Q2 2020 Two Harbors Investment Corp Earnings Call
You Ricardian horsepower that you Harperson investment Corp, second quarter Twentytwenty financial results Conference call.
This time or something like stays audience, some trends going to be shortly we appreciate your patience some things remain on the line.
[music].
Good day and welcome to the two harbors investment Corp, second quarter Twentytwenty financial results Conference call.
Today's conference is being recorded.
At this time I want to extend the conference over to markers car with Investor Relations. Please go ahead.
Thanks, Good morning, everyone.
For joining our call to discuss two harbors second quarter 2020 financial results.
Me on the college nine Ourself Greenberg.
Yeah.
Risky our CFO.
Our CIO.
The press release from financial people differentiated like today's call were filed yesterday with the FCC.
A copy you may find them on our website for on the Fccs much site I see see gosh.
In our earnings release insights, we've provided a reconciliation of GAAP to non-GAAP financial measures. We urge you to review this information in conjunction with today's call.
I'd also like you mentioned that gets college being black casket may be accessed in the Investor Relations section of our website.
I'd like to remind you that remarks made by management. During this conference call on the supporting side. You may include forward looking statements forward looking statements are based on the current beliefs and expectations as management actual results may differ materially different because of a variety of risks and other factors, we caution investors not to rely on two young for rent.
Thanks, Steve.
Except as may be required by law to harvest is not going forward looking statements expressly disclaims any obligation to shop I will now turn the call over to Bill.
Thank you Mackie and good morning, everyone.
Like I welcome you all to our second quarter 2020 earnings call.
First and foremost hoekstra Q and your families are safe and healthy.
I also want to express my heartfelt sympathies, if you or any of your loved ones have been affected by the virus.
Lastly, twox convey our tremendous gratitude.
Sure on the front line to cope with nine chair, especially our fearless healthcare workers.
Please turn to slide three weeks into a summary of oversold.
Book value at June $36.70 per share characteristics dollars or 96 cents per share on March 31st.
Excluding the previously anticipated onetime costs associated with.
With the termination of the management agreement.
Four cents per share.
Value and $7 at 24 cents per share.
After including books interim and regular second quarter dividends from Washington, 19 cents per share.
Represents a 6.8% return of book value.
Turning to slide four.
The past few weeks, you've been asked what modifications and strategy might be expected given the recent management changes.
The answer to that question is gone.
Not like together have been instrumental in developing and executing.
I don't paired RMBS and that's our strategy since we began investing in MSR your 2013.
Good day, and our portfolio consists almost entirely agency RMBS and agency MSR.
Fair future. Thank you my schedule agency mortgage rate going forward.
We believe that our strategy of hearing the agency RMBS with MSR is a better portfolio construction that an agency portfolio without it or sorry.
Mission of MSR portfolio resulted in lower mortgage spread risk for given the amount of novel portfolio leverage, which we believe will result in more attractive and higher quality risk adjusted returns over the long term.
No as confident as ever and this is the right strategy going forward.
Next I'd like to say, a few words or expect to transition to self management.
As you are aware on July 21st the two harbors board of directors announced that it terminated the management agreement with Pine River for cars with an effective date of August 14th.
As provision of the management agreement termination payments is too.
Bob Pine River has amended its original complaint I guess two harbors.
I believe this complaints are without merit and occurs to vigorously defend constraints.
Fortunately, we cannot say much more than that under the circumstances.
I'd say however.
Stand ready and able to become self managed on August 15.
And this will be an important milestone for our company.
Half of the entire team in two harbors I want to express our sincere gratitude to Tom Siering, our previous CEO.
11 years or service to the company.
Forward.
Holding on or given the opportunity to reach two harbors mix next chapter.
Summary.
Very optimistic about the future for two harbors industries portfolio construction.
Second quarter results were strong liquidity is excellent.
We have opportunities in front of us.
Now I'll turn the call over to marry to discuss the details of our financial results.
Thank you Bill.
Turn to slide five let's review our financial results for the second quarter.
At book value at June Thirtyth, plus $6 in 70 cents compared to 696 per share on March 31st.
Moving the previously anticipated onetime cost associated with the termination and management agreement a 54 cents per share.
I would have been $7.24 per share representing a 6.8% return on book value.
Quarterly book value growth was driven by positive performance from our RMBS portfolio at specified pool, perhaps recover.
Thats offset by lower MSR pricing from fast feeds and increase forbearance.
Our liquidity position remains strong with 1.6 billion unrestricted cash at June Thirtyth.
Moving to slide six let's spend a few minutes disrupting our swap position.
Coming into the market volatility in March.
