Q4 2023 Two Harbors Investment Corp Earnings Call

Hello, and welcome to the two harbors investment Corp, fourth quarter 2023 financial results conference call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad.

Try and answer session will follow the formal presentation. He may be placed in the question shoot anytime by pressing star one on your telephone keypad.

As a reminder, this conference is being recorded.

My pleasure to turn the call over to Maggie Karr head of Investor Relations. Please go ahead Maggie.

Margaret Field: Good morning, everyone and welcome to our call to discuss two harbors fourth quarter 2023, and financial result.

Margaret Field: With me on the call. This morning are Bell Greenberg.

Margaret Field: And Chief Executive Officer, Nick <unk>, our Chief investment Officer, and Mary risky, our Chief Financial Officer.

Margaret Field: The earnings press release and presentation associated with today's call have been filed with the SEC and are available on Sec's website as well as the Investor Relations page of our website at two harbors Doc.

Margaret Field: Dot com.

Margaret Field: In our earnings release and presentation, we have provided reconciliations of GAAP non-GAAP financial measures and we urge you to review this information in conjunction with today's call.

Margaret Field: As a reminder, our comments today will create Barbara looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations.

Margaret Field: These are described on page two of the presentation and in our Form 10-K, and subsequent reports filed with the SEC.

Margaret Field: As may be required by law two harbors does not update forward looking statements and disclaims any obligation to do so I will now turn the call over to Bill.

Bill: Thank you Maggie and good morning, everyone and welcome to our fourth quarter earnings call.

Bill: Today, I'll provide an overview of our quarterly and annual performance.

Bill: I will spend a few moments discussing the markets and finish with an update on round points operations.

Mary will cover our financial results in detail and Nick will discuss our investment portfolio and return outlook.

Speaker Change: Let's begin with slide three.

Speaker Change: Our book value at December 31 was $15 21 per share representing a positive 2.0% total economic return for the quarter.

I exam was 39 per share representing a 10, 3% annualized return.

Speaker Change: In the fourth quarter, we issued 7.0 million shares through our ATM program, raising 97 $8 million.

Speaker Change: The common equity.

Speaker Change: Taking a step back and looking at 2023 I'm proud of what our company achieve for the benefit of our stockholders both through the active management of our portfolio and our capital structure and through the addition of our new operational platform.

Speaker Change: In February we raised $176 million in common equity and the allocated all of those funds to investments in MSR, which increased our capital allocation to this asset class to 62%.

Speaker Change: Without a doubt however, the highlight of our year was the acquisition of round point mortgage servicing.

Speaker Change: Which reinforced our commitment to MSR is a core and essential part of our business.

Speaker Change: Please turn to slide four for a brief discussion on the markets.

Speaker Change: Yeah.

The fourth quarter of 2023 was punctuated by continued volatility in rates and spreads.

Speaker Change: On the back of a stronger than expected September jobs reports, coupled with the outbreak of war in the Middle East interest rates moved steadily higher in early October.

Speaker Change: At its peak the 10 year Treasury yield briefly touched 5% approximately 40 basis points higher than it was at the beginning of the quarter.

Speaker Change: An abrupt turn of sentiment followed in early November after chairman Powell as optimistic assessments of the fed's efforts to bring down inflation and engineer a soft landing.

Interest rates quickly reversed course, and declined 36 basis points over the next three trading sessions.

Speaker Change: Supportive economic data in November as well as dovish fed commentary drove the markets pricing as many as six interest rate cuts in 2024.

Speaker Change: The entire yield curve responded as the 10 year Treasury rate finished the quarter at a yield of 388% 69 basis points lower than it started at the beginning of the quarter.

Speaker Change: And the two year Treasury rates declined 79 basis points to $4, two 5%, resulting in a net 10 basis points, a steepening of the yield curve.

Speaker Change: You can see these changes in figure one on this slide.

Speaker Change: From peak to trough, the five year and 10 year treasury yields move to jaw dropping 120 basis points in the quarter.

It's interesting to look at these rate moves in a historical context, which you can see in figure two on the bottom of this slide.

Market practitioners, often quote measures of realized volatility as the variance or standard deviations of historical price movements or sometimes they are percentage changes and that's meaningful for those who are adept in statistics.

Speaker Change: In this chart, we aim to show something simpler and we believe more intuitive.

Speaker Change: We simply look at how many days over the past 20 years had a move in the five year treasury rates of more than 10 basis points.

Speaker Change: In 2023, the market experienced more than 50 days of such moves.

Speaker Change: Is the five year rate moved more than 10 basis points and more than 20% of the trading sessions during the year.

Speaker Change: This was the second highest instance of this metric right behind 2008 during the great financial crisis.

Speaker Change: We're essentially a decade prior to 2022, there were only two years, where there were 10 such days.

Speaker Change: Many years during that period had less than five.

There are of course, many differences between then and now at this time series plot is meant to provide some perspective on the market that we've been managing through.

Speaker Change: Please turn to slide five for a brief discussion on round points operations.

Speaker Change: We closed the acquisition of Brown points effective September 30th and have been actively integrating all systems and people.

Speaker Change: The 10th transfer of our servicing to round points platform is expected to occur on February one.

Speaker Change: And we will have one final cleanup of 60000 loans in early June as shown in figure one.

Speaker Change: In all we expect the total number of loans on the <unk> platform to be just north of 900000.

Speaker Change: Making it the eighth largest conventional servicer in the country.

Speaker Change: Transferring almost 1 million loans in this timeframe is quite an accomplishment and the team at round point has done an excellent job of keeping up with the expanding portfolio, while maintaining our commitment to delivering exceptional service to every homeowner.

Speaker Change: Since the closing of the acquisition, we have made large strides in integrating around points functions operations and overall platform into two harbors.

Speaker Change: We continue to see this acquisition is providing a lot of opportunity going forward for our shareholders.

Speaker Change: In particular, we still believe that the round point servicing platform should benefit the combined company by approximately $25 million in pre tax income in 2024, the result of both incremental revenue and cost savings.

Figure two on the bottom right of this slide highlights our top key strategic initiatives around point for 2024.

Speaker Change: Our first focus is to render additional cost savings and economies of scale from the platform.

Speaker Change: This involves being smart about our technology, knowing when to buy versus build and to streamline processes and create additional efficiencies.

Speaker Change: The second area of focus is to develop a best in class direct to consumer originations channel to provide recapture on our portfolio.

Speaker Change: The note rate on our MSR portfolio is below three 5% and so with mortgage rates north of six 5%. We are a long way away from serious refinancing activity.

Speaker Change: Unless interest rates fall precipitously we.

Speaker Change: We have the time to build the platform that we want.

Speaker Change: We have hired a very experienced individual to lead. This effort who has spent his entire 30 year career building and running direct to consumer businesses.

Speaker Change: We are in the process of expanding the team and we expect to be able to begin making loans in the second quarter.

Speaker Change: The ability to create something from scratch without any legacy issues or risks is tremendously exciting and few companies get the chance to do that.

Speaker Change: With a direct to consumer origination platform. We also expect to be able to offer our borrowers second liens home equity loans and other ancillary products.

Speaker Change: Lastly, we are keenly focused on the growth of around points third party sub servicing business.

Speaker Change: As of yearend round point service, a total of seven true third party clients, including one new clients added in the fourth quarter.

This new client is the operator of a newly formed MSR exchange, which matches MSR buyers and sellers.

Speaker Change: While they have yet to add any new loans to our platform.

Domestic about this new partnership.

Speaker Change: Additionally, there has been increasing demand and activity from institutional investors, who are participating the MSR market through separately managed accounts.

The opportunity exists because the market has never before seen a risk profile like the current MSR asset class with most of the universe being far away from the refinance window.

Speaker Change: We believe the best way to grow sub servicing business is by being the sub servicer of choice for this new capital.

We think there are many reasons why we are a great partner for this new capital and we are actively working to ensure that we have the ability to support various structures.

Speaker Change: Indeed, we recently signed a term sheet to sell a small pool of our own MSR to a non traditional market participants on a servicing retained basis, which will bring the number of true third party sub servicing clients up to eight once that deal closes.

Bringing this all together, let's discuss how we are thinking about our portfolio of securities and MSR and our operational platform and the current environment.

Speaker Change: While agency spreads are attractive, especially in a historical context. The market is in the midst of transitioning from a period of fed tightening to one with a more neutral posture and one where we think spreads on our MBS are roughly fair.

Therefore, we do not think this is a great time to climb far out on a limb in terms of risk or leverage.

Speaker Change: Second the current environment reinforces why MSR is such a valuable asset in our portfolio.

Speaker Change: Having low prepayments and convexity risks and producing a highly positive cash flow and attractive yields.

Whether or not the fed cuts three times or six times or zero times in 2024, we still expect prepayment speeds on our MSR portfolio remains slow for quite some time.

Speaker Change: We are preparing for the unexpected with the development of our direct to consumer recapture channel.

Speaker Change: The nature of our portfolio construction means that when the MBS underperformed our capital allocation will outperform pure agency strategies and when MBS outperformed our portfolio will underperform pure agency strategies.

This was by choice and by design.

Speaker Change: Good example of this can be seen in just the last two quarters.

Speaker Change: While we expect to have underperformed pure agency strategies this quarter as MBS tightened, we significantly outperformed last quarter when they widened.

Speaker Change: Our high capital allocation to MSR acts as a balance to our portfolio and agency spreads fluctuate.

Speaker Change: Looking further ahead, we are forging a path that lies not merely in watching mortgage spreads flicker by on the screen, but rather through the financial investment in an asset class MSR, where we can more meaningfully impact our results through our actions.

Speaker Change: The uniqueness of two harbors is that we are not a pure agency only rates.

Speaker Change: We have built our portfolio with the intent of delivering high quality returns not just over the next quarter or even the next rate cutting cycle, but over the long term, despite interim interest rates and spread volatility.

Ours is not a stagnant portfolio and we constantly evaluate opportunities across our core competencies all through the lens of creating sustainable shareholder value.

