Q4 2022 Two Harbors Investment Corp Earnings Call
Good morning, My name is Sherry and I will be your conference facilitator at this time I would like to welcome everyone to two harbors fourth quarter 2022 financial results conference call.
All participants will be in a listen only mode. After the Speakers' remarks, there will be a question and answer period I would now like to turn the call over to Maggie Karr.
Good morning, everyone and welcome to our call to discuss two harbors fourth quarter 2022 financial result.
On the call. This morning are Bill Greenberg, our President and Chief Executive Officer, Nick <unk>, Our Chief investment Officer, and Mary risky, our Chief Financial Officer.
The earnings press release and presentation associated with today's call and filed with the SEC and are available on SEC's website as well as the Investor Relations page of our website at two harbors and asked me dotcom.
In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures and the urge you to review this information in conjunction with today's call.
As a reminder, our comments today will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations.
These are described on slide two of the presentation and in our Form 10-K and subsequent.
Reports filed with the SEC.
Except as maybe required by law two harbors does not update forward looking statements and disclaims any obligation to do so I will now turn the call over to Bill.
Thank you Maggie.
Good morning, everyone and welcome to our fourth quarter earnings call.
Before I begin I would like to welcome back Maggie Karr as our head of Investor Relations Maggie.
Meg you work with us from 2012 to 2020 before leaving to try something new but she couldnt stay away and we are delighted to have her back on the team.
This morning, I will provide color on the market environment, and our performance as well as our outlook for 2023.
Mary will provide information around our financial results and Nick will discuss our portfolio.
Please turn to slide three for an overview of our quarterly results.
Our book value at December 31 was $17.72 per share representing a positive 11, 6% total economic quarterly return.
Our earnings available for distribution or E. D was 26 cents per share.
As we've discussed on prior earnings calls E. D is a complicated metrics and does not necessarily reflect the earnings potential of our portfolio.
To assist our investors and the analysts when thinking about our earnings potential.
This quarter, we are introducing a new metric called income excluding market driven value changes, which will provide more of a market value based view of our quarterly portfolio returns.
In the fourth quarter. This number was 73 per share representing a 16, 7% annualized return on average common equity.
Maybe we'll discuss E D and income excluding market driven value changes in further detail in her remarks.
Post quarter end, we announced that our book value through the end of January was up 4% net of the preferred dividend accrual.
Please turn to slide four.
Too many superlatives have already been used to describe the market environment of 2022, and I will try not to add anymore, except to say that inflation fears and interest rate volatility consumed investors throughout the year.
Although slow to act once in motion the fed increased interest rates swiftly.
Last week's fed meeting and chairman Powell has comments provided additional clues about the magnitude and pace of continued fed rate hikes.
While still retaining some caution it seems to us that the fed's actions may be working as inflation readings have come down for several consecutive quarters.
Interest rate expectations have leveled off with the market anticipating a fed funds rate settling in just under 5% by mid year.
However, mortgage spreads have continued to be quite volatile.
And so you didn't figure one after widening significantly in September and October spreads on our MBS ratcheted tighter in November and again in January so that along with July we have seen three of the best months on record for excess returns of the Bloomberg U S. MBS index in the last six months.
Nominal an option adjusted spreads for current coupon arm B S tightened by 30, and 37 basis points, respectively. During the quarter.
Due to continuing high interest rate volatility nominal spreads at 128 basis points are still at the 90 percentile of the 20 year history.
On the other hand option adjusted spreads, it's 30 basis points can no longer be considered cheap and our trading close to their long term averages as seen in figure two.
Finally in figure three you can see that the spreads on the coupon stack are displaying their typical downward sloping shape.
We continue to believe that higher coupons offer more relative value not only because of wider nominal an option adjusted spreads, but also because they have shorter duration sensitivities.
At our core we are an agency plus MSR rights.
On the mortgages underlying our MSR or near the current coupon the MSR acts as a spread hedge relative to the mortgage basis.
But MSR does not have to have large hedging benefits with RMB, yes for it to be an attractive part of our strategy.