Again portion of our payer swap position with transaction sometime ago and in a higher rate environment.
As rates fell during the quarter.
These care positions declined in value as you would expect to that by the end of Q1 and mark to market value of these positions with an unrealized loss of approximately 700 million.
As we go Lebanon marks by selling calls we replaced saturation by entering the swap positions with offsetting terms to some of our existing pair slot.
However at that time, three month, LIBOR, which has to pay like of a new slot.
Happened, maybe had elevated rates relative to where it was earlier in the moment.
Created according strength for Q2.
Although economically we are indifferent to swaps with positive or negative mark to market values.
Position in Q2.
It's negative values and correspondingly large costs materially impacted net interest margin core earnings and taxable income.
Importantly at the end of the second quarter, we restructured our entire swap portfolio at current market range.
Wrapping offsetting positions and reducing overall growth nationals.
As you can see on this slide we went from a gross national or 57 billion down to 4 billion and reduced our net swap cost.
Cost of 344 million something projected to be near zero.
Hi, remaining swap position is one nine per basis point in total.
Okay that position had six banks swaps in the front part of the yield curve and fixed receiving swaps in the longer part of the curve in order to hedge the residual duration of our RMBS and MSR portfolio.
Additionally, during this repositioning.
The opportunity to convert the entire position to all I asked swaps instead of LIBOR swap.
We expect these actions will increase net interest margin and core earnings in the latter half of 2020 and future years.
Moving to slide seven let's discuss our core earnings results.
Our earnings were negative five cents per share in the second quarter.
Core earnings are primarily impacted by elevated swap costs as we just discussed and lower net interest income due to sale of legacy non agencies and higher coupon agencies in the first quarter.
So we have not typically provided core earnings guidance and don't expect to do so going forward.
Given the extraordinary difference in core earnings this quarter and current market conditions.
We anticipate core earnings to be in the range of 22 to 26 cents in the third quarter.
No change in portfolio composition.
This quarter again highlights what we have been messaging for many years.
Core anchors not necessarily indicative of the ongoing earnings power of our portfolio.
It necessarily that measure to compared to where given model.
Back in the results of our actions in Restriking, our swap portfolio.
Factored in Q3 and beyond you'll have the opposite situation to prior quarters or core earnings will be in excess of our portfolio earnings power and dividends.
Turning to slide eight.
Portfolio yield in the quarter was 2.84% and our net yield decreased 2.2 or 3% from 1.13%.
Driven primarily by portfolio sales in Q1 and elevated swap cost.
You can see on this slide.
Estimated net yield of 2.24% on the portfolio held as of June Thirtyth is dramatically higher due to swap Restriking continued repo roles at favorable terms.
As we just discussed.
Thanks, a lot position now very small and RMBS position still reflects accounting Nielsen higher rate environment in which most of them are purchased.
Greetings and portfolio.
Skated to exceed our expected returns in coming quarters.
As we continue to rotate our asset portfolio and sell some of our older holdings and move into newer low coupon pools.
We expect our asset yields declined to market rates and the net portfolio yield should start to converge to market levels that are more consistent with our return expectations.
On slide nine we've summarized our financing portfolio as of June Thirtyth.
Our economic debt to equity at quarter end with 7.4 times compared to 7.0 times at March 31st.
And our quarterly average economic debt to equity with 6.8 times.
As we will discuss shortly the plan to increase our leverage to the second half from 2020 with a target in the eight nine times range.
The retail markets have been stable and term markets have redevelop.
At June Thirtyth, we had 20 active agency repo counterparties with a weighted average maturity 47 days.
However, I would note that as chairman markets have developed further since quarter end.
Weighted average maturity has extended to 65 days at the end of July.
Perhaps our MSR facilities, we had 267.2 million outstanding bilateral structures and 400 million outstanding MSR terminal.
As of June Thirtyth, our total committed capacity across our MSR financing alternatives with 750 million.
Post quarter end, we closed an additional 100 million MSR financing facility.
They are also in the final stages of closing a servicing advance homing facility.
Working sequentially on another facility at finances, both MSR assets and servicing advances.
These facilities will provide us with additional liquidity in the event of increase forbearance or defaults.
Support future MSR portfolio growth.
For more information on our financing profile, please see appendix slide 27.
Turning to slide 10, we'd like to address some dividends and taxable income considerations for 2020.
As a result of Dave answer the first quarter.
Right is anticipated to generate net operating loss for 2020.
Distributions to common stockholders are likely to be characterized as return of capital for tax purposes.
Return on capital as a tax concept not an economic concepts and says little about whether distributions are supported by earnings our economic returns due to differences in income recognition roles.