Speaker Change: With that I'd like to hand, the call over to Mary to discuss our financial results.

Mary: Thank you Bill and good morning, Please turn to slide six the company generated comprehensive income of $38 $9 million or 40 cents per weighted average share in the fourth quarter.

Mary: Book value was $15.21 per share at December 31st compared to $15.36 at September 30th.

Mary: Including the 45 cent common dividend resulted in a quarterly economic return of positive 2.0%.

Mary: Before turning to slide seven I'd like to call your attention to appendix Slide 30, where we have included the customary information on REIT taxable income and the tax characterization of our dividend distributions.

Mary: For additional information regarding the distributions and tax treatment. Please refer to the dividend information found in the Investor Relations section of our website.

Please turn to slide seven.

I ask them for the fourth quarter was $38 $2 million or 39 cents per share representing an annualized return of 10.3%.

Lower eye exam quarter over quarter was impacted primarily by spread volatility and related portfolio activity.

Mary: Moving to slide eight let's look at some detail of the quarter over quarter variances and I ask them.

Mary: I ask them as lower quarter over quarter by $11 $1 million. This was driven primarily by decreased income on RMB asks from lower balances and moving our mortgage investments down in coupon.

Mary: Additionally, I axon was affected by certain year end expense accrual adjustments.

Mary: As a reminder, eye exam reflects our daily adjusted holdings over the quarter, there can be quarterly distortions and eye exam like coupon positioning timing of MSR cash flows funding rates and leverage and expense adjustments.

Mary: But we believe that it is the most helpful way for our investors and analysts to understand the current quarter return contributions.

Mary: I ask that is complementary to the return potential on outlook slide later in the presentation, which reflects our view on prospective returns.

Mary: Please turn to slide nine.

Mary: Our MBS funding markets remains stable and liquid throughout the quarter with ample balance sheet available.

Spreads on repurchase agreements widened slightly into the fourth quarter and yearend with financing for our M. B S between sulfur plus 23 to 25 basis points.

Mary: At quarter end, our weighted average days to maturity for our agency repo was 48 days.

Mary: Days to maturity are typically lower at December 31st as we intentionally were all repos past year end to avoid any disruption in funding that can occur in December.

Mary: Post quarter end, we've rolled repos at very attractive spreads given that even longer term repos that pricing in five to six rate cuts into 2024.

Mary: Currently about 16% of our repos have floating rates.

Mary: The finance, our MSR across five lenders with $1 6 billion of outstanding borrowings under bilateral facilities and 296 million of outstanding five year term notes.

Mary: We ended the quarter with a total of $591 million unused MSR financing capacity and one.

Mary: Hundred and $68 million unused capacity for servicing advances.

Mary: I will now turn the call over to Nick.

Nick: Thank you Mary.

Nick: Please turn to slide 10.

Nick: As Bill discussed there was no lack of volatility in the fourth quarter.

Following the rise in interest rates in October mortgage spreads underperformed widening by about 20 basis points.

Rates reverse course in November and spreads tightened back by about 35 basis points.

Nick: This tightening trend continued in December with the fed strongly signaling that the period of rate hikes was over Ulta.

Nick: Ultimately current coupon mortgage spreads on a nominal basis finished the quarter at 118 basis points tighter by 33 basis points.

Nick: This is at the tighter end of the 20th twenty-three range of 100 to 167 basis points you can see this in figure one.

Nick: Though the spread is still much wider than the longer term non kiwi average of 80 basis points. It reflects an environment of high realized rate volatility and tepid demand from depository institutions.

Nick: Being at the tighter end of the range is likely the result of the market's expectations by more than five fed rate cuts priced in for 2020 for a steeper forward curves and lower forward implied volatility.

Putting all that together, while we are positioned to benefit from spread tightening we still see enough risk to as Bill said not go out on a limb.

Nick: As anticipated reported prepayment rates broadly declined by 16% in the fourth quarter.

This decline reflected weaker seasonal and effective mortgage rates of over 7% the highest in 20 years.

Nick: Despite 30 year mortgage rates falling by 70 basis points over the quarter to six 4%, 96% of mortgages remained outside the refinance window.

Nick: One thing I'd like to detail today is how decreasing rates and increasing prepayments could affect our portfolio of MSR.

Nick: Let's look at this in more detail in figure two which shows projected prepayment rates for our MSR versus a typical current coupon MBS in varying interest rate scenarios.

Nick: Being about 300 basis points out of the money prepayment speeds on our MSR remained very insensitive to falling rates in fact less than 1% of our balances at 50 basis points or more a rate incentive to refinance.

Nick: The Green line in this chart represents our portfolio of MSR.

As you can see even with an instantaneous 200 basis point decline in rates speeds are projected to only increase to 10 CPR.

Nick: Compare that to the current coupon whose speeds could top 60 CPR.

Nick: I'm sure. Some of you were thinking that although 10 CPR is still absolutely slow it's a big increase from what we are experiencing now.

Nick: That is true what those expectations are also built into how we actively hedge our MSR.

Turning to the MSR market place as is typical the peso sales slowed in the fourth quarter with 53 billion offered in the bulk market.

Nick: This brings the total MSR offered for the year to just under 500 billion.

Nick: 2023 finished as the second most active year in the MSR market falling just behind 2020 twos total of 525 billion.

Nick: Lower supply in the fourth quarter, it did little to affect the traded spreads of MSR bids.

Nick: Bids remained well supported as evidenced by sellers typically receiving a high single digit number of deaths.

Now, let's turn to slide 11, and discuss our portfolio positioning and activity in the fourth quarter.

Nick: At December 31st our portfolio was $14 6 billion, including 11 billion of settled positions on.

Nick: On the top right of the slide you'll see a few bullets about our risk positioning and leverage as spreads widened in October and our book value decline. We responded by selling some MBS actively lowering our leverage to protect against further losses.

Nick: Our average leverage for the quarter reflects this decreasing to five eight times from six three times at third quarter end.

Operator: Hello, and welcome to the Two Harbors Investment Corp. fourth quarter 2023 financial results conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad.

Nick: Following optimistic signs from the fed in November we strategically increased our risks and added leverage to the portfolio.

Operator: A question and answer session will follow the formal presentation. You may be placed into question Q at any time by pressing star 1 on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Maggie Carr, Head of Investor Relations. Please go ahead, Maggie.

This decision proved to be effective and captured most of the re tightening of spreads through year end.

Nick: Our quarter end economic debt to equity was six times.

Nick: For similar reasons that we have outlined in prior calls we continue to think it is prudent to maintain a neutral leverage position.

Nick: We don't believe that we need to add more leverage should generate strong returns as you'll see in a few slides when we detail our return outlook.

Good morning, everyone, and welcome to our call to discuss Two Harbors' fourth quarter 2023 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer, Nick Ledeca, our Chief Investment Officer, and Mary Riskey, our Chief Financial Officer. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website, as well as the investor relations page of our website at twoharborsinvestment.com.

Nick: Please turn to slide 12 to review our agency portfolio.

Nick: Figure one shows the composition of specified pool holdings by coupon and story and then figure two you can see the performance of TBA as in the specified pools, we own throughout this quarter.

Nick: We migrated the portfolio down in coupon by replacing approximately $2 5 billion in four and a half and six 5% <unk>.

With an equal amount of two and a half 4% TBA is in order to take advantage of the sharp cheapening of lower coupons that occurred in October.

In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call. As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from those of experts. These are described on page 2 of the presentation and in our Form 10-K and subsequent reports filed with the FCC. Acceptance may be required by law. Two Harbors does not update forward-looking statements and disclaims any obligation to do so.

Nick: Additionally, we enhance liquidity by rotating approximately 1 billion four to four 5% specified pools and the same coupon TBA is.

Nick: At quarter end about 70% of our MBS holdings were in specified pools that we believe offer better relative value than TBA is.

Nick: Figure three on the bottom right shows our specified pool prepayment speeds decreasing to 5.4 CPR in the fourth quarter from $6 seven CPR in the third quarter.

Nick: As you can see from the chart on aggregate speeds for these predominantly discount pools were materially faster than TBA as hence providing more return.

I will now turn the call over to Bill. Thank you, Maggie. Good morning, everyone, and welcome to our fourth quarter. Today, I'll provide an overview of our quarterly and annual performance. Then I will spend a few moments discussing the, Let's finish with an update on Round Point. Mary will cover our financial results, and Nick will discuss our investment portfolio. Let's begin with slide 13.

Nick: Please turn to slide 13, our MSR portfolio was 3 billion in market value at December 31, which includes the addition of $829 million UBB through flow purchases in the quarter.

Nick: As rates declined in the quarter the price multiple of our MSR declined from 5.8 to 5.6 times the.

Nick: The prepayment speed of our MSR dropped by 22% to an historically low 3.8, CPR and our expectation is the prepayment rates for deeply out of the more money mortgages will continue to remain at historically low levels through 'twenty 'twenty four providing a tailwind for this strategy.

The book value at December 31st was $15.00, presenting a positive 2.0, total economic For more UN videos, visit www.un.org, IXM was 39 cents, representing a 10 point. In the fourth quarter, we issued 7.0 million shares through our ATM program, raising $97.8 million. Taking a step back and looking at it. I'm proud of what our company achieved for the benefit of our staff, both through the active management of our portfolio and our capital. The addition of our new operational, February to raise $176 million in common and allocate all of those funds to investments in MSR. This concludes today's webinar. Thank you. Thank you. Thank you.

Nick: Post quarter end, we signed two term sheets wanted to purchase 3 billion <unk> of MSR to settle in the first quarter and another to sell one 5 billion <unk> on a servicing retained basis.

Nick: At current spread levels, we prefer investing capital and hedged MSR rather than had securities.

Nick: Finally, please turn to slide 14, our return potential and outlook slide.

Nick: The top half of this table is meant to show what returns we believe are available in the market.