Today with a note rates on our MSR hundreds of basis points out of the money half of our capital is allocated to this low duration high cash flowing asset with very attractive returns.
With prepayment speeds at historically low levels. We think there is further upside to our MSR returns.
Looking ahead, we anticipate that the market volatility will follow inflation, lower and provide a tailwind for our MBS and MSR.
While this year saw both rich and cheap extremes in mortgage spreads we actively managed our portfolio to adjust our exposures to benefit returns when market conditions became extraordinary.
There are always surprises in the mortgage market and we stand ready to take advantage of the opportunities as they arise.
With widespread and RBS and slow speeds and MSR, we believe our portfolio is very well positioned for the current and expected market environment in 2023.
Now I will turn it over to Mary to discuss our financial results in more detail.
Thank you Bill and good morning, everyone.
Please turn to slide five.
For the fourth quarter. The company reported comprehensive income of $162 million or dollar 85 per weighted average basic common share.
Our book value was $17.72 per share at December 31st compared to $16.42 at September 30th.
Isn't it 60 cent common dividend.
And then a quarterly economic return of positive 11, 6%.
Results, primarily reflect the market spread tightening as well as the repurchase of two 9 million shares of preferred stock, which contributed approximately 26 cents to come and book value.
And Laura our ratio of preferred stock to total equity from 34% to 30%.
Before turning to slide six I'd like to call your attention to the appendix slide 27.
While we have included the customary information on REIT taxable income and the tax characterization of our dividend distributions.
Information regarding the distributions and the tax treatment. Please refer to the dividend information found in the Investor Relations section of our website.
Moving to slide six as Bill mentioned this quarter, we are introducing a new metric.
Excluding market driven value changes.
This new metric is defined as total comprehensive income excluding market driven value changes on the aggregate portfolio.
Income taxes associated with market driven value changes.
Recurring operating expenses.
And the gain on the repurchase and retirement of preferred shares.
This metric includes the realization of portfolio cash flows, which incorporates actual prepayments changes in portfolio of current interest and servicing income.
Expenses and price changes.
Price changes are measured daily based on the assumption that spreads and interest rates and volatility factored into the previous day ending fair value are unchanged.
This applies to RMB as MSR and derivatives as applicable.
And isn't that of all recurring operating expenses and income taxes, not associated with market driven value changes.
In essence, you can think of this new measure is being like E. D would be if we sold and bought our portfolio every day.
As you can see in the table on this page this quarter are income excluding market driven value changes with 73 cents per share representing an annualized return of 16, 7%.
We are introducing this metric to better help our analysts and investors understand the current quarter return contribution excluding market driven value changes.
We intend this metric to be complementary to the return potential and outlook slide later in the deck, which reflects management's perspective you on returns.
And it's our hope that going forward as E D deviate meaningfully from our earnings power. This new metric will be instructive on their return contributions of our portfolio and the current market environment.
Please turn to slide seven.
Earnings available for distribution was 26 cents per share compared to 64 cents for the third quarter.
As we communicated on our last earnings call the decline in E. D. This quarter was expected.
E D depends on the historical purchase price the prepay speed on the purchase date.
Other non market based measures.
This quarter represents an annualized return of five 9%.
Whereas we are seeing market returns in the low to mid double digits.
In terms of the drivers of VA did this quarter.
Income increased by $4 $9 million, primarily due to a higher rate on cash holdings, partially offset by a decrease in the size of our agency portfolio.
Likewise interest expense rose by 32.2 million on higher financing rates and higher average borrowing balances on MSR.
This was partly offset by lower borrowing balances on arm B S.
Net servicing revenue was higher as a result of increased MSR float income.
However, we realized increased amortization that partially offset the higher servicing revenue due to the a D calculation being based on original pricing yield.
TBA dollar roll income declined by almost 22 million as a result of lower average notional balances as well as lower price shop.
Losses on U S. Treasury futures favorably declined $10 2 million as a result of spread compression between the cost to deliver unemployed repo.