Return of capital can be constructive to stockholder and that the distribution is not subject to current tax, but rather reduce mr. tax bases in the stack.
Any potential tax from such distribution gets deferred until a feature sale is realized by the stockholder.
Which may also benefit from against long term capital gains tax rate versus ordinary tax rate.
As we have message consistently our dividend level is a function of several factors, including earnings power of the portfolio.
Expense for Q3 in Q4 dividends.
We'll be sustainable at the current level before giving effect to the expense savings we anticipate in Q4 from our transition to self management.
Distributor discretion and several of our board of directors and market conditions.
Lastly, let me say a few words about the nonrenewal payment.
On the board of Directors announced this plan to not renew the management contract and I never on April 13.
The nominal payment as well as associated legal and advisory costs.
Acquired to be recorded in Q2.
And then Marino payment was initially estimated at 144 million.
Currently calculated at 139.8 million based on June Thirtyth results.
As announced on July 21st the board of Directors subsequently terminate the management agreement for cars, which carries with it no associated termination tenants.
With that I will now turn the call over to Matt Unveil our markets All review and portfolio update.
Thank you Mary and good morning, everyone.
Turning to slide 11, let's review, our quarterly portfolio activity and composition.
As Mary noted the quarter to date performance on book value over 6.8%, excluding the recorded charge for the non renewal.
As we've noted the primary contribution to our positive performance was due to reflation and specified pools. Following the extreme stress March.
Better TBS spread widening in Ms read through four and a half coupons. The gross return from pool NPPA performance was approximately 13%.
As expected we did see some pressure on the pricing of the servicing portfolio, which was a negative offset of around 4%.
Reflecting in part the reality of higher servicing costs and the impact of borrowers in forbearance and the ultimate resolution.
We did add modestly to our RMBS portfolio on net during the quarter deploying risk since we became more confident in our liquidity position.
We will discuss shortly.
For TV balances increased by 1 billion as we added in current coupon.
Additionally, we purchased approximately 2.1 billion of low coupon specified pools and sold approximately 1.4 billion of high coupon specified pools.
We have begun rotating down in coupon were due to the spreads large scale purchase activity, we expect roll specialness to persist in the near future.
Our high coupon positions, while experiencing faster speeds should benefit not only from their inherent call protection, but also from burn out at some point.
Please turn to slide 12, as we discuss our specified pool positioning and prepayments.
You can see in the lower left hand chart, the performance of GBA coupons, and Gray and also specified pools and blue.
The underperformance in the for me through four and a half TB coupons occurred.
That's one factor.
Seeing those assets.
At the same time specified pool performance overwhelms the underlying PVA whitening.
Drivers assess where the feds large intervention in the RMBS market the recovery of the repo market.
In general improvement in price stability following remarks.
Today, we remain positioned largely in loan balance in geography stories.
In the lower right hand chart show a comparison of generics feeds to our specified portfolio speeds by coupon.
Lower prepayment speeds up the specified compared to generic highlights the reason that specified pools command a significant price premium over TPH.
We expect that while prepayments will increase in specified those increases should be modest compared to generic collateral.
With that I will turn it back over to though.
Thank you Matt.
Please turn to slide 13.
Yes, it is $4.1 billion WPP of new MSR in the quarter passion resuming our flow sale program with all of our sellers.
The lower left hand shark shows our flow volumes and pricing going back three years.
Yesterday, we had high flow volume in March as originations are high and increasing adjusted liquidity events occur.
April we moved our pricing to zero and lock volume dropped off to almost nothing.
After resuming our program had adjusted levels.
It's starting to generate flow volume again locking in more than $2 billion in June increasing to approximately four and a half billion dollars a flow commitments in July which brings us back to record highs.
Also you have seen activity in the bulk market increase with multiple sellers engaging with brokers and buyers.
Can you to expect higher volumes transacting in the coming quarters.
Origination volumes remain robust.
There is still price discovery, taking place in the Gulf markets refund valuations to be situational.
Some packages trading at pre crisis yields of some are clearing at wider spreads.
Additionally, it's worth noting that our existing portfolio is mark roughly in line with current bulk trade levels.
The lower right hand chart, we have another prepayment comparison this one showing our servicing prepayments speeds glue versus generic collateral and gray.
Most speeds have increased recently the majority of your underlying loans that are servicing portfolio have some form of seasonally or prepayment protection.
Just why our speeds are somewhat slower.
Nevertheless, we do have expectations for speeds to remain elevated going forward.
Low interest rates has given rise to all time low mortgage rates.
With the spread between primary and secondary rates at very wide level.