Nick: We estimate that about 62% of our capital is allocated hedged MSR with a market static return projection of 12% to 16%.

Nick: The remaining capital is allocated to hedge our MBS with a market static return estimate of 10% to 11%.

Nick: The lower section of the slide is specific to our portfolio with a focus on common equity and estimated returns per common share.

Without a doubt, however, the highlight of our year was the acquisition of Round Point Mortgage Services, which reinforced our commitment to MSR as a core and essential part of Go to slide 4 for a brief discussion on the. The fourth quarter of 2023 was punctuated by continued volatility, on the back of a stronger than expected September job coupled with the outbreak of war in the Middle East. Interest rates moved steadily higher in early October, and it's. 10-Year Treasury Yield, briefly touched 5. It was approximately 40 basis points higher than it was at the beginning of the quarter. An abrupt turn of sentiment followed in early November.

Nick: With our portfolio allocation as shown in the top half of the table and after expenses. The static return estimate for our portfolio is between 8.9 to 11, 5% before applying any capital structure leverage to the portfolio.

After giving effect to our outstanding convertible notes and preferred stock we believe that the potential static return on common equity falls in the range of nine 9% to 14% or a prospective quarterly static return per share of 38 to 53 cents.

Speaker Change: Thank you very much for joining us today and now we will be happy to take any questions you might have.

Speaker Change: Thank you will now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad.

Chairman Powell's optimistic assessment and Ted's efforts to bring down inflation drove the market to price in as many as six interest rate cuts, the entire YieldCurve response, and your treasury rate finished the quarter at a yield of 3.88%, to your treasury. 4.25, resulting in a net 10.

Speaker Change: Confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from me Q1 moment. Please while we poll for questions. Our first question is coming from Doug Harter from UBS. Your line is now live.

Speaker Change: Yeah.

Doug Harter: Thanks Kim.

Doug Harter: Can you talk about.

Doug Harter: What were kind of the factors that are leading you to see the the lower returns in the AR.

Doug Harter: Agency MBS hedged with rates.

Kim: And kind of other participants are seeing still seeing kind of teens returns and kind of hoping you could.

Kim: Sort of offer your opinion as to why Youre seeing 10% to 11%.

These changes are in Figure 1 on this slide. Shroff, the 5-year and 10-year Treasury, after a jaw-dropping 120 base- It's interesting to look at these rate moves in a historical context..., see figure two on the bottom of this slide. Market practitioners often quote measures of realized volatility, as the variance or standard deviation, sometimes their percentage, and that's meaningful for those who are adept.

Kim: Hey, Doug This is Nick Thank you for the question.

Nick: Yes over the quarter, well spread did tightened over the quarter.

Nick: You know for US specifically, we again this is due to the lens of our spreads in how we construct our portfolio on that aged in the capital structure of the portfolio.

Nick: Which you know can cause differences from.

Nick: Person to person or institution institution, but.

In addition to all those things we did as you can see from our other slide we did materially go down in coupon over the quarter and these are nominal spreads and when you go down in coupon and mortgages you can't you do lose spread so it's a lot of this spread potential is driven by the coupon selection for mortgages and it is also just.

We aim to show something simple, and, we believe, more intuitive. Simply look at how many days in the past 20 years had a move in the five-year trajectory and more than 10. In 2023, the market experienced more than 50 days. That is, the five-year rate moves more than 10, more than 20% of the trading second highest instance of this metric, behind 2008, for essentially a decade prior to 2020. There were only two years where there were 10. Many years during that period had left them fatherless.

Nick: To remind everyone that it is a it is a moment in time right. It is just a snapshot of the portfolio at the end of the quarter.

Nick: It so happened in this last quarter from a relative value reasons. We did think that it made sense to go down in coupon as we went through the quarter and that creates.

Nick: That does negatively impact the <unk>.

Nick: Return potential of that segment of the portfolio.

There are, of course, many differences between then and now. The time-series plot is meant to provide some perspective on the market that we have been managing. Please turn to slide 5 for a brief discussion on round point operations. We closed the acquisition of Brown Point effective September 30th, and have been actively integrating all. The 10th transfer of our servicing to Roundpoint's platform is expected to occur on February 1st, and we will have one final cleanup of 60,000 loans in early June, as shown in Figure 1. In all, we expect the total number of loans on the Round Point platform to be just north of 900,000, at the 8th largest conventional service. Transferring almost a million loans in this time frame is quite an accomplishment, and Round Point has done an excellent job, including C.C. Colburn, Since the closing of the acquisition, we have made large strides in integrating Roundpoint's functions, operations, and overall platform into 2HR.

Nick: But it is by no means.

Nick: Something that we think is long term in nature in the sense that as you go.

Nick: As you all know we do move our coupon exposure around quite a bit from quarter to quarter and in fact over this quarter. We have gone back up in coupon and if we were to rerun those projections today you would see.

Materially higher.

Nick: Which our projections on that segment of the portfolio. So it really is just a snapshot at the end of last quarter reflects predominantly down in coupon bias.

Speaker Change: And I might just add Doug good morning by the way is that the down in coupon movement in the portfolio that <expletive> mentioned, we did that from a from a relative value perspective, as we thought the total return potential of those of those mortgages would be better than some of the up in coupon ones. As we moved a portion of the portfolio are there so the lower Roe.

Speaker Change: Turn potential as a as an artifact of you will if you will even though we thought the total return was going to be better by making that move.

Speaker Change: Got it and just on that total return comment.

Speaker Change: I guess, how do you think about the timeframe for kind of capturing that total return and how do you think about the trade offs.

We see this acquisition as providing a lot of opportunity going forward for our students. In particular, we still believe that the Round Point Servicing Platform should benefit the combined company by a proct... $25 million dollars in pre-tax income, as a result of both incremental revenue and, The two on the bottom right of this slide highlight our top..., for Round Point for 2024. The first focus is to deliver additional cost savings and economies of scale. All of this involves being smart about our technology, knowing when to buy versus build. Streamlined processes and created this. The second area of focus is to develop a best-in-class, direct-to-consumer origination. Thank you. Thank you.

Speaker Change: There between current and total return and on time to time to reconcile something.

Yes, that's a good question, it's one that we talk about frequently.

Speaker Change: When we're making these decisions I would say generically we're.

Thinking about months.

Speaker Change: In terms of seeing seeing the relative value opportunity.

Speaker Change: Play out overtime, it's it's certainly not days.

Speaker Change: Where we're thinking about longer time scales on that than we do.

Speaker Change: I expect them to occur less than a year or so.

Speaker Change: I'd say the timescale is generally a few months.

Speaker Change: The other thing I, just what I mentioned about the return potential calculation.

Note the rate on our MSR portfolio is below three and a half percent. So with mortgage rates north of six and a half. We are a long way away from serious refinancing, and unless interest rates fall precipitously, I think that we have the time to build the platform that we want. We've hired a very experienced individual to lead this effort, who spent his entire 30-year career building and running DirectX. We are in the process of expanding the, and I expect to be able to begin making loans in the second quarter. The ability to create something from scratch without any legacy issues or risk.

Speaker Change: I'm sure you guys know, there's a lot of technicalities in our market and how people look at things you know we tend to look at things are spreads we look at the growth of the entire occurred rather than <unk>.

Speaker Change: Just looking at things versus a blend of for example, the 510 for sure.

Speaker Change: Curve is inverted.

You run mortgages against the whole curve you tend to get tighter spreads than you do if you just look at something versus the Lauren.

Speaker Change: I think that also was a factor that plays into.

We look at things versus others and of course, it just depends on the leverage people assume also that you have a big factor as to how those numbers.

Speaker Change: It's really as I said a moment in time.

Speaker Change: And it is something that will move around.

Tremendously exciting, companies get the chance, direct-to-consumer origination platform. We also expect to be able to offer our borrowers second liens, home equity loans, and other ancillary products. Lastly, we are keenly focused on the growth of Round Point's third-party subservice. As of year-end, Roundpoint serviced a total of seven true third-party clients, including one new client added in the fourth quarter.

Thanks.

Speaker Change: Thank you.

Thank you. Your next question today is coming from Trevor Cranston from JMP Securities. Your line is now live.

Trevor Cranston: Hey, Thanks, good morning.

Trevor Cranston: Good morning, another question on the on the return potential slide.

Trevor Cranston: You guys had been earning you know a.

Trevor Cranston: A pretty decent amount of flow to income on the MSR portfolio.

This new client is the operator of a newly formed MSR exchange, matches MSR, buyers, and sellers, while they have yet to add any new laws to our platform. We are optimistic about this new partnership. Additionally, there has been increasing demand and activity from institutional investors, who are participating in the MSR market through separately managed accounts. The opportunity exists because the market has never before seen a risk profile like the current MSR, most of the universe being far away. We believe the best way to grow our subservicing business is by being the subservicer of choice.

When we look at the forward return projections on slide 14.

Trevor Cranston: Does that incorporate the.

Trevor Cranston: The impact of lower forward fed funds on the float income component of the MSR and and also funding expenses.

Trevor Cranston: And I guess generally if you guys could just comment on kind of how you think about the impact of lower fed funds being on the portfolio as a whole. Thanks.

Speaker Change: Yeah. Good morning. Thanks, Thanks for the question.

Speaker Change: So yes, the downward sloping.

Speaker Change: <unk> curve is incorporated into the float earnings of the MSR asset and of course.

Capra, We think there are many reasons why we are a great partner for this new capital, and we are actively working to ensure that we have the ability to support various structures. Indeed, we recently signed a term sheet to sell a small pool of our own MSR to a non-traditional marketer, and a servicing and retain base will bring the number of true third-party subsurfacing clients up to eight once that deal closes. Bringing this all together, let's discuss how we are thinking about our portfolio of securities at MSR and our operational platform, current and future... Agency spreads are attractive, especially in a historical... The market is in the midst of transitioning from a period of Fed tightening, one with a more neutral stance and one where we think spreads on RMBS are roughly fair. Therefore, we do not think this is a great time to climb far out on a limb, risk, or level.

