TWO - Earnings call transcript Q1 2024 | Two Harbors Investment Corp.

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Operator

Good morning. My name is Jennifer, and I will be your conference facilitator. At this time, I'd like to welcome everyone to the Two Harbors First Quarter 2024 Financial Results Conference Call. [Operator Instructions]I would now like to turn the call over to Ms. Maggie Karr.

Margaret Field

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

William Greenberg

morning, in Slide call. financial return I overview everyone, update our our investment RoundPoint to Thank Nick you, and with and few markets provide finish cover spend quarter of portfolio operations. and outlook.Let's will begin results earnings an moments X. on welcome Maggie.Good a will first Today, our our with will quarterly and Mary Then an I'll detail performance. discuss discussing the

the X.X% a $XX.XX to per total Our representing book value increased XX economic for return at positive quarter. March share,

a experienced volatility MSR, the portfolio very our and by attractive RMBS with MSR prepayment with rate combined benefit in risk of low which a speeds. environment declining limited sensitivities. Our prepayment to portfolio interest continues results yield, our were driven and lower-than-expected performance

new indices report expected longer core implied when our rate a we agency confident sticky that higher for acts Agency positions of with Employment the our to came current the be for both we each per and our a capital and producer As consumer jobs RMBS pushed price than XXX,XXX the spreads of X Similarly, higher in to MSR inflation interest likely and rates is stronger quarter, to and X-month month most portfolio data Slide expect have path. month. the of allocation longer CPI, annualized realization I'm gains in higher a the averaging surprised high watched discussion interest futures Fed, ballast a well MSR to Stronger-than-expected metric market by design than portfolio market funds us highest XXXX as of reaching readings level markets. seen the previously for in XXXX. start emphasized, between fluctuate. rate X.X%, year, quarter allocation since economic the and Fed Figure and in cuts X. that the rates June for brief the the in At closely environment.Please to its higher led X turn interest as more what

our see rate X. RoundPoint's XX,XXX shown X, approximately by expectations of those that mid-April to one final X. We end, fallen you and XXth in quarter turn servicing as February X, continues brief about had RoundPoint's Sentiment fallen have under had to operations. evolve. Fed's for meeting, following can completed in So on in early X.X number we the discussion And Slide just on the for XXXX.Please interest to to Figure of Figure platform X June, to a loans transfer as transfer cuts

the our subservicing client. quarter, stages platform. And X the in added early new still We we building in are of subservicing

be to and are our begin supporting continuing XX,XXX to originations term.We channel, the team locks in the a approximately taking business second This may quarter. looking in build our near infrastructure who the refinance something customers from retention being remains an of seem any exciting to offer loans do.Institutional the of given thought points second critical of never-before-seen MSR ability are for this expect with lien direct-to-consumer current that products, and intend still high We a as meantime. portfolio we Though to hundreds the in for servicing The few from way in is this risk issues to ancillary distant, universe the of to outstanding to prepayment of companies in business risks client transfer basis and direct-to-consumer our incentive from we loans legacy without market, to environment. MSR including the investors majority away that piece servicing recapture or should out refinance. expect the to have build profile scratch speeds participate opportunity to hedge the demand in economic faster-than-expected

MSR we service we that are capital, to remaining to to on investor, our support the for the current new an in partner ideal Given benefit XX% actively this we capital XX% and are ability MSR our are securities, environment market we we over as to believe various beyond. structures.With servicing the and deep that working expertise to and positioned allocated of believe the

attractive we portfolio owning owning mortgage MSR. when operating of is our interest inactions, mortgage And spread means way less rate not Our and through performance.In spreads a that actions securities. to future impact significantly this to the our particularly results volatility allows portfolio a high an or us own uncertainty in is in addition, possible company exposed that only actions MSR than paths that's believe allocation an over position, portfolios Fed of amid to without fluctuations our

areas risks.With by to of be to disciplined and sticking over interest and future expertise, like our call discuss determined to Our remaining financial the will hand Mary results. I'd success our prepayment to managing rates that,

Mary Riskey

turn Thank you, morning.Please to Slide Bill, and good X.