The longer that interest rates stay low greater our expectation that primary rates will come in further.
In addition, the refinancing machinery in the market seems to be operating with no degradation from the social assistance and measures in place across the country.
Prepayment speeds have generally been faster than most market participants expected.
This quarter, we have once again put together, our forbearance and liquidity projections as shown on slide 14.
Our data remain similar to other publicly public sources, and we're seeing more borrowers exiting forbearance been answering.
From a high on June 1st of 7.2% of borrowers by loan count.
We are down to approximately 5.8% at the end of July with approximately 32.2% of borrowers putting money into July payments as of July 28.
Said another way.
Loans that are both in forbearance and not paying their mortgage is just under 4%.
You will recall from prior presentations are scenario analysis includes peak forbearance uptake rates of 812 and 16%.
Our result in liquidity profile is updated based on those scenarios and displayed in the loan matures.
Stephen we retain significant amounts of liquidity, even in the 16% scenario.
Given that our delinquency forbearance loans are only running at 4%.
Projections show that we are well protected even at levels that are four times our current experience.
I would point out that this liquidity forecast includes the impact of the use of our anticipated funding facilities.
Clues expected future capital deployments.
Assumes no payment for the termination of the management contract.
Do you expect if we will be deploying additional capital in the coming quarters and that would reduce the liquidity projection is shown here by approximately $200 million to $300 million.
Finally, given our confidence in the outlook for forbearance and our liquidity, we don't anticipate including this slide in future presentations.
If you turn to slide 15.
I'd like to make a few comments about the retail markets. In addition to what Mary discussed earlier.
The last 10 chart shows the time series of the Feds outstanding balances in overnight and term repo operations going back to September.
Which were at the outset at the fed program to normalize market functioning.
It's notable that recently the balances have fallen to zero.
On the right hand chart, you can see our estimate of mortgage repo rates since March after spiking during March rates have settled in at much lower levels.
Combined.
Presents a fixture of a much healthier funding environment and importantly, a freestanding market without the support of the federal reserve.
On the next few slides, we discuss our effective coupon positioning and risk profile.
On Slide 16, you can see that as of June Thirtyth, our effective coupon conditioning was short the one and a half and 2% coupons through our condition in MSR and long term and perhaps to fives.
The current coupon today includes the one and a half coupon.
As the 2% coupon was trading around a one or $2 price at the end of June.
Although there isn't any significant volume trading in the wanted to have yet and there is no regular ta quoted.
Observed a small amount of one and a half coupons fourth recently.
Additionally, subsequent to quarter and we have continued to rotate down coupon and have outright added to this to our position.
Moving to slide 17.
Our exposure to both rates and spreads remains low and inline with our historical positioning.
The left hand chart shows that for a 25 basis points parallel shift up in rates, we would expect book value to increase by <unk>, 0.6%.
Interestingly, our MSR position has more negative duration than RMBS position.
Shown in the right hand chart for 25 basis points spread widening we expect book value to lose 1.4%.
Again, our MSR position provides significant hedging benefits and reduces the overall exposure by 70%.
I would like to remind you that these exposures are expressed as changes to book value of common shares not changes to book value of total stockholders' equity.
The capitalization changes during the events the first quarter resulted in the amount of preferred shares increasing from roughly 20% of total stockholders' equity to around 35%.
This increase in preferred share percentage Max is just like additional leverage to the common shares.
Which should be considered in conjunction with the overall portfolio leverage.
While we are respectful of the overall nominal leverage and the preferred share percentage, we manage our portfolio to drawdown risks to common which includes all these effects and we're very comfortable with the dropdown risk exposure of 1.4.
Percent shown on this line.
In conclusion before turning it that can be operator, let's take a look at our outlook for two harbors and our return expectations on slide 18.
We see gross returns for RMBS hedged with swaps TPN range of high single to low double digits, depending on coupons story and roll financing.
On the MSR side, we're seeing larger than usual divergence between flow and bulk acquisitions.
With slow MSR paragraphs RMBS, having expected return in the low to mid double digits.
Bulk transactions.
Can be 250 to 500 basis points tighter.
Although last quarter, we indicated that returns on paired MSR could be in high teens to mid Twentys. These returns turned out to be unachievable at scale.
As regular sellers have been retaining their production and NSR prices in general have increased off from those very rapidly like most asset classes.
As we look forward.
Our liquidity profile has become not only stable strong.
The risk of price declines on MSR due to increased forbearance and delinquencies have receded.
As a result, we're increasingly comfortable with prudently deploying additional capital in the second half of the year.