Speaker Change: The entire subject to float is one that we.

Speaker Change: <unk> actively hedge the interest rate risk.

Speaker Change: Alright, so that I wouldn't say that that we experienced a windfall when rates rose and we won't experience.

A large decline.

Speaker Change: In book value, when when and if rates fall, because we're hedging that exposure right.

Speaker Change: Yep.

And so that is also the answer to the question of what happens to our portfolio. If the fed cuts and if if funding rates are short term rates fall right is that because our portfolio is hedged across the curve right.

Speaker Change: We do.

And as a result, our portfolio returns and how that slide.

The current environment reinforces why MSR is such a valuable asset in our portfolio, having a low prepayment and convection, producing a highly positive cash flow and attracting investors. Whether or not the Fed cuts three times, or six times, or zero times, we still expect prepayment speeds on our MSR portfolio to remain slow for quite some time. We are preparing for the unexpected. For example, the development of our direct-to-consumer

Speaker Change: All of the return potential is really constructed depends really on the spread right between the assets and and the I'll say longer term rates, but outstanding what Nick just said about not being one point on the curve by this drove every point that we hedge on the curve.

Speaker Change: But that's a complexity.

Speaker Change: It's the spread of the asset relative to the risk free curve that matters and not and not the funding rate itself.

The nature of our portfolio construction means that when MBS underperform, our capital allocation will outperform pure agency. And when MBS underperform, our portfolio will underperform. This is by choice and by design.

Speaker Change: So I'd say, it's a zero order.

And if you wanted to talk about it more completely I think it actually the returns would go down slightly because of the risk free rate that's earned on the equity.

A good example of this can be seen in just the last two quarters. While we expect to have underperformed pure agency strategies this quarter as MBS Titan, they significantly outperformed last quarter when they widened. Our high capital allocation to MSR acts as a ballast to our portfolio when the agency spread fluctuates. And further ahead, we are forging a path that lies not merely in watching mortgage spreads flicker by on the screen. But rather through the financial investment in an asset class, MSR, where we can more meaningfully impact our results through our actions. The uniqueness of Two Harbors is that we are not a pure agency.

But.

To your to your base question.

Speaker Change: Those calculations.

Speaker Change: Assume that the forward curve is realized so those are all embedded in the calculation.

Speaker Change: Right, Okay that makes a lot of sense.

Speaker Change: And then Bill you talked about some of the opportunities for.

Speaker Change: For growth in the sub servicing business and in particular.

I was wondering if you could maybe expand a little bit on that and talk about sort of how you see.

The magnitude of potential growth on the sub servicing side of things specifically over the next couple of years. Thanks.

Speaker Change: Yeah sure well.

We have built our portfolio with the intent of delivering high-quality returns, not just over the next quarter or even the next rate-cutting cycle but over the long term, despite the interim interest rate and spread. Ours is not a stagnant portfolio, and we constantly evaluate, across our core companies, all through the lens of creating sustainable shareholder value. With that, I'd like to hand the call over to Mary to discuss our finances. Thank you, Bill, and good morning.

Speaker Change: As I said in my remarks I D.

Speaker Change: The interesting thing that's happened in the sub in the servicing market over the last year or two as that that rates have risen so much in the in the mortgage universe as has been well described by us and others.

Has as an average dollar price of 80, and as you know more than 300 basis points out of the money and so the risk characteristics of the assets is something that hasn't really been seen before right you see it a little bit on the chart that that Nick talked about.

Please turn to slide 6. The company generated a comprehensive income of $38.9 million, or $0.40 per weighted average share, in the fourth quarter. Our book value is $15.21 per share at December 31st compared to $15.36 at September 30th, and the 45 cent common dividend results in a quarterly economic return of positive 2.0%. Before turning to slide 7, I'd like to call your attention to Appendix Slide 30, where we have included the customary information on REIT taxable income and the tax characterization of our dividend distribution. For additional information regarding distributions and tax treatment, please refer to the dividend information found in the Investor Relations section of our website. Please turn to slide 7.

Speaker Change: In his presentation, where we showed the relative S curves.

<unk> of the portfolio on page.

Speaker Change: One piece of it.

Yeah.

Yes.

Speaker Change: Whatever where where we showed that if rates fall 200 basis points.

Page 10.

Speaker Change: That the prepayments are in our portfolio that arent expected to increase very much.

Speaker Change: It has very low prepayment sensitivity is very low convexity right and so there's just a risk profile has not been seen before and as a result, we're seeing lots of interest from.

Market participants who are not the usual.

Speaker Change: The cast of characters that are buying MSR theres been lots of structures that had been created in the marketplace.

IXM for the fourth quarter was $38.2 million or $0.39 per share, representing an annualized return of 10.3%. Lower IXM, quarter over quarter, was impacted primarily by spread volatility and related portfolio activity. Moving to slide 8, let's look at some detail of the quarter-over-quarter variances in IXP. IXM is lower quarter over quarter by $11.1 million. This was driven primarily by decreased income on RMBS from lower balances and moving our mortgage investments down in coupons. Additionally, IXM was affected by certain year-end expense accruals.

Speaker Change: In order to help those non traditional market participants.

Speaker Change: Invest in the MSR market.

Speaker Change: And I think there's lots of reasons why we are the best sub servicing partner for those new investors chief among them being that that we have $200 billion of our own servicing that is.

Speaker Change: Is that round points and we.

We will be subject to the exact same.

Speaker Change: Results of the sub servicing platform round point.

Speaker Change: As any third party clients that we bring into it.

Speaker Change: Now I'd like to say that we are managing sub servicing.

As a reminder, IXM reflects our daily adjusted holdings over the quarter. There can be quarterly distortions in IXM, like coupon positioning, timing of MSR cash flows, funding rates and leverage, and expense adjustment, but we believe that it is the most helpful way for our investors and analysts to understand the current quarter return contract. I extend this compliment to the return potential and outlook slide later in the presentation, which reflects our view on perspective. Please turn to slide 9.

For MSR investors by MSR investors, meaning that we know exactly what what MSR investors like to see.

Speaker Change: To extract the value from the cashless and so forth, there's other reasons as well, we're well capitalized institution.

Which provides the wherewithal to invest and and and.

Speaker Change: In infrastructure and deal with any any.

Speaker Change: Any market uncertainties that occurred in two weeks. So I think for all those reasons. This is one area that we're going to focus on is being able to.

Speaker Change: To grow our sub servicing business from that perspective.

RMBS funding markets remain stable and liquid throughout the quarter with ample balance sheets available. Spreads and repurchase agreements widen slightly into the fourth quarter and year-end. Financing for RMBS between SOFR plus 23 to 25 base. At quarter end, our weighted average days to maturity for our agency repo was 48 days. Our days to maturity are typically lower at December 31st, as we intentionally roll repos past year-end to avoid any disruption in funding that can occur in December. Post-quarter end, we've rolled repos at very attractive spreads, given that even longer-term repos are pricing in 5-6 rate cuts into 2025. Currently, about 16% of our repos have floating rates to finance their MSR across five lenders with $1.6 billion of outstanding borrowings under bilateral facilities and $296 million of outstanding five-year terms. We ended the quarter with a total of $591 million unused MSR financing capacity and 168 million I will now turn the call over to you. Thank you, Mary.

Speaker Change: Got it okay. That's helpful. Thank you.

Speaker Change: Thank you. Your next question is coming from Eric Hagen from <unk>. Your line is now live.

Eric Hagen: Hey, Thanks, Good morning, guys, Hey, so how do you feel like you control for recaptured in the MSR without an origination platform and how how security you feel like that is.

Eric Hagen: And do you have an estimate for how much MSR you might need a bias mortgage rates were you know like 50 or 75 basis points lower than they are today.

Eric Hagen: Okay.

Speaker Change: I'm not sure I understood. The second question, but the first question is but the answer to the first question is that we have we as we said in our prepared remarks.

Speaker Change: We have hired an experienced professional to begin the build out of a recapture or portfolio of defense.

Speaker Change: Strategy.

Speaker Change:

Speaker Change: In order to provide that not only to our own our own portfolio, but also to any third party clients that we have.

Speaker Change: That process is ongoing we where we're hiring people we're filling roles.

Speaker Change: And as we said in the prepared remarks, we expect to be able to be making loans in.

In Q2.

Please turn to slide 10. As Bill discussed, there was no lack of volatility in the fourth quarter. Following the rise in interest rates in October, mortgage spreads underperformed, widening by about 20 basis points. Rates reversed course in November, and spreads tightened back by about 35%. This tightening trend continued in December with the Fed strongly signaling that the period of rate hikes was over. Ultimately, current coupon mortgage spreads, on a nominal basis, finish the quarter at 118 basis points, tighter by 30. This is at the tighter end of the 2023 range of 100 to 167. You can see this in Figure 1. Though the spread is still much wider than the longer-term, non-QE average of 80 bases, it reflects an environment of high realized rate volatility and tepid demand from depository investments.

Speaker Change: Again looking at page 10, and looking at how far out of the money. Our servicing portfolio is we feel like we have time Theres no particular urgency to this although we are certainly acting with.

Speaker Change: With due haste.

Speaker Change: In order to build it hum as quickly, but as prudently as we can.

And again the main point here is we're not going to be a a a retail originator, we're not going to be.

Speaker Change: A someone's going to compete with the largest guys out there in the world. The point of this thing is really to protect our servicing portfolio.

Speaker Change: To defend our portfolio to perform recapture on our portfolio.

Speaker Change: We're really excited about the opportunity and the ability to be able to build this thing from scratch.

Speaker Change: And Erik if I can.

Speaker Change: This is Nick I'll, just build on what Bill said I think to your second question, which I also didn't fully understand.

Nick: That slide shows that Bill referred to on page 10 already of authority is very far the money as well.

