Two Harbors Investment Corp

Good morning. My name is Maddie and I will be your conference facilitator. At this time, I would like to welcome everyone to the two fourth quarter 2024 earnings call. All participants will be in a listen only mode. After the speaker's remarks, there will be a question and answer period. I will now like to turn the call over to Maggie Carr.

Good morning, everyone, and welcome to our call to discuss TU's fourth quarter 2024 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 William Dallal, our Interim 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 2inv.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. Acceptance may be required by law to 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 turning to our results, I'd like to take a moment to remember our board member, Reed Sanders, who passed away this month. Reid served as a member of our board of directors since our company's inception in October of 2009. He was a trusted advisor and partner to Tu and our management team, and to me personally, and we will miss him greatly. Please turn to slide three. Our book value at December 31st was $14.147 per common share, and which, including the fourth quarter common stock dividend of 45 cents per share, represented a 0.0% quarterly economic return on book value. For the full year of 2024, we generated a 7.0% total economic return on book value. Please turn to slide four. Figure one shows the evolution of the market's expectations for the Fed's interest rate policy over the past year. While the Fed delivered two 25 basis point cuts over the quarter, robust jobs and inflation data along with hawkish comments from Chairman Powell at the Fed's December meeting, tempered rate expectations for 2025. Indeed, at the beginning of the fourth quarter, the market was pricing in more than 100 basis points worth of additional Fed cuts, shown by the blue line, but by the end of the quarter, the market had reconsidered, only pricing in roughly 35 basis points, as seen by the purple line. Over the quarter, the 10-year Treasury yield went up by 79 basis points, to finish at 4.57%, while the two-year increased by 60 basis points to 4.24%, deepening the yield curve by 19 basis points, as seen in Figure 2. While short-term rates may yet decline in 2025, the Fed remains very data dependent. Further, a decline in short-term rates does not necessarily correlate to a decline in longer-term Treasury rates or mortgage rates. Rather, It's our expectation that mortgage rates are likely to remain above 6% in the intermediate term. At that level, the so-called lock-in effect should keep housing activity muted and, incidentally, will also help prepayments slow, which is a benefit to the value of MSR portfolios like ours. Interest rate volatility is likely to remain high for the foreseeable future, with the biggest risk being that inflation re-emerges and the Fed pauses or reverses the rate-cutting cycle. We continue to keep our interest rate exposure low and believe that our MSR-centric strategy will generate favorable returns independent of any short-term fluctuations in Fed drip and funding rates. Let me turn to slide five. At year-end, we service 212 billion UPB of MSR across 861,000 loans, 58,000 or 11.2 billion UPB of which are serviced for third-party clients. Looking back, 2024 concludes our first full year owning an operating mortgage company, and I'm pleased to say that the integration of Roundpoint into two has largely gone according to the plan that we laid out in August of 2022. In particular, we are already reaping the improved economics that we estimated due to lower costs and increased revenue streams from servicing the loans from our own MSR portfolio. Specifically, we have benefited from increased economies of scale and additional cash flows from the servicing asset, which had previously benefited our sub-servicers and not us. In 2024, we also launched a direct-to-consumer origination platform with the intent of maintaining our current servicing portfolio through recapture of the underlying mortgage loans when the borrower refinances or moves into a new loan product. We think of this effort primarily as being a hedge to our MSR portfolio that serves to protect our asset from faster-than-expected prepayment speeds should interest rates drop precipitously. Taken all together, The value of 2's MSR portfolio benefits from the success of servicing, which directly affects the success of originations, which circles back to a positive value contribution to the MSR portfolio. With a weighted average note rate of 3.46% in our MSR portfolio and mortgage rates currently around 7%, roughly only 0.2% of our customers would benefit from a rate and term refinance. With that as background, we funded $42 million UPB of first mortgages in the quarter, and there's approximately another $21 million UPB currently in the pipeline. We recognize that these are small numbers, but we are very pleased with the proof of concepts and progress thus far. In less than one year, we stood up a brand new platform entirely from scratch with no legacy risks and for a de minimis cost. The challenge and opportunity in 2025 is to bring this platform fully to scale. Despite the small number of refinanceable loans in our servicing portfolio, we are utilizing the platform to bring incremental revenue and returns to our shareholders. With mortgage rates north of 7%, many of our customers are looking for ways to extract equity while not giving up their ultra-low mortgage rates. And so, in the latter half of the year, we began to offer second lien loans to our borrowers. In the quarter, we acted as a broker on $33 million UPB in a combination of both open-ended and closed-end loans. We intend to expand this effort, which will likely include originating the loans in our own name. With mortgage rates expected to remain above 6% in 2025, our focus at Roundpoint is on generating additional cost efficiencies in servicing, especially through the use of technology and AI applications. From a customer experience perspective, we are dedicated to creating a strong platform and brand for our customers to turn to for all their mortgage and home equity needs. Our results in 2024 demonstrated the benefits of our portfolio, with its core focus on hedged MSR. With roughly two-thirds of our capital allocated to MSR, that's almost 400 basis points out of the money, that asset should generate relatively stable cash flows going forward, regardless of the path of short-term interest rates. RMBS spreads remain wide on a nominal basis, reflective of continued elevated levels of implied interest rate volatility. While 2024 saw RMBS spreads meaningfully tighten, the outlook for RMBS in 2025 is still attractive, but the risks are more balanced. The efforts we have made and continue to make regarding process improvements and product offerings at Roundpoint allow us to shape our return profile in a way that owning only a portfolio of securities cannot. I'm very proud of what we have accomplished in the past year, and I'm tremendously excited about where we are going. With that, I'd like to hand the call over to William discuss our financial results.