X.X%. quarterly the XX. results common share December a $XX.XX to book value Our dividend positive increased Including per $X.XX to in compared March of return XX at at $XX.XX economic

points. comprehensive return the ratio turn the million indicator million metric on expense common by $XXX a balances XX the billion financing RMBS The by remained favorable as XXX,XXX $XXX of primary reminder, million million maturity Slide million subservicing RMBS and of third-party the consider rates RMBS borrowing an continue and million notes. days. income $X increased will a of unused we servicing result costs seasonality as of to interest average the with was third-party income with lower end, approximately balances and $XX net preferred offset servicing transferring RMBS in in million first the fee company call capacity we on RoundPoint term from markets quarter from Slide to quarter million Net $XXX somewhat weighted share income XX and Nick. float MSR funding other other offset of values a capacity over a repurchase stock across our as the liquid than sheet and lowering platform.Please facilities turn outstanding turn by of to lower of weighted to total preferred is of unused total tightening included advances.I X. for during of that agency million of lower XX days and $X average QX total was $X the outstanding between the RMBS X more fees ample X. SOFR servicing We We for to costs.Overall, $XX.X our to with We QX and per equity.Please At to of borrowings which by net of spread the quarter, values repo partially tightening, performance. spread available. As to average servicing and allocated under unfavorable stock $X.X income plus or loans collections, of of with $XXX basis servicing MSR-related due float agreements to X-year MSR for MSR-related interest tightened funds, and quarter of partially quarter. lower and and our escrow mortgage higher income, repurchased income observed fee futures, million stable movement, servicing cost on gains our now the generated was $X.XX decreased lower by by balance offset servicing the with income swaps lenders financed is of slightly Spreads offset shares million quarter we economic as in consistent MSR rate bilateral offset $XX throughout of $XXX ancillary lower to sales. ended hedge. quarter.Net financing and

Nicholas Letica

Thank Slide you, X. turn Mary.Please to

risk to We that market go of $X.X limb maintained including portfolio a we at $XX.X equity billion terms now debt with in not the the on is spreads. And leverage March of time in in a $XX.X to or level was settled given billion a risk billion, belief current the TBAs. XX out neutral positions ending Xx. and and profile as economic of result, conditions kept Our

This realized performance spread Over resulted exposure we implied in up Though lower high rise declined, see XX-year portfolio optimism on detail still year, did chart as RMBS. from volatility In which this the in will the across exposure in volatility. Fed in Slide our volatility the standards, cutting quarter by on a less coupon, you portfolio despite summary the rates the agency XX-basis-point the XX. about as quarter, yield turn quarter, shifted can the and treasury in fell curve benefited we positive mortgage spread our the historical this commentary. rates and driving for page.Please to sensitivity, first prior

on to XXXX.The rates essentially beginning options coupon at basis to points for the the end XX finished Our of quarter. close over nominal X-year volatility of preferred to range on swap the basis XXX points, since its current gauge annually, unchanged about implied spread bottom treasuries the XX-year declined

were tame closely inflows the As well to Spreads for fund percentile of you strong coupons from history. prepayment above supply, the lower-than-expected remained rates. volatility Figure X, spread fixed continues current long-term see aided XXth by and income implied can and track

XX of TBAs.Specified outperformed higher typical lower the broadly the investors basis pools against quarter, to potential positive coupon the fast pools around Belly Although RMBS elevated like X prepayment of coupons performance widely. in for and points protect was of varied on same by owing first coupons, of performance bank outperformed to widened TBA outperformed to X.Xs overall specified demand Lower higher and and performance coupons speeds. portfolio beginning and Xs concerns XX-year reallocations. the seeking year coupons the

our of coupon quarter X, holdings X, you and lower our portfolio. in story. the can pool from As notional specified review is with the with to turn billion flattened spread tighter quarter versus XX we TBAs to and pools coupon evident reversing Figure more of quarter. see agency Figure higher of X.Xs amount X.Xs of coupon trade by composition the We on own from equal coupons replaced $X.X through Slide higher positioning specified a over the wider.Please curves shows Xs Figure And through our in X this portfolio coupons X.Xs TBA performance the defensively perspective. fourth down spread throughout approximately TBA, and the an