Finally, we realized higher servicing expenses due to the boarding costs associated with transitioning MSR sub servicing turnaround point in accordance with our previously articulated plan.
We anticipate that these servicing expenses will be higher than average for the next several quarters as we continue to transition our servicing portfolio.
Expect to achieve considerable expense savings once the acquisition of Franklin has claws and our MSR portfolio has fully transferred.
Turning to slide eight.
Portfolio yield increased 31 basis points to 492% driven primarily by sales of lower coupon agencies that had high and amortize premiums and purchases of higher coupon agencies with Laura unamortized premiums.
We also experienced lower CPR on our agencies securities and.
And had a higher proportion of our total portfolio invested in higher yielding assets.
Our net realized spread in the quarter narrowed by 80 basis point to point, 97% as compared to 1.77% in the prior quarter due to higher rates and financing.
Minded that portfolio yield calculations in this table also reflect the historical purchase price the prepay speed on the purchase date and other non market based measures.
Please turn to slide nine.
Funding in the repo market remains liquid and well supported.
Spreads on repurchase agreement financing for MBS increased marginally from September 30 to December 31st to suffer plus 11 to 17 basis points with no signs of balance sheet stress.
We maintained access to diverse funding sources for MSR was a total of approximately 700 million unused MSR financing capacity at quarter end.
Please turn to slide 10.
Before I hand off the call to Nick to discuss our portfolio I'd like to note that our economic debt to equity declined to six three times at December 31st from seven five times at the end of the third quarter.
Average in the fourth quarter was $6 five times compared to the third quarter average of six eight times.
I will now turn the call over to Nick.
Thank you Mary.
As Bill noted earlier after capturing much of a spread tightening in the fourth quarter, we moved into a more neutral position reflected in the decline in our debt to equity ratio.
Continuing on slide 10, our portfolio decreased to $14 7 billion over the quarter down about 11% predominantly from the sales of specified pools.
The decrease balance can be partially attributed to the purchase of $2 9 million shares of preferred stock, which as Mary noted added about 26 cents to common book value.
The fair value of our MSR portfolio was stable ending the quarter at $3 billion.
Before turning to slide 11, I wanted to point out that we moved our portfolio risk positioning metrics onto one page, which is slide 16 in the appendix.
The top section shows exposures across parallel and non parallel interest rate shocks.
And as has historically been the case, our exposures are quite low.
By virtue of reducing our leverage over the quarter. We also brought down our current coupon spread sensitivity into a more neutral range.
Turning to slide 11 figure two shows the performance of our MBS by coupons for both TBA and specified pools.
We benefited from having concentrated positions enforced through fives.
We continue to rotate up in coupon both in TBA and pool positions, increasing the portfolio's nominal yield in OAS.
We added to our specified pools in four and a half sixes and TBA is from fives or sixes.
As you can see in figure three repayment speeds came down 35% in the quarter to an average speed of 5.9 CPR.
The anticipated slowing of prepayments speeds is why do we move the portfolio up in coupon throughout 2022.
Higher coupon MBS performed better than slow prepayment environments and provide more stable returns over a wide range of prepayment assumptions as we showed graphically on our last quarterly call.
30 year, Fannie Mae speed slowed down by 6% in the last report and with the slowest seasonal once ahead, we anticipate even slower speeds over this coming quarter.
The U P. D of the MSR book is captured by Slide 12 finished at 206 billion with flow channel purchases and recapture of 2.7 billion, mostly offsetting portfolio run off the.
Price multiples of book was unchanged at five five times.
Notably our prepayment speeds continue to decline.
For the three months prepayment rate for the MSR book declined to 4.6 CPR.
Projected speeds in January are between three and three and a half CPR. These.
These prepayment rates are a historically slow levels, which provides a strong tailwind for the strategy.
Regarding MSR supply, it's worth noting that 2022 annual transaction volume set a record at just over 600 billion U P. B, a 32% increase over the prior year.
So far 20 twenty-three volumes have already been strong with over 120 billion in supply.
Interesting supply and demand imbalance in the MSR market has developed as rates have risen in origination volumes have slowed many mortgage companies are motivated to sell MSR.