This will result, and ultimately raising our economic debt to equity from our June Thirtyth level of 7.4 times up to eight to nine times and also increasing our dropdown risk from 1.4% to a range of 2% to 3%.
We expect that this will increase our portfolio returns from high single digits to low to mid double digit gross returns.
With that I will turn it back to the operator.
Thank you Sir.
If you would like to ask a question to signal pressing star one on your telephone keypad.
If you using a speaker phone. Please make sure your mute function, it's turned off to allow your signal to reach our equipment.
Ken Press Star one to ask a question.
I'll now take our first question from voice charge. Please go ahead, Sir your line is open.
Hi, everyone. Good morning.
Can you just talked about your economic return expectations. This quarter you noted the core earnings expectations.
Yes, the difference between that sentence and sort of.
I guess the economic return so just curious how that would be and especially keeping in mind budget SAS is still a little bit higher than the clinical devens normalized.
Good morning Bush thanks for the questions.
So.
I would say this that the the expected economic return for the portfolio is as Matt described on page 18.
For the various different combinations of RMBS and MSR.
Actually we have.
More cash than maybe you're used to seeing from us is a little bit of.
Other side show that really we're managing our portfolio with respect to.
Risk.
All right, then and what we call drawdown risk.
And given the changes in our portfolio.
Since Q1.
NVS and really only having agency assets.
That is the the de lever that is most constraining to us.
That said, we intend to.
Greece or leverage to eight to nine times, because that's a level of risk that we feel comfortable with and given the competition the portfolio that will necessarily come with higher cash balances that are used to seeing.
Okay, yes, so that makes sense, so Andy so sort of the cadence of the returns. So this improve over the course of the year I guess when.
As the leverage gets to that level and has that sort of the year end target or when you get to the.
Higher level of levels.
Yes. Good morning Bose. This is Matt I do think that we are we're intending to be prudent about it.
The cadence of the increase we'll we'll have to.
You will be dictated a little bit by what's going out in the market, but I do think certainly by by year end, we'll be able to.
To get to those levels and hopefully sooner than that.
Okay, great. Thanks very much.
We will now take our next question from Doe Casher. Please go ahead.
Thanks.
On your comment about increasing the drawdown.
Square exposure there was that you thats something that.
I guess you get there through the higher leverage for planning.
Or.
Can you give any change in small portfolio.
Hey, good morning, Doug No, it's more from the well the into higher leverage will in turn increase.
Mortgage spread risk, which is which is what would lead to sort of higher Sean so.
That's a pretty low number.
Right as you know.
In absolute terms and relative to our peers I think we'd still be quite comfortable.
With a portfolio that had 2% to 3% snow drawdown and I've been at 25 basis point Morgan shock so.
Right some of that rich I would add one thank Doug.
To us.
The variation that range will depend on the as we deploy additional capital it will depend on the mix of.
The MSR amounts that we will be able to add.
In that process as well, obviously, the more MSR that we add the smaller that increase will be.
So I guess sort of along.
Point right.
You mentioned.
Kind of the it's.
Your negative duration from the MSR.
Kind of got exposure is greater than that.
And that is on the agency MBS I guess, how do you think about balancing those those two numbers and kind of as youre looking to add leverage and part of that kind of fit into that kind of what you what you're looking to do over the coming on.
Yes, good question April overhead.
I will just go say right for the metrics up and that the fact that the MSR interest rate duration and the RMBS interest rate duration happened to be very close to one another although the MSR slightly higher isn't accident of just where we happened to be in rate level and in notional amounts of.
Each of those components.
No target for that and to said that we add additional assets we will.
Hedge the interest rate duration as we always do something close to zero that would you heading into that.
I was just going to say, it's going to be a function of a little bit and what sort of from servicing we are able to procure we we've had good luck as we said recently.
Restarting our flow program those volumes.
Have been increasing nicely.
Attractive levels we've.
Started to.
The more bulk transactions being discussed, especially more recently in the last month and so.
The size of our servicing portfolio will be a function of what we're able to.
Execute on and we certainly have room to grow it come here.
Great. Thank you but.
We will now take our next question from Trevor Cranston. Please go ahead.
Alright. Thanks.
Question about how you're thinking about the agency market as you're looking to sort of redeploy some of your excess capital.
There you mentioned that your rotating gehrmann coupon.
Can you comment on how you see the relative value between dosing in keep years versus versus pools given.
Specialists that receive supermarkets. Thanks.
Yes, I'll start tomorrow.
Hi, good morning, everyone.
Thanks for the question I would look obviously the masimo specialists that we're seeing in in two two and a hasn't threes is.
Significant.
As Matt indicated during during his remarks.
We have.
Especially post quarter end began adding.
