book value plus the $10.5 million. Should we assume that consideration here is going to be 100% cash And then when we think about things on an EPS basis, you talked about $20 million of net income accretion. I'm assuming that you see this as EPS accretive as well.

Sure. Good morning, Rick. Thanks for joining. So on an EPS basis, we did disclose we expect incremental pre-tax income to be approximately $20 million once our portfolio has fully transferred, which on a per share basis after-tax basis would be $0.45 accretive.

And I'm sorry, what was the first part of your question? Consideration. And again, the EPS accretion makes a lot of sense since it sounds like book value is de minimis, so it's a relatively small acquisition price for $20 million of pre-tax. Yeah, you can expect that'll be a cash purchase. Got it. And then when we think about the P&L on a go-forward basis, a servicing platform certainly brings on some additional operating expenses. So is there anything we need to consider there in terms of how much of an impact it will have on your OpEx side?

So I actually think we will have, let's see, we will have some integration savings over time. So we would expect our operating expense ratio to improve as we integrate common functions. Got it, okay. Obviously, servicing expense is what it is, but on the OPEX side, we would expect some integration savings.

Got it. And then, look, historically, the plus and minus of being a servicer is that it is a business that doesn't scale particularly well, but it is a business that at the same time has a very predictable stream of revenues. And as a business that has historically relied upon outside servicing, you've been able to bulk up very quickly opportunistically. Do you lose that by taking on the scalability issues of owning your own servicing platform?

Well, I mean, yes and no. I would phrase it this way. Servicing is an integral core part of our strategy. It's going to continue to be so. And having made that decision, then the best way to extract the most value from the asset and the platform we've decided is to have our own servicer. And so You're not going to see us, and our experience has been, our history has been, not that we have moved our capital or moved our MSR balances up and down 50% over any periods of time. It's been steady or growing. We expect that to continue, and as long as that's going to be continuing, then owner-owned servicer is going to be more efficient and more able for us to extract the value of the platform, the borrower, and all the ancillary opportunities that we see.

Got it. And then last question, and this is for Mary. Is there any reason, so you use fair value accounting for your MSR. Many of the servicers use lower of cost or market. Is there any reason if you internalize your servicing that you need to change that accounting? I just don't remember all the rules associated with this.

No, we will not change our economy methodology for MSR. It will continue to be valued at fair value. Okay.

Thank you, guys.

Thanks, Rick.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Bill Greenberg for any closing comments.

I'd just like to thank everyone for joining us again today, and as always, thanks for your interest in Two Harbors.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.