$XXX pools to specified We also lower rotated approximately positive performance. million of into capture X% specified pools pay-up notional coupon

exposure. TBAs CPR in $XXX right brisk, market investments Activity market turn pools favor continued wanted in to We totaling pools accounting slightly bottom from we to prepayment shows fourth with MSR. the billion. Slide quarter X Figure specified discuss first speeds quarter.Please the about MSR with X.X% to X.X% decreased for activity in our as over remained pool our bid XX the CPR XX% in for on environment the of the

as years. a X prior sizable this Figure in first from down is is of quarters Although number, the X, the shown slightly

have deeply can that time along on a with few we traded have quarter. that as will the MSR sales. MSR. monthly expectation so supported see our low so this very are years UPB mortgage This increased the loan and strong basis is we on a And Slide year.Mortgage committed housing that we billion supply last historically A from predominantly turnover The home. you disincentive servicing remain Though of market given so-called MSR sales turnover with gross investor over on you expect spring servicing far X.Xx. on attract of base, Being than discussed closely MSR our Appendix lower market series.Existing turnover is housing billion to XX which this servicing low money, and effect our below homeowner to on pace to a a primary through X, that refinancing basis XX, a to origination of home the in continue our quarters, is rather lower low-rate see the something We keep review or to well supply, and is billion rates years, UPB values X.XX%, Slide X.Xx price prepayment of with of addition recent out the points XXXX sell coupon this purchases portfolio. for home quarter still large bulk added multiple our rate. averaging levels.Please far volume a to better at package. MSR there a In for $X.X a around purchase line be at this to so rates, traded $X a higher should portfolio the lock-in their how hands. March the rates end, of normalize been levels prepayments coupon Note The homeowner their our bulk historically that in today's or in on was a direct far flow charts speeds includes mortgage combined prior low-rate move reason mortgages run above rates. beginning XX, slightly to other proxy lower to to Figure evidenced from are This level of with is can turn turnover data has low MSR $XXX drifted in existing high prior already XX-year amount it growing signs the compared UPB the quarter quarter. post to by at of hundreds

For speeds CPR projections. X.X% the our entire paid than quarter, slower

or estimate this rates, back rates quarterly show capital mortgage half slide. XX% our our mortgage portfolio less X.X% prepayment expenses, the to current is return believe please with with of outlook second so expect preferred over our shown XX%. portfolio.After to return of half allocation applying are falls in are on to potential to notes and points We XX.X% we rates.Finally, static the subject believe the mortgage and that nominal table to Assuming to modestly basis realized refinance giving to and the volatility $X.XX With The about spreads of of to XX% XX% in the XX, estimate Though loans our near-term share the return portfolio that capital table, tightening what turn strong. and RMBS our RMBS return current the stock, potential projection static in after convertible is on static of top XX%. potential on XX.X% basis and capital is The allocated XXX leverage historical high unchanged for MSR we effect any outstanding reflecting balances fixed securities on static return top markets meant likelihood least a of assets prospective for remote, static the rate XX% equity seasonality. between of spreads turnover X% rates rise at Even are likely of portfolio structure or a we the return returns allocated of our a and the estimate remaining portfolio. XX.X% of is is to servicing before wide available Slide quarter, of common range to remain our to that return significant to income a our below at periods to of the Agency per of $X.XX. to than

volatility.Thank and now much our portfolio you we cash us will to have. attractive MSR levels, you take low content any flows spread today. for to sit continues with to while happy joining at very here might convexity questions spreads let And their be low duration are low We current generate

Operator

We'll Instructions] with first go Harter to [Operator Doug UBS.

Douglas Harter

of And the stance? First, update a in could kind how is spread hoping performed widening, kind sort you on enough given so off has outlook moving give April. us book your neutral an change in on of to and that that far of market context, then

William Greenberg

us thanks joining for Doug, today.

Nick he question to the in of estimate answer we between changed Friday, and outlook our how far, April, as and of I'll book our X%. be let So positioning. X.X% last that's thinks down value

Nicholas Letica

for the Nick. question. thank This Doug, is you

we been or would been capital -- has it amount be bit. is range And we So mortgage the continue somewhat allocation really spreads remain of of really about, no, and year. And outlook the to in the It would to the has defensive as securities They out outlook to We spreads not there that positioning. for a about disturbance be. I have say. we've relative -- talked it MSR portfolio where our is I it little to changed within still or widened sufficient our market not change say they've or believe that our as we between would spreads. our a like that widening on stands others, construction

mortgages We while already. of -- we've degree continue a changed quarter have as some to the X the in is the seen near do regard some with bouts from perspective, range And sentiment that they subject for is volatility have longer-term at shifts the to these believe value term, in of the The value.In these range still things to market subject longer-term to last although tighter mortgages about Fed market definitely than to spreads, do to were of react to and spreads be years. periods the it. seem this

exposure we But again to spreads in our trend. you to exposure neutral have have the positive our mortgage range. keep So to a which continue long-term near from see as the continue prefer we we -- to exposure -- would tightening, in we -- to term, numbers, likely is