At the same time, some large MSR holders have publicly announced their decision to step back from the MSR market focusing on customers with whom they have more than a single touch point.
Given all the supply we may look to opportunistically allocate some capital to bulk MSR purchases in the first half of 2023.
Please turn to slide 13.
We introduced this slide last quarter to provide transparency around our capital allocation estimated return and portfolio composition for the primary components of our strategy on both the portfolio and a common equity basis.
We estimate that about 53% of our capital is allocated to hedge Dennis or with a static return projection of 14% to 16%.
The remaining capital is allocated to headed or MBS with a static return estimate of 14% to 15%.
The top half of this chart is meant to show what returns are available in the market not merely specific to our portfolio.
The lower section of this slide is specific to two harbors with a focus on common equity and estimated returns per common share.
With our portfolio allocation shown in the top half of the chart and after expenses. The static return estimate for our portfolio is between 10.7 to 12, 1% before applying capital structure leverage to the portfolio.
After giving effect to the convertible notes and preferred stock we believe that the potential static return on common equity falls in the range of 12.9% to 15.1% or a perspective quarterly static return per share of 57 to 67 cents.
Please keep in mind that these estimates do not include any price changes and hence do not include any benefit to the potential spread tightening.
Any loss due to potential spread widening.
These return estimates do not include any benefit from our team's skilled asset management, including asset allocation security selection and hedging activity.
Finally, these estimates do not include any benefits arising from increased revenue or cost savings from the acquisition of round point and transfer of our MSR portfolio.
In closing we are excited about the opportunities ahead, and we think our portfolio is very well positioned for the market environment in 2023.
Thank you very much for joining us today, and we will now be happy to take any questions you might have.
Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue. You May press star two to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question is from Doug Harter with Credit Suisse. Please proceed.
Thanks.
Hoping you could help reconcile.
Reconcile your new disclosure.
The income ex market value changes in the return potential you know this quarter you go kind of over earned her return potential.
I'm kind of I'm trying to understand what the differences there.
And kind of how to think about that those two numbers going forward.
Sure Good morning, Doug.
Question. So there are there are many reasons why those numbers are all will be different slide 13 is a static look forward.
Whereas this metric is calculated daily and includes position changes daily spread changes.
Interest in an actual cash calls and prepayments.
Yeah.
Okay. So I mean are they so I guess there.
I mean, I guess is that sort of a structural difference that could well what kind of always lead to differences or would overtime, where they kind of converge towards each other.
And then kind of along that lines.
How does the management the board think about you know the importance of each of those two metrics in terms of setting.
Setting the dividend level.
So.
The slide 13 at that point in time estimate.
So we will have differences as well.
I'll, probably changes et cetera.
Yeah with regards to the dividend.
Set the dividend with more than one quarter in mind, you know based on book value and return expectations.
We believe the current debt is sustainable at this level and it is supported by the range shown on.
On slide 13.
Yeah.
All of these decisions on future dividends depend on many factors.
Including the static Levered return estimates as well as REIT distribution requirements and sustainability.
And ultimately up all your doctors makes that final decision.
If I can add just one thing good morning, Doug.
Hum.
The number the the the metrics shown earlier the income excluding market driven value changes.
Is is the calculation that slide 13 would give you calculate it everyday.
Alright, so it takes like 13 calculate that everyday.
Uh huh.
Buy and sell the portfolio every day with market changes our position changes.
And everything new spread changes and then do it again every day and string those together and compound them together and that's what ends up with being.
The backward looking income excluding market driven value changes as compared with the forward looking which is slide 13, which is a static point in time.
Which by the way.
If if if nothing were to what happened in the portfolio or in the market for the next three months then those two numbers would be the same.
And got it and obviously, we don't have an world where nothing changes that's right and it would be and if we bought and sold our portfolio at at the beginning of the quarter on the first day, then that number would also be the same as <unk>.
Okay I appreciate that that's helpful. Thank you.
Our next question is from Trevor Cranston with JMP Securities. Please proceed.