Exposure.
To those coupons.
It seems like.
The forces that have driven the real specials to be what it is seem to be in place for a little while obviously these things never last forever.
But they seem to be in place for the foreseeable future and so.
I think.
That's make those coupons very attractive from a from a total return perspective, obviously prepay speeds are fast. It's obviously one of the reasons why roll specialists is what it is but this is also through the exact environment where.
The prepayment protection of those specified characteristics.
Really become manifest and show why those pay ups are what they are so.
We continue to find.
Attractive opportunities and value in both of those things, but as Matt said we are.
Bulk of our of our.
Your exposure has been in the current coupons.
Got it okay. Thanks.
And then one more follow up on the on the hedging strategy.
You talked about the duration of the MSR versus the agency portfolio today.
And obviously, the reset or swap book.
Can you talk about how you're thinking about options working into your hedging strategy.
According to the converts you're going to larger amounts of premise order through.
Portfolio.
Sure I'll start with that.
Typically when.
Typically the time that we are more active in option strategy is when all the portfolio.
More.
Negatively comeback.
And given the low level of race and low.
Durations in both servicing and mortgages.
We are we are less negatively convex than usual and that stat.
Then requires less use of club options in the portfolio at the moment at this level of rates, that's where we find ourselves.
Okay, Okay sense.
And then go up question on the internalization.
You guys comments on sort of where you expect a quarterly expense level to come ropes.
On a run rate after the internalization is completed.
[music].
Sure.
This is Gary so.
Our our management fee is currently one and a half a percent of.
Equity and our other operating expenses is running around the same.
We just expect.
As a small.
Increase in.
The expense ratio for the things that will cover to enter the management agreement I would expect we would be in that.
Two to two and half range.
Okay. That's helpful. Thank you.
We will now take our next question from Rick Chang. Please go ahead.
Hey, guys. Thanks, so much for taking my questions most announced in the answer but.
First just one housekeeping perspective.
On the termination of the management team.
On the assuming that we.
We'll see a reversal of that until quarter. Because this is the timing issue.
Anything.
Any legal or GAAP perspective that needs.
Good.
Click status risk is there any certainty that needs to be achieved there that need to be aware.
[music].
So that now that as I noted on the call that or in my prepared remarks that the nonrenewal termination was required to be recorded under GAAP.
The termination for caused.
Was announced.
In Q3.
As stated has now termination payment under contract.
As you now there is pending litigation. So we will just be evaluating that as we go through the quarter.
And see how all that unfolds.
Okay. So it's not it's not.
Four cents or who.
That will be reimbursed so to the extent you're providing value.
Yes.
The.
At the termination scene.
That's something that needs.
Yes.
Well I said, we can't say more than we will be just says right. Unfortunately, given the situation I hope you understand.
When we when we can just mentioned the results of a book value of some of what the book I would have been upset in 24 had that termination payment not been recorded that was to give.
You a sense of what the economic return would have been just based on the earning assets. These other onetime charges will on will be accounted for and began unfold as they will in the course of the events.
Got it Tonight I do want to be respectful of the tip of the sensitivity of the topic and so awesome. Thanks, Thanks guys for that.
Just to explore a little bit further some of the comments. This has been made on the call.
Was.
There the intention in the opportunity to increase leverage understand the portfolios.
Through more under the.
Secondly, the slow program.
Then turned back on for you guys made the comment that there are lenders.
We're seeing in servicing in pricing will be higher.
Two questions there.
That suggest that.
More to the MSR portfolio based on.
Pricing.
Positive, yes, we will.
Take them today in the fall, so does that change or strategy related to hedging.
These are the NSR versus wall, particularly in light of the fact that lease or will be like from lower so long.
So I'll start there was a theres a lot there and so please forgive me if I if I missed some of the questions and you can remind me to answer some of them. So.
So firstly as as Matt said.
In his remarks, we believe based on the on the trade color that we're seeing.
Paul market.
Situational as it may be.
Seems supportive.
Of the level that we are currently marketing or MSR.
Where the brokers are marketing Amazon that so we don't go unlike in the first quarter when we felt like.
Values would likely drift lower but they hadnt, yet because brokers hadn't.
Any observations on which the base that.
We now feel like all that is in sync and and extend the MSR portfolio was mark where trade levels are occurring.
On the flow side, we are again as Matt said, we are able to.
Acquire servicing through that channel.
At a significantly cheaper level than where we see bulk deals clearing.
To the tune of 250 to 500 basis points cheaper.
While we made.
Record levels in in.
In.
In July.
Run 4.5 billion, we're currently running.
In the days since then I can say, we're currently running.
