Two Harbors Investment Corp

Hello, and welcome to the Two Harbors Investment Corp. 4th Quarter 2023 Financial Results Conference Call and Webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Maggie Carr, Head of Investor Relations. Please go ahead, Maggie.

Good morning, everyone, and welcome to our call to discuss Two Harbors' fourth quarter 2023 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer, Nick Ledica, 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 page 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. Today, I'll provide an overview of our quarterly and annual performance. Then I will spend a few moments discussing the markets and finish with an update on Round Point operations. Mary will cover our financial results in detail, and Nick will discuss our investment portfolio and return outlook. Let's begin with slide three. Our book value at December 31st was $15.21 per share, representing a positive 2.0% total economic return for the quarter. IXM was 39 cents per share, representing a 10.3% annualized return. In the fourth quarter, we issued 7.0 million shares through our ATM program, raising $97.8 million in common equity. Taking a step back and looking at 2023, I'm proud of what our company achieved for the benefit of our stockholders, both through the active management of our portfolio and our capital structure, and through the addition of our new operational platform. In February, we raised $176 million in common equity and allocated all of those funds to investments in MSR, which increased our capital allocation to this asset class to 62%. Without a doubt, however, the highlight of our year was the acquisition of Round Point Mortgage Servicing, which reinforced our commitment to MSR as a core and essential part of our business. Please turn to slide four for a brief discussion on the markets. The fourth quarter of 2023 was punctuated by continued volatility in rates and spreads. On the back of a stronger than expected September jobs report, coupled with the outbreak of war in the Middle East, interest rates moved steadily higher in early October. At its peak, the 10-year Treasury yield briefly touched 5%, approximately 40 basis points higher than it was at the beginning of the quarter. An abrupt turn of sentiment followed in early November, after Chairman Powell's optimistic assessment of the Fed's efforts to bring down inflation and engineer a soft landing. Interest rates quickly reversed course and declined 36 basis points over the next three trading sessions. Supportive economic data in November, as well as dovish Fed commentary, drove the market to price in as many as six interest rate cuts in 2024. The entire yield curve responded as the 10-year Treasury rate finished the quarter at a yield of 3.88%, 69 basis points lower than it started at the beginning of the quarter. And the 2-year Treasury rate declined 79 basis points to 4.25%, resulting in a net 10 basis points steepening of the yield curve. You can see these changes in Figure 1 on this slide. From peak to trough, the 5-year and 10-year Treasury yields moved a jaw-dropping 120 basis points in the quarter. It's interesting to look at these rate moves in a historical context, which you can see in Figure 2 on the bottom of this slide. Market practitioners often quote measures of realized volatility as the variance or standard deviations of historical price movements or sometimes their percentage changes. And that's meaningful for those who are adept in statistics. In this chart, we aim to show something simpler and, we believe, more intuitive. We simply look at how many days over the past 20 years had a move in the five-year Treasury rate of more than 10 basis points. In 2023, the market experienced more than 50 days of such moves. That is, the five-year rate moved more than 10 basis points on more than 20% of the trading sessions during the year. This was the second highest instance of this metric, right behind 2008 during the Great Financial Crisis. For essentially a decade prior to 2022, there were only two years where there were 10 such days. Many years during that period had less than five. There are, of course, many differences between then and now, but this time series plot is meant to provide some perspective on the market that we have been managing through. Please turn to slide five for a brief discussion on Roundpoint's operations. We closed the acquisition of Roundpoint effective September 30th and have been actively integrating all systems and people. The 10th transfer of our servicing to Roundpoint's platform is expected to occur on February 1st, and we will have one final cleanup of 60,000 loans in early June, as shown in Figure 1. In all, we expect the total number of loans on the Roundpoint platform to be just north of 900,000, making it the 8th largest conventional servicer in the country. Transferring almost a million loans in this timeframe is quite an accomplishment, and the team at Roundpoint has done an excellent job of keeping up with the expanding portfolio while maintaining a commitment to delivering exceptional service to every homeowner. Since the closing of the acquisition, we have made large strides in integrating Roundpoint's functions, operations, and overall platform into Two Harbors. We continue to see