Alright. Thanks.
One one follow up on the new.
Metric the income excluding market value changes.
But specifically curious about.
The operating expense line I understand you're trying to exclude one time items from that so as the as the adjustment to the operating expense line there.
Primarily.
Due to the servicing transfer charges or is there anything else going on in that one that's a onetime item.
The servicing transfers are included in recurring operating expenses.
The the nonrecurring or.
Certain acquisition related costs associated with a wrong point.
Nonrecurring.
Legal fees and I would just note that.
Those items are the same.
From.
Yeah.
So the operating okay and international are consistent.
Sure, Okay that makes sense.
And then with respect to the the recent capital offering.
Can you talk about sort of how you how you're deploying that capital.
You had a pending any potential bulk MSR purchases.
And then if there are some.
Sizeable MSR portfolio as they come up for sale.
Maybe discuss generally how you'd think about.
The potential personal of large pools, and how much how high you'd be willing to take your capital allocation Java source. Thanks.
Yes, thanks very much for that question, that's a very good one.
What are the main reasons for the capital raise was to be able to take advantage of what we think is a really interesting and exciting supply demand imbalance, which is currently existing in.
In the MSR market.
Subsequent to to the comments that we made surrounding the capital raise we actually did sign.
A term sheet to acquire a portfolio of $11 billion <unk> of MSR that at what we think are very attractive spreads and prices.
You know the capital is is essentially already deployed through a combination of of that 11 billion, which of course, we start earning the economic returns on trade date as well as we purchased some MBS mom as placeholders, while we continue to to look at that MSR packages theres lots of MSR.
<unk> available in the market today.
With packages isn't as Nick said Theres been more than a 120 billion of U P b coming out in the market in January alone.
And we're seeing more all the time so.
We think there's some really interesting opportunities there we're continuing to bid on some of those packages.
If you look at it at sort of the slide 13, you can sort of see how how we allocate MSR with MBS.
So you can see how.
How much additional MSR that capital raise were two supports if we were to apply it to deploy it all into MSR, which would be in the three to 400 million dollar range of market value and of course, we could also redeploy some of our capital out of MBS into MSR. If we thought that was that was really attractive to which which depending on the levels. We might actually do also.
Okay.
Yes.
Okay. That's helpful. Thank you.
<unk>.
Our next question is from Kenneth Lee with RBC capital markets. Please proceed.
Hi, Good morning, Thanks for taking my question just one more question on that new metric of income excluding market driven value changes.
What would it be fair to say that since the income ex market driven value changes.
As you just mentioned a backwards looking.
That's the static returns would still be a very good way to to assess that potential dividend paying capacity or earnings power of new money yields going forward.
When when we're trying to set the dividend capacity there, but just wanted to get your thoughts around that thanks.
Yes, I think that that's a fair.
Function.
Got you great and then in terms of the.
In terms of the hedging strategy that you have.
Sure sensitivity to spreads.
Are there any particular macro or market scenarios that that youre looking to hedge against a at this point. Thanks.
Hey, Kevin. Thank you for the question this is nicoletta.
No. We really are where we're trying to stay as we noted in the call. We've taken our leverage to what we believe is a neutral position.
And the market, while you know well, it's certainly been very supportive of the strategy and as Bill noted in his comments you know we like the.
We still think mortgages look good on a nominal basis, but look a little bit less attractive on an OAS basis. We are trying to stay you know very balanced and as as we typically do have hedged out.
Of wide variety of scenarios in terms of interest rate and the interest rate scenario. So no. There's nothing there's no scenario that we are looking for specifically right. Here. You know we think the market is still prone to some amount of volatility as evidenced by the.
Apparel payroll report that came out last Friday that injected some new uncertainty into the market, but we are we're well hedged across the variety of scenarios.
Okay.
Got you very helpful. There. Thanks again.
Our next question is from Bose George with <unk>. Please proceed.
Hey, everyone. Good morning, just wanted to go back one more on the slide six.
So if you assume that means now if you're hedging with swaps versus futures it doesn't really.