At around 5 billion dollar per month rate at the moment.
And we're continuing to.
Add new sellers and relationships and so.
I think we would expect that number to go higher rather than lower over the.
Balance of the year.
Maybe to 6 billion or or so.
Lots of factors.
But thats, where we see it headed over over the balance of the year hopefully.
And then if you had a question about leverage potentially Matt you want to jump in there.
I think rec year I think the last part of your question was maybe about how we're thinking about hedging and swaps.
I think we're not thinking.
Differently about how we structure and hedge our portfolio we have.
No we because of the presence of MSR ours.
Wow.
Hedges are quite small right. We are met payers in the front end and net receivers.
In the longer end.
So it's really it's really just to hedge out our curve exposure.
But as I think you observed in mentioned the.
Very large.
What percentage of our of our spread and long and duration is hedged and in the portfolio contract with servicing.
Great.
Film that thank you got all those questions I appreciate very much had a great. Thank guys.
Thank you Rick.
Thanks, Rick.
We will now take our next question from Stephen Laws. Please go ahead.
Hi, good morning.
Like the brick a lot of my stuff has been covered but do have a couple of smaller things I.
I guess will continue for leverage for second just understand the eight to nine is that comparable to the economic leverage of 7.4 or do we need to build a mine versus some other leverage metric that you referenced.
No that's comparable to the 7.4 good morning, Thank you for the call.
Good morning.
A follow up on that obviously, you can increase leverage by buying back common stock trading at about a 20% discount to book almost 30, if you add back the restructuring charge.
Is that something you're considering as a way to increase leverage that might have better returns than the.
Double digit.
So portfolio returns on new investments or.
Something with the lawsuit put you on a blackout period until that is resolved and prevent you from repurchasing common stock.
Yes.
So.
Repurchasing stock is obviously something that that we look at frequently and obviously.
We've talked about about doing such a thing.
Earlier in the in the period and the crisis when when the discount to book was was very significant.
In March and April we were obviously.
Very concerned about our liquidity when capital is precious.
So.
We chose not to.
To do anything at that time at current levels when we look at that.
We are we're always weighing what does the 20% to 30% onetime gain.
That compare with.
No, earning low low mid double digits for many years right and it was are we talking about as sort of a two year sort of equivalents. We think it's a better use of capital to keep it in house and to invest in our target assets rather than to buy back shares, but depending on the opportunities in front of us and the level of.
The discount that May change.
But that's certainly one tool in our box that we look at as ways to increase shareholder value.
But it told its or disposal, you're not blackout at this point.
I mean other than the 48 hours I guess returns.
I can't answer that question I'm sorry.
Okay.
Moving on them.
We have sort of thing expenses up upsell I'm not as much less expected I believe you've got some tier.
Subservicing cost with your contractors can you maybe talk about those tiers and I guess are related to your deck.
I appreciate all the disclosure in the work you guys have put into this expanding of losses couple quarters, but.
The MSR looks it really an 812 in 16%.
Forbearance rate can you talk about what the impact will be on your sub servicing expense rate.
At those different levels.
Okay.
Sure so.
Good question so.
As you know.
The cost to service. The current current loan rise is call it six to $7 per loan Brian the cost to service delinquent loan is is I don't know 10 times that number everyone's difference in sub service is a different mix right.
Given the situation that we have.
With the carriers act bands and people entering forbearance and so forth. It obviously cost more to service those loans than does the current loan but not as much to service the lowest forbearance that does to service a day delinquent loans or people aren't paying and are trying to get them paying again. This is you said it and you forget it in a way until.
They come off in six months or year or whatever and so we have renegotiated.
Our sub servicing costs for all loans that are delinquent and then for Barents.
To be something between those two levels.
Call it something in the $30 per loan area.
Okay.
So I don't have those numbers handy in terms of of 812 and 16 I think within method of gave you could probably Calcutta more quickly than I can.
And on the call here.
But that's what it would be but as I said, we are seeing more loans exit forbearance than the answer.
We said we were at at 5.8%.
End of July that's continued to gone down in the in the days since even more.
Obviously.
We're concerned and we're watching about.
Until second waves or exploration at BBB and that cars.
Those rates to go up so were aware of that but as of right now the trend is still clearly for for those numbers to go down.
Interestingly.
I can also tell you that over the people who are leaving forbearance.
Around 80% of those guys, where the guys that were current price. So we would it would it be sensitive as today at the end of July.
Our current rates is 5.8% and 32% have made their July payments.
Thats that compares in previous months, where the number who recurrence score is higher.
Most of the people exiting forbearance have been people who are been been car. That's part of the reason why that ratio has been dropping.