Being at the tighter end of the range is likely the result of the market's expectations of more than five Fed rate cuts priced in for 2024, a steeper forward curve, and lower forward implied volatility. Putting all that together, while we are positioned to benefit from spread testing. We still see enough risk to, as Bill said, not go out on a... As anticipated, reported prepayment rates broadly declined by 16% in the fourth quarter. This decline reflected weaker seasonality and effective mortgage rates of over 7%, the highest in 20 years.

A reasonable rally are going to stay slow so we don't we're not going to.

Nick: It would be very.

Nick: Very very surprising if we were to see.

Nick: A rapid rapid amortization on our on our MSR as it is so.

Nick: Yes.

Nick: As.

Nick: We also said in our prepared comments, we really like the the the <unk> strategy no we would like it right now it looks.

It looks great right on our return potential.

Nick: So our.

Nick: Our intention is new capital as we have to keep adding to it but we don't really see.

Despite 30-year mortgage rates falling by 70 basis points over the quarter to 6.4%, 96% of mortgages remained outside the refinance. One thing I'd like to detail today is how decreasing rates and increasing prepayments could affect our portfolio of MSRs. Let's look at this in more detail in Figure 2, which shows projected prepayment rates for our MSR versus a typical current coupon MBS in varying interest rate scenarios. Being about 300 basis points out of the money, repayment speeds on our MSR remain very insensitive to falling rates.

Speaker Change: Hey, Doug.

Speaker Change: Big issue for the near future.

Doug Harter: Okay Yeah.

Doug Harter: Flushing that out.

Speaker Change: You guys talked about a neutral leverage position, but if if you do see growth opportunities in the MSR. I mean is there room for that to change and what what are the parameters for it to change, especially if the fed cuts rates I mean do you feel like you would still run with this level of leverage and how much.

Speaker Change: Flexibility do you feel like you have there the fed cuts.

Yes in terms of leverage.

In fact, less than 1% of our balances have 50 basis points or more of rate incentives to refinance. The green line in this chart represents our portfolio of MSR. As you can see, even with an instantaneous 200 basis point decline in, Speeds are projected to only increase to 10 cpr. Compare that to the current coupon, whose speeds could top 60.

Speaker Change: Yes, definitely we are running and what we think is a neutral territory as we said again in our prepared remarks.

Speaker Change: And the tighter end of recent ranges and we think they price and a lot of.

Speaker Change: What the market expects defense do perhaps too much but.

Speaker Change: There is still.

Speaker Change: They're so volatile events ahead of us and we think spreads are.

Speaker Change: So kind of two sided right now so.

Speaker Change: Lots of things can change this year that we are a year coming up with.

I'm sure some of you are thinking that although 10 CPR is still absolutely slow, it's a big increase over what we are experiencing now. That's true, but those expectations are also built into how we actively hedge our efforts. Turning to the MSR market, as is typical, the pace of sales slowed in the fourth quarter, with $53 billion offered in the bulk market.

Speaker Change: A big election, coming up we can know what ramifications and geopolitical tensions and other things.

Speaker Change: Where we're going to just see where the market takes us.

What makes the most sense, but for the near future and are we kind of see ourselves as being in this kind of leverage posture.

Speaker Change: Got it alright, thank you guys.

This brings the total MSR offered for the year to just under $500 billion. 2023 finished as the second most active year in the MSR market, falling just behind 2022's total of $525. Lower supply in the fourth quarter did little to affect the traded spreads.

Speaker Change: Okay.

Thank you. Our next question is coming from Kenneth Lee from RBC capital markets. Your line is that right.

Hey, good morning, Thanks for taking my question in terms of the I extend that you report in the quarter.

Kenneth S. Lee: I Wonder if you could just further expand upon the portfolio activity that you mentioned that.

Bids remain well-supported, as evidenced by sellers typically receiving a high single-digit number. Now, let's turn to slide 11 and discuss our Portfolio Positioning and Activity. At December 31st, our portfolio was $14.6 billion, including $11 billion of settled positions. On the right side of the slide, you'll see a few bullets about our risk positioning and leverage. As spreads widened in October and our book value declined, we responded by selling some MBS, actively lowering our leverage to protect against further losses.

Kenneth S. Lee: The prepared remarks that potentially impacted the IX them in the quarter. Thanks.

Kenneth Lee: Sure.

So as discussed yeah, we did we.

We did go down in coupon, which.

Speaker Change: What was it.

Speaker Change: One factor that took our IX them down for the quarter our.

Speaker Change: Uh huh.

Speaker Change: For the quarter as well as as we mentioned we did sell some mortgages when things widen out in October which was.

Our average leverage for the quarter reflects increased to 5.8 times from 6.3 times in the 3rd quarter. Following optimistic signs from the Fed in November, we strategically increased our risk and added leverage to the portfolio. This decision proved to be effective and captured most of the retightening of spreads through year-end.

Speaker Change: We felt it was prudent just given.

Speaker Change: The environment at the time and as you know as Youll know from our prior calls you know we've been talking about the fact that.

Speaker Change: Going into the last quarter.

Speaker Change: The market was different than it was in prior years, we just feel like there was money managers had or.

Speaker Change: Do you expressed a pretty big overweight in the market and there were still fall events ahead of us. So we decided in that in that time.

Our quarter-end economic debt to equity was six... For similar reasons that we have outlined in prior calls, we continue to think it is prudent to maintain neutral leverage. We don't believe that we need to add more leverage to generate strong returns, as you will see in a few slides when we detail our return. Please turn to slide 12 to review our agency.

Speaker Change: I'm sorry to take.

Speaker Change: To reduce our exposure to some mortgages in that.

Speaker Change: As mentioned comments Mary made we did have reduced balances for the portfolio for a period of time at a little lower leverage all of those things did impact our except for the quarter, but as I have discussed.

Figure 1 shows the composition of specified pool holdings by coupon and story, and Figure 2 shows the performance of TBAs and the specified pools we own throughout this quarter. We migrated the portfolio down in coupon by replacing approximately 2.5 billion, 4.5, and 6.5% PBA with an equal amount of 2.5% to 4% TB in order to take advantage of the sharp cheapening of lower coupons that occurred in October. Additionally, we enhanced liquidity by rotating approximately a billion four to four and a half percent specified pools into the same coupon TBA. As a result, at quarter end, about 70% of our MBS holdings were in specified pools that we believe offer better relative value than TDP. Figure 3 on the bottom right shows our specified pool prepayment, increasing to 5.4 CPR in the fourth quarter and 6.7 CPR in the third.

We did we did buyback some mortgages bring back our leverage up and we have also gone back up in coupon since the end of the quarter. So all of those things you know for this quarter, we think will have a positive effect in both directions.

Just add a couple more thoughts if I can which is now even even without portfolio activity. There is natural variation in the in the backward looking eye exam that occurs just from.

Speaker Change: Timing of cash flows you know MSR is not a bond it doesn't get paid a fixed coupon every month right. Some people pay their mortgage payments and therefore their servicing on the 31st of the month and therefore, they don't have to pay any for the next months or sometimes they pay it on the first and then the <unk>. So theres two in one month versus another there's all kinds of interesting.

Timing of cash flows on the MSR asset that occur right and also of course, you know we know that the I extend the backward looking eye exam.

As you can see from the chart, on aggregate, speeds for these predominantly discount pools were materially faster than TBAs, hence providing more return. Please turn to slide 13. Our MSR portfolio was $3 billion in market value at December 31, which included the addition of 829 million UPB through Flow Purchases in the Quarter. As rates declined in the quarter, the price multiple of our MSRs declined from 5.8 to 5.9. The prepayment speed of our MSR dropped by 22% to a historically low 3.8 CPR, and our expectation is that the prepayment rates for deeply out-of-the-money mortgages will continue to remain at historically low levels through 2021, providing a tailwind for this strategy. Post-quarter end, we sign two terms, one to purchase three billion UPB of MSR to settle on the first and another to sell 1.5 billion UPP on a servicing

Speaker Change: <unk> also reflects actual prepayment speeds, so prepayment speeds come in slower than we thought we were slower than projected that will be a benefit if they come in faster than expected that would be a document.

Speaker Change: So even without any portfolio activity, there's natural variation.

Speaker Change: At the at the quarter end.

Speaker Change: Hum, we think all of that being considered and you are taking to consideration. The forward looking projections on slide 15. There is a good estimate of what we think the portfolio will earn it and as Nick said earlier well that.

Speaker Change: That snapshot at the end of the quarter is actually lower than it would be you'd be rents today by a couple of hundred basis points, probably and so given all of that and how that corresponds a dividend we feel pretty good.

Gotcha Gotcha very helpful. There.

Speaker Change: And just one follow up on the potential expansion on the round point. The DTC channel wondering how should we think about potential need for for investments or spending along with those efforts. Thanks.

At current spread levels, we prefer investing capital in hedged MSR rather than hedged S&P. Finally, please turn to slide 14, Our Return Potential and Outlook. The top half of this table is meant to show what returns we believe are available in the market. We estimate that about 62% of our capital is allocated to hedging, with a market static return projection of 12. The remaining capital is allocated to hedged RMBS with a market-static return estimate of 10 to 11%. The lower section of this slide is specific to our portfolio, with a focus on common equity and estimated returns per common share. With our portfolio allocations shown in the top half of the table, and after expenses, the static return estimate for our portfolio is between $8.9 to $11.5 billion, for applying any capital structure leverage to the portfolio. After giving effect to our outstanding convertible notes and preferred stock, we believe that the potential static return on common equity... falls in the range of 9.9 to 14.5, or a prospective quarterly static return per share of $38,000. Thank you very much for joining us today, Thank you, and now we'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.

Speaker Change: Yeah, we think that we think the capital investment for that activity.

Speaker Change: We will be pretty low.

Speaker Change: The intent is not for us to to originate these loans and unnecessary hold them all right. We will we will do what what.

As is normally done these are sorts of things, which will originate the loans and sell them directly to the agencies right and then we will keep the servicing for ourselves of course and the idea is that this is just going to replace the servicing that otherwise would have run off right and would have disappeared and the benefit of having it in house and having to recapture thing.