Douglas Harter

be the the holding kind willing will, volatility if kind how bouts guess, of are of you versus those of and I that. of defensive trading range, on follow-up longer-term kind a you neutral of tactical position. during sort just more guess opportunistic I to

Nicholas Letica

Look, to is in as we day markets, day the they markets as develop. know. new respond Every a we

of they if if range done believe now. the in and spread of at look are over opportunistically so. wide, to we we current it you within market, it's the the still and we're do portfolio construction positioned we're as that how right last So is well But absolutely said, like we range believe as and take spreads advantage couple years, will the

Operator

go We'll Securities. to Cranston with JMP next Trevor

Trevor Cranston

to composition been the on up comment April. on in not performance in particular? terms Following there's coupon April or changes in of question you portfolio about Can significant in any whether the

Nicholas Letica

-- has has no, little from been very portfolio the -- not No, there our to quarter date. end changed

Trevor Cranston

it. Got

then given to And update Okay. few sort last over months, on give how of right us now? the and of relative TBAs value pools relative you outperformance think about the spec specs TBAs an between can the you

Nicholas Letica

value some have portfolio of selling as has think to We the to coupons and noted lot amount to Sure. you stack pools, do is bit, the see that tend fairly coupon Right priced stack We coupons. always, first to reallocations. in there could seems are question of guys in some the making we TBAs roles these to there a exposure position coupon in lower market compelling bank around elaborate flat. our be say, is we relative little a been do a And I market, know, comparing TBA been move trading related across We're of as and higher how like commentary, governed course, our now, right pools Spec move judgments. by proposition reason that we -- are your where in frankly. the on -- infrequently. just don't value persist the to The well not now. right pretty would our now, is lower

over we quarter we -- our quarter moved moved not positioning at have we our from materially the outperformance where were end. So not the the have over

Operator

Bose next go with We'll KBW. George to

Bose George

Can are to providing? you or us target you end the sort what the you're high the that drivers or range end push remind of of the low range

Nicholas Letica

are Bose, prepayment and funding rates. are primarily The drivers drivers -- the

Bose George

your then And midpoint can the It's just dividend? it's below range. Okay. guess with given comfort -- of slightly actually, -- about the you level Great. talk I the

there? comfort of level a suggest that does So

Nicholas Letica

within as Yes. see the good And can The dividend of basis. about it's our to dividend, being we return yes, the go-forward for squarely support range outcomes. those you able projection, on feel a

Operator

JonesTrading. next go to Jason with We'll Weaver

Jason Weaver

lower you say, relative noted returns production do comments MSR see Where new supply. expecting value and coupons on I the between, today looks deals? your where and like incremental seasoned

William Greenberg

and range think low unhedged we the coupons question. see for being low probably Levered mid-teens of The on coupons unlevered, hedged, teens. We be to probably. and value pretty Thanks an the Yes. the proposition high it's returns flat. is in basis

the the recapture are the very been the market, One that in demand pretty lots and of bid embedded assumptions been in of pretty efficient. the coupons the there's is things well some can observed market, we've this that in servicing quarter, of that has be high, higher

situation is keep something values in and -- right across relative so and across coupons able at pool coupons.But different. and we're look coupons. the this specific, we to of between every low is participate mind high is And the sector to the in terms Every as willing

bought a in noted our prepared remarks, we we small post quarter end. pool As

We continue we're the be active bidders. are being order in so market we get in the think returns that market. very And can on pay worthwhile that in we that price we disciplined the and active to

Jason Weaver

were ahead? interplay MSR to making longer are you approach between then your I'm curious, a we Agency view of higher potential to longer higher the environment Okay. hedging volatility given with outside any RMBS, of helpful. that and just That's -- term a consensus And changes for coming additional

William Greenberg

We've think our generally. an don't so. I No, had approach exposures of keeping rate always low interest

hedges have feel keep knowing exposures our out are to low. and edge and we calculations full our or embedded in the the we the generally portfolio range that just do interest less the need portfolio. other the going. in And figure much gets that risk, put which hedges more in to rate we're don't into so direction rates in We the of has how that interest But which we MBS. MSR and particularly order mix interest That trying whether is

pretty disclosures, see kind the as And we our show. you exposures flat, we that of our sensitivities from so can keep

Jason Weaver

financing? and Are any the just of additional one And back MSR seeing in drop right. in willingness the All more extend to I'll changes you queue. counterparties

William Greenberg

No.