It really matter in terms of the returns that it generates in that slide is that right.
Yes, that's correct.
So okay, great and then your comment about being neutral on.
On your positioning I mean does that.
Yes.
Most of the basis risk now being hedged through MSR and in other ways as that.
Is that kind of what you're suggesting.
No I mean, the the Oh.
Thanks for the question both of the as you as I think you know the.
Parents strategy that we have.
The MSR in our MBS, you know naturally hedge each other to varying degrees over time.
But you know, we manage that that spread risk along with the other risks that we have and as also noted we have kind of taken that risk down into what we think is a more historically neutral point to us in terms of our exposure between the dose to a broad based asset classes.
If I could add a couple of comments to that.
Nick and Bose.
With and I mentioned this in my prepared remarks, with the with D E Shaw with the mortgage rates on our MSR being three in a quarter, which is very far away from the current coupon. The the the up the number of mortgages the amount of mortgages that are needed to hedge that position in current coupon terms is a low number right and so our portfolio is in some ways now.
Decoupled them more than than it has been in the past Institute segments, which is why we show that on slide 13 between the hedged MSR piece and the RBS piece by itself.
If you look on slide 16, right. This is where we show our our sensitivity.
Portfolio sensitivity book value sensitivity to changes in current coupon mortgage spreads out there at the bottom half of the slide.
Where you see you know up or down 6%, depending on the 25 basis point move and you can see the components there relative to the the two parts of the portfolio themselves.
Okay, great. Thanks.
Our next question is from Rick Shane with J P. Morgan. Please proceed.
Sure. Thank you guys for taking my questions. This morning.
First Mary is there any chance you guys would consider publishing a historical.
Look at the new earnings metrics back.
Perhaps at least two years by quarter, so that way, we can sort of develop a run rate. We've got the four quarter number but it would be really helpful to put things in historical context as well.
That's that's a request and then in terms of actual question.
When we look at.
The MSR and the distribution of coupon.
And you guys are out in the market, making acquisitions because of the selling them.
I'm curious has.
Opt out things like purchased a bulk purchase of legacy portfolios with lower coupons versus flow deals that.
That might be out there today with higher coupons and potentially ultimately much higher prepayment risk.
Good morning, Thanks for the questions with regards to publishing a couple of years a backward looking of this measure.
We did consider but determined that it just isn't it isn't feasible, but hopefully if we continue to produce this metric for you each quarter going forward that will be helpful.
Okay I can take your question about MSR Rick.
Thanks for the question too.
You know, where we're looking at in the market today, there are packages of different coupons as you know much of this servicing which has been produced over the last two years is of the low coupon variety.
Gross wax in the two and three quarters to three and a half range. Although we are starting to see some packages with higher wax.
You suggest that maybe the higher WAC ones have more prepayment risk I'm not sure I would agree with that I would say they have more prepay sensitivity.
This points in the market because they're closer to the money, but the difference between.
You know small changes in prepayment rates when the numbers are small.
Also is also meaningful we do think and I think the data is is showing that this view is correct that we're at we're in an environment with historically slow turnover speeds historically slow prepayment speeds.
Nick said our portfolio is experiencing.
Between three and three and a half C. P R.
In January .
And we think that that's February could even slower than that.
So that's that phenomenon as existing all through the low coupon MSR universe, the higher coupons by the way aren't paying much faster everything is between you know 45678 CPR. It's all very very slow and of course the thing about.
MSR or mortgages in general.
Is is less about the speeds and more about whether the speeds are different from what you projected them to be so even if you bought higher coupon MSR and you expect in an interest rate rally to speech to go up then that's fine as long as the speeds are within that range right. So it's all about.
Relative pricing, right, and which ones, we think are more attractive and which ones offer most value and we're open to purchasing any one of those the $11 billion pool that we bought was the higher coupon variety and out of the low coupon variety.
And we think that that offered.
Very attractive returns.
Got it and just to pull that thread a little bit more look I think we can imagine a scenario at some point in the next two years, where there's a significant divergence.
Speed for 2020, 'twenty, one vintage loans or pools, and 'twenty, two and 'twenty three.