Speaker Change: That we can keep the servicing we can keep the loans on the round point platform, rather than having them refinance away right. So that's the whole idea of what we're trying to do with this direct to consumer channel.

Speaker Change: Gotcha very helpful. There. Thanks again.

Speaker Change: Thank you.

Speaker Change: Thank you next question is coming from Bose George from K B W. Your line is now live.

Bose George: Good morning, she could we get an update on your book value quarter to date.

Bose George: Yeah as of as of the close of Friday, We think that book values up between.

Bose George: And one and one 5%.

Bose George: Okay, great. Thanks, and then the range in your target sort of eye exams.

Bose George: What takes you to the high end versus the low end is that.

You may press star 2 if you'd like to remove your question. One moment, please, while we poll for questions. Our first question is coming from Doug Harter from UBS. Your line is now live. Thanks. Can you talk about what were kind of the factors that are leading you to see the lower returns in the agency MBS hedged with rates? And kind of other participants are still seeing kind of teens returns, and I'm kind of hoping you could sort of offer your opinion as to why you're seeing 10 to 11 percent. Doug, this is Nick.

Bose George: Prepayment expectations or just sort of curious what kind of drives that range.

Yeah.

Speaker Change: Hey, Bose.

Bose George: For the question, we have various factors that go into that range.

Bose George: Among them would be our prepayment assumptions as well as some of our funding assumptions.

Bose George: And those are the things that are our primary primary drivers of that range.

Bose George: Okay. Thanks, and then just in terms of where that number is central corridor did bill did you say, it's going to back up a couple of hundred basis points is that what you said.

Speaker Change: Yeah again.

Speaker Change: As Nick and I, both said it moves around with the portfolio and so forth, but I would say given our current current coupon distribution so forth.

Thank you for the question. Yeah, over the quarter, well, you know, spreads did tighten over the quarter, as you know. For us specifically, we, and you know, again, this is through the lens of our spreads and how we, you know, construct our portfolio on that page and the capital structure of the portfolio, but which, you know, can cause differences from person-to-person or institution-to-institution. But, you know, in addition to all those things, we did, as you can see from our other slides, we did materially go down in coupon over the quarter So a lot of this, you know, potential spread is driven by the coupon selection for mortgages, and it is also just to remind, you know, everyone that this is a moment in time, right?

Speaker Change: Yes, that's about the right magnitude.

Speaker Change: Okay, and the security side of the portfolio not on the on the combined thing. If you look at the RBS part, which is 10 to 11, that's probably 200 basis points higher well given our portfolio right now, but not in the overall.

The overall it would you could you did you characterize how much the overall is up.

Speaker Change: Multiplied by the relative capital allocations, if that so that'd be 38% times the types of children.

Speaker Change: Okay, Okay, great. Thanks.

Speaker Change: Thank you next question is coming from Rick Shane from Jpmorgan. Your line is now live.

Rick Shane: Thanks, guys for taking my questions. This morning, I just wanted to talk a little bit about the use of the ATM during the quarter.

Rick Shane: I'm curious if this is going to be something we should expect going forward more aggressively.

When we do the math it looks like you did the offering a little bit below $14 per share.

Rick Shane: And even on a sort of mark to market basis. If we go back to your comments last quarter at this time about where this where book value was.

It is just a snapshot of the portfolio at the end of a quarter, and it so happened that last quarter, from relative value reasons, we did think that it made sense to go down in coupon as we went through the quarter, and that creates, you know, that does negatively impact the return potential of that segment of the portfolio, but it is, you know, by no means something that we think is long-term in nature in the sense that, you know, as you well know, we do move our coupon exposure around quite a bit from quarter to quarter, and in fact, you know, over this quarter, we have gone back up in coupon, and if we were to rerun this projection today, you would see, you know, materially higher return projection of that segment of the portfolio. So it really is just a snapshot at the end of last quarter reflects predominantly a down in coupon bias.

Rick Shane: Intra quarter it looks like the offerings were dilutive to book modestly can you talk about the rationale for that please.

Yeah sure. Thanks, Rick.

Speaker Change: That's correct right. We also saw then is modestly dilutive to book.

Speaker Change:

Speaker Change: The rationale is the same as what we said when we raised capital in in.

Speaker Change: In February of 2023.

Speaker Change: We think that.

Speaker Change: At its most.

Speaker Change: A sort of mechanical level that that even at a slight discount to book the the dilution of the expenses.

Speaker Change: Means that the return on the investment of that dilution.

And I might just add, Doug, good morning, by the way, that the down-in-coupon movement in the portfolio that Nick mentioned, we did that from a relative value perspective because we thought the total return potential of those mortgages would be better than some of the up-in-coupon ones, and so we moved a portion of the portfolio there. So the lower return potential is an artifact, if you will, even though we thought the total return was going to be better by making that move. I got it. And just on that total return comment, you know, I guess, how do you think about the timeframe for kind of capturing that total return? And how do you think about the tradeoffs?

Speaker Change: <unk> is still quite high is certainly higher than our cost of capital and the.

I'd say mid double digits by that I mean, 30%, 40% somewhere in that in those sorts of numbers.

Speaker Change: And also as we always say we have to have have somebody that could you do with the money and we think we do right, which is to buy more MSR with that money in February of course, we did that right away today, we're looking for we're pools.

Speaker Change: To buy that fit our criteria, but.

Speaker Change: With the round point acquisition the earnings that we make on new MSR purchases.

Speaker Change: Are greater than the existing MSR that we have in our portfolio because the the marginal cost of service goes down with the more loans that we have on the platform and so it's a really very powerful.

There between current and total return and time to record. Yeah, that's a good question. It's one that we talk about frequently when we're making these decisions. You know, I'd say, generically, you know, we're thinking about months, right, in terms of seeing the relative value opportunity play out over time. It's certainly not days.

Speaker Change: Set of Oh mass.

Speaker Change: I want to take that money and invest and invest in new MSR, where we are the servicer and we get the benefits of economies of scale that we thought that paying a slight dilution today.

We're thinking about longer timescales than that, and we generally expect them to occur less than a year. So, you know, I'd say the timescale is generally a few months. The other thing I just want to mention about the return potential calculation is, as I'm sure you guys know, there are a lot of technicalities in our market and how people look at things. You know, we tend to look at things, our spreads, we look at them versus the entire curve rather than just looking at things versus a blend of, for example, the 510 part of the curve. The curve is inverted, so if you do run mortgages against the whole curve, you tend to get tighter spreads than you do if you just look at something versus the, you know, longer end of the curve.

Speaker Change: Well worth it for those reasons.

Speaker Change: Got it thank you and then.

There was some repurchase of depressed as well.

Speaker Change: Is that just an arbitrage when you see the implied yield on the press approaching the yield on the common you'll step in or how should we think about that what drove it because it seemed like it was across all three of the press.

Speaker Change: [noise].

Speaker Change: Hey, yes.

Speaker Change: Yes, so as you know we've.

Speaker Change: For the last for a long time, we've been managing our capital structure.

Speaker Change: And we do consistently constantly evaluate where our perhaps were trading relative to our assets and where that arbitrage wise and I think and as you guys know from prior times whenever we have.

I think that also is a factor that plays into how we look at things versus others, and of course, it just depends on the leverage people assume also. I mean, that's a big factor as to, you know, how those numbers get determined. But, you know, it's really, as I said, a moment in time.

Speaker Change: Then seeking all else vehicle to reduce our share perhaps.

Speaker Change: As.

Speaker Change: Some of our total.

Speaker Change: As a percentage of our total shareholder equity so.

I think last quarter, they did align and.

And, you know, it is something that will move around, as you know. Thank you. Thank you. The next question today is coming from Trevor Cranston from J&P Securities. Your line is now live. Hey, thanks. Good morning.

Speaker Change: Perhaps if we did we did buy back a little over 200 to 200000 shares or perhaps.

Speaker Change: Which is their activity will continue to do should they traded at an attractive level as you said relative to where our investments are.

Got it okay. That's it for me guys. Thank you.

Thanks, Rick.

Another question on the return potential slide. You guys have been earning a pretty decent amount of float income on the MSR portfolio. Um, when we look at the forward return projections on site 14, do they incorporate, you know, the impact of lower forward fed funds on the float income component of the MSR and also funding expenses? And I guess, generally, if you guys can just comment on kind of how you think about the impact of lower Fed funds being on the portfolio as a whole. Yeah, good morning.

Speaker Change: Thank you. Your next question is coming from Eric <unk> from Citi. Your line is now live.

Speaker Change: Thanks.

Eric Hagen: The question I have is more on the spread tightening that happened in the fourth quarter I believe that you typically have your portfolio to benefit from spread tightening why why did the book value not benefit from the spread tightening that happened in November and December.

Speaker Change: Well I mean it did.

Speaker Change: If you.

Speaker Change: If you look at the progression of.

Speaker Change: Of our quarter.

Speaker Change: At our last quarterly call, which I think was right at the end of October beginning of November we reported.

Speaker Change: Approximate.

Speaker Change: Book value declined about 6% at that time, and yet we ended up the quarter and up two so.

Thanks. Thanks for the question. So yes, the the downward sloping curve is incorporated into the float earnings of the MSR asset. And of course, the entire subject to float is one that we actively hedge the interest rate risk of, right so that you know I wouldn't say that that we experienced a windfall when rates rose and we won't experience um you know a large decline um in in book value when when and if rates fall because we're hedging that exposure, right. And so that is also the answer to the question of what happens to our portfolio if the Fed cuts and if funding rates or short-term rates fall, right, is that because our portfolio is hedged across the curve, right, and as a result, our portfolio returns and how that slide of the return potential is really constructed depends really on the spread, right, between the asset and the, I'll say longer-term rates, but outstanding what Nick just said about not being one point on the curve, right, it's true of every point that we hedge on the curve, but that's a complexity.

Speaker Change: There wasn't material reversal in <unk>.

