Two Harbors Investment Corp

Good morning. My name is Sherry, and I will be your conference facilitator. At this time, I would like to welcome everyone to Two Harbors' fourth quarter 2022 financial results conference call. All participants will be in 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 Maggie Carr.

Good morning, everyone, and welcome to our call to discuss Two Harbors' fourth quarter 2022 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer, Nick Letica, our Chief Investment Officer, and Mary Riske, our Chief Financial Officer. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website as well as the investor relations page of our website at twoharborsinvestment.com. In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are described on slide two of the presentation and in our Form 10-K and subsequent reports filed with the SEC. Except as may be required by law, Two Harbors does not update forward-looking statements and disclaims any obligation to do so. I will now turn the call over to Bill.

Thank you, Maggie. Good morning, everyone, and welcome to our fourth quarter earnings call. Before I begin, I would like to welcome back Maggie Carr as our head of investor relations. Maggie worked with us from 2012 to 2020 before leaving to try something new, but she couldn't stay away and we are delighted to have her back on the team. This morning, I will provide color on the market environment and our performance, as well as our outlook for 2023. Mary will provide information around our financial results and Nick will discuss our portfolio. Please turn to slide three for an overview of our quarterly results. Our book value at December 31st was $17.72 per share, representing a positive 11.6% total economic quarterly return. Our earnings available for distribution, or EAD, was 26 cents per share. As we've discussed on prior earnings calls, EAD is a complicated metric and does not necessarily reflect the earnings potential of our portfolio. To assist our investors and analysts when thinking about our earnings potential, this quarter we are introducing a new metric called Income Excluding Market Driven Value Changes, which will provide more of a market value based view of our quarterly portfolio returns. In the fourth quarter, this number was 73 cents per share, representing a 16.7% annualized return on average common equity. Mary will discuss EAD and income excluding market driven value changes in further detail in her remarks. Post quarter end, we announced that our book value through the end of January was up 4% net of the preferred dividend accrual. Let's turn to slide four. Too many superlatives have already been used to describe the market environment of 2022, and I will try not to add any more, except to say that inflation fears and interest rate volatility consumed investors throughout the year. Although slow to act, once in motion, the Fed increased interest rates swiftly. Last week's Fed meeting and Chairman Powell's comments provided additional clues about the magnitude and pace of continued Fed rate hikes. While still retaining some caution, it seems to us that the Fed's actions may be working, as inflation readings have come down for several consecutive quarters. Interest rate expectations have leveled off, with the market anticipating a Fed funds rate settling in just under 5% by mid-year. However, mortgage spreads have continued to be quite volatile. As seen in Figure 1, after widening significantly in September and October, spreads on RMBS ratcheted tighter in November and again in January, so that along with July, we have seen three of the best months on record for excess returns of the Bloomberg U.S. MBS Index in the last six months. Nominal and option-adjusted spreads for current coupon RMBS tightened by 30 and 37 basis points respectively during the quarter. Due to continuing high interest rate volatility, nominal spreads at 128 basis points are still at the 90th percentile of the 20-year history. On the other hand, option-adjusted spreads at 30 basis points can no longer be considered cheap and are trading close to their long-term averages, as seen in Figure 2. In Figure 3, you can see that the spreads on the coupon stack are displaying their typical downward sloping shape. We continue to believe that higher coupons offer more relative value, not only because of wider nominal and option-adjusted spreads, but also because they have shorter duration sensitivities. At our core, we are an agency plus MSR REIT. When the mortgages underlying our MSR are near the current coupon, the MSR acts as a spread hedge relative to the mortgage basis. But MSR does not have to have large hedging benefits with RMBS for it to be an attractive part of our strategy. Today, with the note rates on our MSR, hundreds of basis points out of the money, half of our capital is allocated to this low duration, high cash flowing asset with very attractive returns. With prepayment speeds at historically low levels, we think there's further upside to our MSR returns. Looking ahead, we anticipate that the market volatility will follow inflation lower and provide a tailwind for RMBS and MSR. While this year saw both rich and cheap extremes in mortgage spreads, we actively managed our portfolio to adjust our exposures to benefit returns when market conditions became extraordinary. There are always surprises in the mortgage market, and we stand ready to take advantage of the opportunities as they arise. With wide spreads in RMBS and slow speeds in MSR, we believe our portfolio is very well positioned for the current and expected market environment in 2023. Now, I will turn it over to Mary to discuss our financial results in more detail.