And again, we don't have the transparency on MSR pricing, what you're suggesting is that.
The market is appropriately.
Pricing for that risk how dramatic.
Is the pricing differential just to give us a status because again from our seat you imagine a world at some point in the future, where it's sort of highly bifurcated in terms of the coupon.
Yeah, I'm not sure I understood. The question exactly but let me say a couple of words so.
So on the one hand, the Oh I don't know if I say so there is the difference you were saying between 2020 2021 versus 'twenty two in Florida is not just coupons, although that's part of it but also H P. As an important part of that too right and so the loans, which were created in 2020 'twenty one.
I have had the benefit of a significant run up in prices and of course, I think it's well understood in the market. These days that significant H b E leads to significantly faster.
Turnover speeds.
And so that is again understood and priced into the market right in terms of.
The coupon distribution.
Of the things and the relative pricing again, that's that's understood you know generically you see where our portfolio was mark for something with a three and a quarter coupon.
I'd say stuff with higher coupons I always say is as a rule of thumb just just.
Now depending on everything as I like to say at the money servicing is is oftentimes priced at around a four multiple.
Alright, just generically.
And it depends on the pool depends on the characteristics. It depends on does that everything but you know that that gives you the range of differences between where higher coupon pools are and where lower coupons.
Okay. Thank you guys very much.
Our final question is from Eric Hagen with P. T. I G. Please proceed.
Hey, Thanks, Good morning, maybe just going a little bit further on the MSR can you talk about the control that you have around negotiating the recapture opportunity and the MSR that you could acquire.
In this market and then when you think about bidding on bulk MSR is how.
How do you think about the attractiveness relative to the cost and kind of availability of debt financing.
Like do you envision using sort of a full advance rate that's available to you with leverage whenever you acquire bulk packages or are there scenarios, where you wouldn't maybe look to lever the MSR as much.
<unk>.
Sure. Thanks for that question.
So the first question in terms of recapture and so forth as as I'm sure you're aware and as I'm sure you're alluding to there are some portfolios out there in the market, where there are restrictions on on that that ability for for the purchaser to to solicit the bars to recapture.
You know that ability whether its present or not is of course part of the price of the asset.
So you know we have a very good.
History of looking backwards and seeing how much we think that capacity is worth its ability to be able to recapture loans in our portfolio. We have we have had agreements with our sub servicers hum too too to acquire recaptured loans and so we know what that velocity is and we know how much.
Money, that's worth and we can include that are not include that in in the market pricing and I think most market participants are are these days explicitly.
Excluding those cash flows from the value of the servicing and so that's just it's just part of the price right. So we don't view it I'm really positively or negatively other than just adjusting for it.
In the in the price negotiations.
Your second question was about.
But I forgot them, just like the attractiveness of using debt leverage Oh, yes.
Yeah. Thanks, Yeah. So so you know.
Your question is really really amounts to go how we manage our overall liquidity and.
And risk to feel comfortable in the AR and the in the possibility of drawdowns of various kinds either from from from a from a from an interest rate movements from a spread movements and so forth and so when we think about the amount of capital that we have allocate.
Good too.
Two our strategy, whether it's the RMB is hedged with rates or or MSR hedged with RBS and with financing on both sides. We consider how much extra cash we think we need to hold in order to adequately protect yourselves against those dropdowns and so.
The question is is less.
Less easy to answer in terms of do we use the full financing.
As much as how much extra.
Liquidity, how much extra cash capacity do we attach in our minds to that position. After it's after its funded and in the portfolio and you can see some of that on slide 13 based on how much equity. We say we have allocated the strategy and you can see there how much assets we have.
And you can and you can look elsewhere in our filings about what are what our outstanding debt and so forth and figure out those numbers.
Alright, great I appreciate it guys. Thanks Yep. Thank you.
We have reached the end of our question and answer session I would like to turn the conference back over to Bill for closing comments.
So I thank everyone for joining the call today and thanks, everyone for your support at two hours.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Yeah.
No.
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Okay.
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