Speaker Change: There are things in the quarter such as.

Speaker Change: Such as our ATM issuance and other things that did.

Speaker Change: That did.

Impact our tiara and it would've been higher for example, if we haven't done that but.

Speaker Change: We did as mentioned in the comments we did decide.

Speaker Change: I think prudently at the time to sell some mortgages in October as well.

Speaker Change: Book value was declining.

And.

Speaker Change: And then we did immediately in November when there was a sentiment change start buying them back, but when you engage in that kind of activity that does tend to impact the book value.

Mind, you if you look at if you look at our our risks at the end of last quarter.

Speaker Change: We we had something like a <unk>.

Speaker Change: Average return.

Speaker Change: Okay.

Speaker Change: Nothing like.

Speaker Change: Okay.

Yes, 6%.

Speaker Change: Positive book value for a 25 basis point tightening in mortgages and.

Speaker Change: Which is not the same as some of our peers that are just more purely an agency spread play as we've discussed our capital structure, where we have <unk>.

38% of our capital in mortgages in the majority of and hedge the MSR is going to not give us the same amount of.

It's the spread of the asset relative to the risk-free curve that matters and not the funding rate itself, and so I'd say to zeroth order that it's hedged, and if you want to talk about it more completely, I think the returns would go down slightly because of the risk-free rate that's earned on the equity. But the, you know, the, to your base question. Those calculations all assume that the forward curve is known.

Volatility and exposure to mortgage spreads in both directions right in the third quarter of last year, we passed we outperformed our peers.

Speaker Change: When mortgage spreads widened in the prior quarter was the opposite and Thats why construction.

Speaker Change: It is why youre not going to see the same kind of numbers on a us generally speaking.

Speaker Change: Compared to some of our other peers, where you have mortgages spreads let me Brad.

Brad: Yeah, Hi, I just had a couple of comments.

Brad: I think as Nick said, the salient point, which is that our capital structure, our asset allocation, rather I only has 38% of our of our assets allocates Rvs. So a pure agency strategy has got a returned 10% in a quarter like this we only have 38% of that so it's gonna be high 3% sort of number and then there's other things on top of the top of that.

So those are all embedded in the calculation. Right, okay, that makes sense, um... And then Bill, you talked about some of the opportunities for growth in the subservicing business, in particular. I was wondering if you could maybe expand a little bit on that and talk about sort of how you see the magnitude of potential growth on the sub-servicing side of things, specifically. Yeah, sure. Well, as I said in my remarks, the interesting thing that's happened in the servicing market over the last year or two is that rates have risen so much in the mortgage universe, as has been well described by us and others, has an average dollar price of 80 and is, you know, more than 300 basis points out of the money.

Brad: Of how people hedge or or or various other things that go.

Go into impacting that but the point is that that our portfolio.

Brad: Is by choice meant to emphasize maybe over emphasize the MSR part of the portfolio was 62% of our capital structure and we think the round point acquisition is going to be able to add even more revenue to that part of the strategy right and then the RBS, which is 38% right serves to hedge the inch.

Brad: First rate risk in the mortgage risk of the MSR portfolio and also to provide his store of liquidity.

Brad: For rainy days and so forth, but the result of that is that we did we just have less exposure to mortgage spreads than portfolios without agency MSR.

And so the risk characteristics of the asset are something that hasn't really been seen before, right? You see it a little bit in the chart that Nick talked about in his presentation where we showed the relative S-curves of the portfolio on page, what page was that again? Whatever, where we show that if rates fall 200 basis points, page 10, that the prepayments on our portfolios aren't expected to increase very much. It has very low prepayment sensitivity, it has very low convexity, right?

Brad: Without agency MSR and we like that.

Brad: And Thats the strategy that we're pursuing them and we think it's really good.

Speaker Change: Okay, Yeah, and then on the.

Direct to consumer build out it sounds like you're doing that organically versus going out to acquire something you know what what's that's benefiting of doing that.

Versus going to buy something that's existing and then would you be.

Speaker Change: In addition to protecting the MSR would you be marketing outside of your existing servicing mortgages are or would it be kind of just more.

And so it's just a risk profile that's not been seen before, and as a result, we're seeing lots of interest from market participants who are not the usual cast of characters that are buying MSRs. And there are lots of structures that have been created in the marketplace in order to help those non-traditional market participants invest in the MSR market. And, you know, I think there are lots of reasons why we are the best subservicing partner for those new investors, chief among them being that we have $200 billion of our own servicing that is at Roundpoint, and we will be subject to the exact same results of the subservicing platform Roundpoint as any third-party clients that we bring in, too. And I like to say that we are managing subservicing for MSR investors by MSR investors, There are other reasons as well.

Specifically targeted at your own them at your own book.

Speaker Change: Yeah, you know the benefits of of building versus buying or the same as if there's any kind of decision like that is saying that about.

Speaker Change: Oh about remodeling your house, rather than buying an existing one is where you get the thing that you want right and with with this environment and lots of lots of other <unk>.

Speaker Change: Structures out there are companies out there that are upside down on costs are built for a different environment or or have legacy risks of some kind.

We don't want to be involved in any of that we're going to build the platform that we want.

Speaker Change: That's that's perfectly suited for our needs right and I don't feel like we are stressed for time here because of where the.

Speaker Change: The gross WAC use of our portfolio and the current outlook of rates were just miles and miles away from being able to refinance and so we have the time and so I can take forever to build this thing as I said, it's going to be just measured in months not years and so we at the time, we need to build exactly what we want.

You know, we're a well-capitalized institution, which provides the wherewithal to invest and invest in infrastructure and deal with any market uncertainties that occur then too. So I think for all those reasons, this is one area that we're going to focus on as being able to grow our subservicing business from that perspective.

Speaker Change: We're gonna have no legacy issues or risks right and we're going to focus on on recapture on our portfolio. That's the main thing of what we're doing here you asked whether we're going to go out and try to market to the whole world.

Speaker Change: And so forth, that's really a very different business model than what we have in mind, we're really focused on portfolio defensively recapture of our portfolio.

Okay, that's helpful. Thank you. Thank you. Next question is coming from Eric Hagen from BTIG. Hey, thanks. Good morning, guys. Hey, how do you feel like you control for recapture in the MSR without an origination platform? And how secure do you feel like that is?

Speaker Change: Okay got it that's sounds better since the alternative would be pretty expensive I'd imagine, but alright. Thank you.

Speaker Change: Yes exactly.

Speaker Change: Great. Thanks, very much Andrew.

Speaker Change: Thank you we reached the end of our question and answer session I would like to turn the floor back over for any further or closing comments.

And do you have an estimate for how much MSR you might need to buy if mortgage rates were, you know, like 50 or 75 basis points lower than they are today? I'm not sure I understood the second question, but the answer to the first question is that we have, as we said in our prepared remarks, hired an experienced professional to begin the build-out of a recapture or portfolio defense strategy in order to provide that not only to our own portfolio but also to any third-party clients that we have. That process is ongoing, we're hiring people, we're filling roles, and as we said in the prepared remarks, we expect to be able to make loans in Q2. Again, looking at page 10 and looking at how far out of the money our servicing portfolio is, we feel like we have time; there's no particular urgency to this, although we are certainly acting with due haste in order to build it as quickly but as prudently as we can. And again, the main point here is we're not going to be a retail originator; we're not going to be someone who's going to compete with the largest guys out there in the world.

Speaker Change: Just want to thank everyone for joining us today and thank you as always for your interest in two harbors.

Speaker Change: Thank you that does conclude today's teleconference. Webcast. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.

Yeah.

The point of this thing is really to protect our servicing portfolio, defend our portfolio, and perform recapture on our portfolio, and we're really excited about the opportunity and the ability to be able to build this thing from scratch. Eric, if I could just build on, this is Nick. I just want to build on what Bill said, and I think about your second question, which I also didn't fully understand, but, you know, as that slide shows that Bill refers to on page 10, RMSR is very far in the money, and speed, even with a reasonable rally, is going to stay slow. So, you know, we're not as though we're going to, and it would be very, very surprising if we were to see a rapid amortization on our MSR as it is.

So, you know, we are, as we also said in our prepared comments, we really like the carry strategy, as you know, we like it right now, it looks great in terms of return potential. So, you know, our intention is, you know, new capital as we have to keep adding to it, but we don't really see, you know, paid out being a big issue for the near future. Okay, yep, thanks for fleshing that out. You guys talked about a neutral leverage position, but if you do see growth opportunities in the MSR, is there room for that to change, and what are the parameters for it to change? And especially if the Fed cuts rates, I mean, do you feel like you would still run with this level of leverage and how much? You know, the flexibility you feel like you have there. It's a subculture.

In terms of leverage, yes, definitely, we are running in what we think is neutral territory. As we said, again, in our prepared remarks, spreads are at the tight end of recent ranges, and we think they price in a lot of what the market expects the Fed to do, perhaps too much. But there's still a ball of events ahead of us, and we think spreads are kind of two-sided right now. So, look, lots of things can change this year. We have a year coming up with a big election coming up that could have a lot of ramifications and geopolitical tensions and other things.

So, we're going to just see where the market takes us and what makes the most sense. But for the near future, we kind of see ourselves as being in this kind of leveraged position.

All right. Thank you, guys. Thank you, sir.

Thank you. The next question is coming from Kenneth Lee from RBC Capital Markets. Your line is now live. Hey, good morning.

Thanks for taking my question. Um, in terms of the IXM that you report in the quarter, I wonder if you could just further expand upon the portfolio activity that you mentioned, the prepared remarks that potentially impacted IXM in the quarter. Thanks.

So, as discussed here, we did go down a coupon rate, which was a factor that took our IXM down for the quarter as well as, as we mentioned, we did sell some mortgages when things widened out in October, which we felt was prudent just given the environment at the time. And as you'll know from our prior calls, we talked about the fact that going into last quarter, the market was different than it was the prior year; we did feel like there was, you know, money managers had already expressed a pretty big overweight in the market. And there were still, you know, fall events ahead of us.