In fact, regularly. market financing seeing We're of side, MSR participants the we're the opposite. demand There's the new market. of out lots there new enter balances seeing the for supply MSR lots on in

Operator

to with next go JPMorgan. Shane Rick We'll

Richard Shane

questions most way bit. and asked tweaked my a do guys our to items, been we because have little need line of question answered. I have Look, simply have model you report the a housekeeping and you reconstruct

income for converts You historically the quarter? securities on other And broke out what the us? from interest income. expense Can you also, break out that was

Mary Riskey

Sure. Rick.

I interest the of and filed today. just included So details our expense will interest will be which note that the be income Q, in will

the also find of the yields and financing deck our You XX on breakdown portfolio on costs. can Page

specific And was expense other what to question, million. senior $X.X your quarterly your convertible notes, was question? So

Richard Shane

interest line? was income other What the

Mary Riskey

Let's was million. believe Yes. see. I it $XX

'XX, expense on you So can see of RMBS million. interest $XXX.X

So the be other. would remainder

Richard Shane

Okay. Terrific.

with hassle just do model. of lot to a us saved that, but it the Sorry

Operator

Hagen with go Eric next to BTIG. We'll

Eric Hagen

think see Following that you leading on you you the improved mean, MSR having market? counterparties do get in terms the economics are the up to you in And financing. subservicing credit maybe giving function? that guys brought I your for do or

William Greenberg

the for thanks question. Eric,

that. things whether yet, these are repos seen byproduct facilities of will know, way overnight evolve, maybe. to our terms I facilities. that the one of have there's financing keep that generally, thing spreads and of we longer-term these but though, generally of, when that a are In not answer a to haven't doing that definite think, is I it's typically lots of in competition often kind spreads however, thing. mind, is One These Tighter so forth. don't

up, these little recently But longer they so to lower and for do did takes renewal. these which last for forth. And rates We it as renegotiate renegotiate couple the things up facilities as occur. in come rates. so And come to actually fact, a reset bit things we of have

the happen -- profile credit could of That us how So sure not remains is and lenders do. subservice analysis to view into question it giving or in then are and lenders they by other beginning lending and your for what that happen. whether give the I'm our aware our lenders the analysis more? it that's servicing that brought seen.And but to be mean we our rates you for our And operations. their incorporated credit that in-house, are the affects all they us that and us, servicing how terms

yes. So

Eric Hagen

Yes.

on that that do is hikes mean see guys like market are risk I to much its point. even into you that, basis actually year? how the at there's sell I table helpful. this being point? you mean, risk the a do mortgage lot think Fed then That's feel this mean, the always Fed the the And from priced one like at risk this adjacent you actually do rates thoughtful on some point generally. was point MBS you very just a portfolio? mortgage could mean, I that at conversation I That a of Agency Okay. at

Nicholas Letica

think do Eric, any the the -- is this we there's that that a is sales Nick. Fed. No, and risk not out mortgages there of that

in, far the very as as as -- priced far As efficient. the are whether market is things

-- So in today, higher than rates. volatility response surprise out and overall of in prior we would the first quarter little to and a that to period a the an hard thing volatility extremely kind say. the bit seen had we've of of say of periods I muted mortgage or it's in market more --

mortgage to at the I function But exposure the that's point does cut near-term we've the that -- calibrated the Fed do believe to still done that will like this does like that's with market the of spreads We're reasonably expectations. at believe think well have we against overall stayed think long-term fact think in still seemingly a range. that And market that the year. time. So market, I said, things balance the any But up have that volatility sure. a the but that I -- not can being spreads, you for in some pop Fed the been of long the volatility have this

Operator

remarks. back turn for at And call time, I'll this to the closing Bill Greenberg

William Greenberg

for everyone for us joining support. thank to like always, And thanks I'd as today. your

Operator

conclude participation. today's thank We This does for your you conference.

Two Harbors Investment (TWO) 30 Apr 242024 Q1 Earnings call transcript