Around 20% of those guys have been actually prepaid and have been touring and one other way or or another so.
I mean.
The trends could reverse but right now you see the chart, it's a pretty pretty significant trend.
Declining that.
I guess, we expect to.
We expect that to continue.
Sure.
For some time.
Great and my last question a follow up on servicing.
I believe your advanced obligations include real estate taxes, and correct me, if I'm wrong, but.
What kind of Rins do you think there is that.
Different municipalities try to address the budget issues by higher real estate taxes that maybe make this liquidity.
I have if taxes reported what you have to advance or are those assumed flat and these liquidity projections and how do you view the risk around higher real estate taxes as far as what that would do to your advance obligations.
Yes, so so.
The short answer is we would have knows.
The longer answer is is it our projections, we do assume real estate taxes increase at around 3% per year.
That's that's just some relative.
Inflation rate.
He did the frequency of the remittances to local taxing authorities is is typically.
Infrequent it's on average one to two times years, sometimes there are some some.
Value.
Let them quarterly.
And so.
Those numbers have so far been small.
Alright, because.
The biggest mumps are.
February and and and August September. So those are just as are just starting here, but the current rates are still look as we said 4% so.
I guess, if that number goes up it did it could go up but my sense is that we'll take a long time for four for people to to try to.
Change those things.
In some way that that could affect these things and and who knows how long that the time scale. This thing will happen and then I'll point out also that guys liquidity projections show that we are very comfortable at least up to four times. Our current levels of what they are so if you had map a higher real estate tax amounts into a.
Gross higher forbearance take up rates you can see there's lots of room, there that we would be comfortable with them. So that's not something that we're worried about really at all.
Okay. Appreciate the color in the times when thinking.
We will now take our next question from tennis Lee. Please go ahead.
Hi, Thanks for taking my question.
Just one follow up on and prepared remarks, you mentioned that you're probably earnings excess debt investment spreads currently.
Would you expect to asset yields to gravitate towards.
Little bit lower wondering if you could just give us a sense of where the net investment spreads could ultimately settle down that mix.
I think we're expecting over time it would.
No 125 to 150 range Matta enough you have anything to add to that.
Yes, Thats sounds right. Good morning, Ken I mean, you can look in the market and see sort of.
The current yield environment.
Obviously were or below here and so if you know if if asset yields on RMBS or.
100, or to 125 basis points or 150 basis points.
As we said we stay low right our.
You would expect that as as.
Prepayment speeds work their way through our portfolio and we're reinvesting into current market rate.
In addition, any portfolio turnover that we have where we were selling existing assets and buying new assets at new market yields you could see right with enough time, passing you would expect.
You would expect our net interest spread and our yield about portfolio to reflect something that looks more like a market rate.
But that would be measured over the course of that would be that will take time right. Even if we stay at low rates, that's going to be measured in years.
Thats one one to three years before we fully realized.
Lower net investment spreads so.
Gotcha very helpful and just one follow up our if I may.
Just in terms of the current discussions on the servicing advance facilities.
Realize as you guys are close to the final stages, but wondering if you could just give us any additional color on the discussions and then perhaps time frames and in terms of what when you come since enclosed thanks.
Yes, as as Mary said the remarks, you know, we're very close on one some of these times timelines.
Have a life of their own in terms of the approvals that need to be acquired and so forth and so.
We expect that went to be to be up and running shortly I'd say and then the second one.
And as Barry said, we're working on that sequentially, so that will be a little bit longer but there is no roadblocks or hurdles. It's all just just what I would say regular way people getting approvals in this environment.
Great very helpful. Thank you very much.
Thank you.
We will now take a follow up question from Bose George Please go ahead.
Hey, Thanks for taking the follow ups I just had a question of the dividends you noted the slides of the common dividend will be treated as a return of capital for tax purposes was curious whether benefit it goes to the preferred as well.
As that is.
To be determined.
I think I think you can assume that all the dividends would be let's have the potential of the return of capital that'll depend on how that.
How that.
Plays out.
Okay and that you just sticking perspective leads the given the level of flexible losses is portion of the dividends likely to be.
Return of capital.
Sort of wireless and how should we sort of speak about that as well.
Tom I think there's the potential that a portion of the dividend in future years could be return of capital.
Okay, great. Thank you.
Okay.
There are no further questions I'll now turn the call back to Nike care for any additional or closing remarks.
Thank you Tracy and thank you for joining our conference call today, we look forward to speaking with all of you again soon have a wonderful day.
This concludes today's call. Thank you for your participation ladies and gentlemen, you may now disconnect.
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Okay.
No.
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