So, you know, we decided in that time slice to reduce our exposure to mortgages, and that's, you know, as mentioned in the comments that Mary made, we did have reduced balances in the portfolio for a period of time and a little lower leverage. All of those things did impact our IXF for the quarter, but as discussed, we did buy back some mortgages, bring back our leverage, and we have also gone back up in coupon since the end of the quarter. So all of those things, you know, for this quarter, we think will have a positive effect in that direction. I might just add a couple more thoughts if I can, which is, you know, even without portfolio activity, there is natural variation in the backward-looking IXM that occurs just from the timing of cash flows.

You know, MSR is not a bond. It doesn't pay a fixed coupon every month, right? Some people pay their mortgage payment, and therefore, they're servicing on the 31st of the month, and therefore, they don't have to pay any for the next month, or sometimes they pay it on the 1st and then the 30th, so there are two in one month versus another.

There's all kinds of interesting timing of cash flows on the MSR asset that occur, right? And also, of course, we know that the IXM, the backward-looking IXM, also reflects actual prepayment speeds. So if prepayment speeds come in slower than we thought or slower than projected, that will be a benefit. If they come in faster than expected, that would be a downer, and so forth.

So even without any portfolio activity, there's natural variation. You know, at the quarter end, we think, you know, all of that being considered, you know, taking into consideration, you know, the forward-looking projection on slide 15 is a good estimate of what we think the portfolio will earn, and as Nick said earlier, that snapshot at the end of the quarter is actually lower than it would be if we ran today by a couple hundred basis points, probably. And so, given all that and how that corresponds to the dividend, we feel pretty good. Gotcha, gotcha. Very helpful people there. And just one follow-up on the potential expansion of the round point, the DTC channel. I was wondering how we should think about the potential need for investment or spending along with those efforts.

Thanks. Yeah, we think that the capital investment for that activity will be pretty low. You know, the intent is not for us to originate these loans and necessarily hold them all right; we will, we will do what is normally done with these sorts of things, which will originate the loans and sell them directly to the agencies, right, and we'll keep the servicing for ourselves, of course, and the idea is that this is just going to replace the servicing that otherwise would have run off, right, and would have disappeared. And the benefit of having it in-house and having the reCAPTCHA thing is that we can keep the servicing; we can keep the loans on the Round Point platform rather than having them refinance away.

So that's the whole idea of what we're trying to do with this Direct-to-Consumer channel. Gotcha. Very helpful there. Thanks again.

Yeah, thank you. Thank you. The next question is coming from Bose George from KBW. Your line is now live. Good morning.

Actually, could we get an update on your book value court date? Yeah, as of the close of Friday, we think that book value is up between 1 and 1.5%. Okay, great. Thanks. And then, you know, the range in your target sort of IXM, what takes you to the high end versus the low end? Is that a lot of prepayment expectations? Or just curious, what kind of drive.

Hey Bose, this is Nick. Thank you for the question. We have, you know, various factors that go into that range. Among them would be our, you know, prepayment assumptions, as well as, you know, some of our funding assumptions. And those are the things that are our primary drivers of that range. Okay.

And then just in terms of where that number is in each quarter, did Bill, did you say it's going to back up a couple of hundred basis points? Yeah, again, as Nick and I both said, it moves around with the portfolio and so forth, but I'd say given our current coupon distribution and so forth, yeah, that's about the right magnitude. On the security side of the portfolio, not on the combined thing. If you look at the RMBS part, which is 10 to 11, that's probably 200 basis points higher given our portfolio right now, but not overall. Okay, and the overall, how could you characterize how much the overall is? I multiply by the relative capital allocations of that, so that'd be 38% times the 200.

Okay. Okay, great. Thanks.

Your next question is coming from Rick Shane from J.P. Morgan. Your line is open. Thanks, guys, for taking my questions this morning. I just wanted to talk a little bit about the use of the ATM during the quarter. I'm curious if this is going to be something we should expect going forward more aggressively. When we do the math, it looks like you did the offering a little bit below $14 per share. And even on a sort of mark-to-market basis, if we go back to your comments last quarter at this time about where book value was intra-quarter, it looks like the offerings were dilutive to book. Modestly, could you talk about the rationale for that?

Yeah, sure. Thanks, Rick. I think that's correct. We also saw them as modestly dilutive to the book.

The rationale is the same as what we said when we raised capital in February of 2023. We think, at its most sort of mechanical level, that even at a slight discount to book, the dilution of the expenses means that the return on the investment of that dilution is still quite high, certainly higher than our cost of capital. It's in the, I'd say, mid-double digits.

By that, I mean 30%, 40%, somewhere in those sorts of numbers. And also, as we always say, we have to have something good to do with the money, and we think we do, which is to buy more MSR with that money. In February, of course, we did that right away. Today, we're looking for pools to buy that fit our criteria.

But with the round point acquisition, the earnings that we make on new MSR purchases are greater than the existing MSRs that we have in our portfolio because the marginal cost of service goes down with the more loans that we have on the platform. And so it's a really, very powerful set of math in order to take that money and invest in new MSRs where we are the servicer, and we get the benefits of economies of scale so we think that paying a slight dilution today was well worth it for those reasons. Thank you. I got it.

And then there was some repurchase of the preferred shares as well. Is that just an arbitrage when you see the implied yield on the press approaching the yield on the common you'll step in, or how should we think about that? What drove it?

Because it seemed like it was across all three of the press. Hey, yeah, so as you know, we've, for the last, you know, for a long time, we've been managing our capital structure. And we do consistently, constantly evaluate where our profits are trading relative to our assets and where that arbitrage lies. And I think, and as you guys know, from prior times, you know, we have been seeking, all else being equal, to reduce our share of PREPS as a percentage of our total shareholder equity. So those things last quarter did indeed align.

And the PREPS, we did buy back a little over 200,000 shares of PREPS, which is an activity we'll continue to do should they trade at an attractive level, as you said, relative to where our investments are. Okay, that's it for me, guys, thank you. Thanks, Eric. Thank you. Our next question is from Arren Cyganovich from City, Your Line is Now Live.

Thanks. The question I have is more on the spread tightening that happened in the fourth quarter. I believe that you typically have your portfolio to benefit from spread tightening. Why did the book value go up? Aaron, well, I mean, it did.

If you, you know, the progression of our T.E.R. of the quarter at our last quarterly call, which I think was right at the end of October, beginning of November, you know, we reported an approximate book value decline of about 6% at that time. And yet, you know, we ended up a quarter at up two.

So there was a material reversal, and, you know, there were things in the quarter such as our ATM issuance and other things that did impact our P.E.R. I know it would have been higher, for example, if we hadn't done that. But, you know, as mentioned in the comments, we did, I think prudently at the time, to sell some mortgages in October as, you know, as the book value was declining. And then we did immediately, in November, when there was a sentiment change, start buying them back. But, you know, when you engage in that kind of activity, it does tend to impact your book value.

Now, mind you, if you look at if you look at our our risks at the end of last quarter, you know, we we had something like an average mortgage, something like, you know, six percent, a positive book value for a 25 basis point tightening in mortgages and you know which is not the same as some of our peers that are just more purely an agency spread play as we've discussed you know our capital structure where we have 38 percent of our capital in mortgages and the majority in in hedged MSR is going to not give us the same amount of volatility and exposure to mortgage spreads in both directions right in the third quarter of last year we vastly outperformed our peers when mortgage spreads widened and this prior quarter was the opposite and that's by construction and it's it is why you're not going to see the same kind of numbers out of us generally speaking compared to some of our other peers when you have mortgages spreads as they move around. Yeah I said I said a couple comments you know I think Nick said the salient point which is that our capital structure our asset allocation rather it only has 38 percent of our of our assets allocated to RMB so if a pure agency strategy is going to return 10 percent in the quarter like this you know we only have 38 percent of that so it's going to be high three percent sort of number and then there's other things on top of that in terms of how people hedge or or or various other things that that go go into impacting that but the point is that that you know our portfolio is by choice meant to emphasize maybe overemphasize the MSR part of the portfolio 62 percent of our capital structure and we think the round point acquisition is going to be able to add even more revenue to that part of the strategy right and then the RMBS which is 38 percent right serves to hedge the interest rate risk and the mortgage risk of the MSR portfolio and also to provide a store of liquidity for rainy days and so forth but the result of that is that we just have less exposure to mortgage spreads than portfolios without agency MSR without agency MSR and we like that and that's the strategy that we're pursuing and we think it's really good. Yeah, and then on the direct-to-consumer build-out, sounds like you're doing that organically, are going to cover A part of my career, which starts right now, doing that. Bye. Thanks. Would you be?

in addition to protecting the MSR, marketing outside of your existing, servicing mortgages or... You know, the benefits of building versus buying are the same as any kind of decision like that. It's the same as, you know, about remodeling your house rather than buying an existing one. It's where you get the thing that you want, right? And you know, with this environment and lots of other structures out there or companies out there that are upside down on costs or built for a different environment or have legacy risks of some kind, we don't want to be involved in any of that.

We're going to build the platform that we want, that's perfectly suited for our needs, right? And I don't feel like we are stressed for time here because of where the gross imbalance is of our portfolio and the current outlook for rates. We're just miles and miles away from being able to refinance.

And so we have time. It's not going to take forever to build this thing, as I said, it's going to be just, you know, measured in months, right? Not years.

And so we have time, we're going to build exactly what we want, we're going to have no legacy issues or risks, right? And we're going to focus on recapture in our portfolio. That's the main thing about what we're doing here. You asked whether we're going to go out and try to market it to the whole world and so forth. That's really a very different business model than what we have in mind. We're really focused on portfolio defense and recapture of our portfolio.

Got it, yeah, that sounds better, the alternative. All right. Yeah.

Operator: Thanks very much, Aaron. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further questions. I just want to thank everyone for joining us today and, as always, for your interest in Two Harbors. Thank you. That does conclude today's teleconference webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.