this acquisition as providing a lot of opportunity going forward for our shareholders. In particular, we still believe that the Round Point servicing platform should benefit the combined company by approximately $25 million in pre-tax income in 2024, the result of both incremental revenue and cost savings. Figure 2 on the bottom right of this slide highlights our top key strategic initiatives for Round Point for 2024. Our first focus is to render additional cost savings and economies of scale from the platform. This involves being smart about our technology, knowing when to buy versus build, and to streamline processes and create additional efficiencies. The second area of focus is to develop a best-in-class direct-to-consumer originations channel to provide recapture on our portfolio. The note rate on our MSR portfolio is below 3.5%, and so, with mortgage rates north of 6.5%, we are a long way away from serious refinancing activity. Unless interest rates fall precipitously, we think that we have the time to build the platform that we want. We have hired a very experienced individual to lead this effort who has spent his entire 30-year career building and running direct-to-consumer businesses. We are in the process of expanding the team and we expect to be able to begin making loans in the second quarter. The ability to create something from scratch without any legacy issues or risks is tremendously exciting and few companies get the chance to do that. With a direct-to-consumer origination platform, we also expect to be able to offer our borrowers second liens, home equity loans, and other ancillary products. Lastly, we are keenly focused on the growth of RoundPoint's third-party subservicing business. As of year-end, RoundPoint serviced a total of seven true third-party clients, including one new client added in the fourth quarter. This new client is the operator of a newly formed MSR exchange, which matches MSR buyers and sellers. While they have yet to add any new loans to our platform, we are optimistic about this new partnership. Additionally, there has been increasing demand and activity from institutional investors who are participating in the MSR market through separately managed accounts. The opportunity exists because the market has never before seen a risk profile like the current MSR asset class, with most of the universe being far away from the refinance window. We believe the best way to grow our subservicing business is by being the subservicer of choice for this new capital. We think there are many reasons why we are a great partner for this new capital, and we are actively working to ensure that we have the ability to support various structures. Indeed, we recently signed a term sheet to sell a small pool of our own MSR to a non-traditional market participant on a servicing retained basis, which will bring the number of true third-party subservicing clients up to eight once that deal closes. Bringing this all together, let's discuss how we are thinking about our portfolio of securities in MSR and our operational platform in the current environment. While agency spreads are attractive, especially in a historical context, the market is in the midst of transitioning from a period of Fed tightening to one with a more neutral posture and one where we think spreads on RMBS are roughly fair. Therefore, we do not think this is a great time to climb far out on a limb in terms of risk or leverage. Second, the current environment reinforces why MSR is such a valuable asset in our portfolio, having low prepayment and convexity risks and producing a highly positive cash flow and attractive yield. Whether or not the Fed cuts three times or six times or zero times in 2024, We still expect prepayment speeds on our MSR portfolio to remain slow for quite some time, though we are preparing for the unexpected with the development of our direct-to-consumer recapture channel. The nature of our portfolio construction means that when MBS underperform, our capital allocation will outperform pure agency strategies. And when MBS outperform, our portfolio will underperform pure agency strategies. This is by choice and by design. A good example of this can be seen in just the last two quarters. While we expect to have underperformed pure agency strategies this quarter as MBS tightened, we significantly outperformed last quarter when they widened. Our high capital allocation to MSR acts as a ballast to our portfolio when agency spreads fluctuate. Looking further ahead, we are forging a path that lies not merely in watching mortgage spreads flicker by on the screen. but rather through the financial investment in an asset class, MSR, where we can more meaningfully impact our results through our actions. The uniqueness of Two Harbors is that we are not a pure agency-only rate. We have built our portfolio with the intent of delivering high-quality returns, not just over the next quarter or even the next rate-cutting cycle, but over the long term, despite interim interest rates and spread volatility. Ours is not a stagnant portfolio and we constantly evaluate opportunities across our core competencies, all through the lens of creating sustainable shareholder value. With that, I'd like to hand the call over to Mary to discuss our financial results.