Q1 2025 Two Harbors Investment Corp Earnings Call
Please standby.
Cynthia: Good morning, My name is Cynthia and I will be your conference facilitator at this time I would like to welcome everyone to choose first quarter 'twenty 25 earnings call all participants will be in a listen only mode.
Cynthia: After the Speakers' remarks, there'll be a question and answer period.
Maggie Karr: I would now like to turn over the call to Maggie Karr. Please go ahead.
Speaker Change: Good morning, everyone and welcome to our call to discuss <unk> first quarter 'twenty 25 financial results with me on the call. This morning are Bill Greenberg, President and Chief Executive Officer.
Speaker Change: <unk>, our chief investment Officer.
Maggie Karr: The long our Chief financial Officer.
Maggie Karr: 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 too I envy dotcom.
Maggie Karr: In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures.
Maggie Karr: Thank you to review this information in conjunction with today's call.
Maggie Karr: As a reminder, our comments today will include forward looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations.
Maggie Karr: As I described on page two of the presentation and in our Form 10-K, and subsequent reports filed with the SEC.
Maggie Karr: Except as may be required by law to does not update forward looking statements and disclaims any obligations to do so I will now turn the call over to Paul.
Paul: Thank you Becky.
Paul: Good morning, everyone and welcome to our first quarter earnings call.
Paul: Please turn to slide three.
Paul: We generated a total economic return of four 4% for the first quarter with both our M. P S and MSR contributing positively to the results.
Paul: Brought the changed macroeconomic environment of the first quarter, we kept our risk exposures law, which proved to be prudent.
Paul: Well overall spreads have widened in the second quarter. They have been variable day today, and we get actively manage the portfolio and they're risk taking advantage of any market dislocations and attractive return opportunities.
Paul: Please turn to slide four.
Paul: Interest rates across the U S treasury yield curve in the first quarter lower than at 2020 for year end.
Paul: Two year and 10 year notes, both decreasing by 36 basis points to finish at 388% and 4.21% respectively as seen in figure one.
Paul: But once again held rates unchanged at their March 19th meeting.
Paul: Lower real GDP growth expectations for this year from two 1% to one 7% while core P. C. He was revised up from two 5% to $2 eight per cent Jacobs Chairman Powell acknowledged we're related to potential changes in trade policies.
Paul: At the end of March the market's expectations for cuts for the remainder of 2025 moved from 50 to 75 basis points as you can see in figure two.
Paul: However, subsequent data unemployment inflation and most everything else has largely been overshadowed by growing economic uncertainty driven by proposals from the administration on tariffs trade policy and the composition of the fed and its reaction function.
Paul: Instability in U S policy has for the first time raised questions about the status of the dollar as the world's reserve currency.
Paul: We are carefully watching developments unfold.
Paul: Please turn to slide five.
Paul: Our focus at round point this year is five schools.
Paul: First to bring our direct to consumer originations platform fleets of scale with widespread brand recognition.
Paul: Second to increase the velocity and depth of our offerings of second liens, where borrowers producing additional revenue.
Paul: Third to evaluate opportunities and adapt as the mortgage finance landscape evolves. This includes diversifying our portfolio by potentially participating in the Ginnie Mae market.
Paul: Well as exploring possibilities in the non agency sectors.
Paul: As a full service mortgage servicer and originator to grow our presence in third party sub servicing.
Paul: And fifth and finally to continue to generate additional cost efficiencies in servicing primarily through the use of technology and AI applications.
Paul: As I just described we view the round one platform as an expansion of our opportunity set providing additional benefits for our shareholders.
Paul: Allowing us to impact our results through our own actions in ways that portfolios without operating platforms cannot.
Paul: Two we have thoughtfully and intentionally built to the investment portfolio with MSR at its core.
Paul: It's designed to deliver attractive risk adjusted returns across a variety of market environments.
Paul: The investment into allows our shareholders to benefit from our team has deep expertise and experience in managing and hedging portfolios of MSR and mortgage backed securities.
Paul: I'm very excited about the opportunities ahead for two.
Paul: That I'd like to hand, the call over to William to discuss our financial results. Thank you Bill.
Paul: Please turn to slide six our book value increased to $14.66 per share at March 31.
Paul: Compared to $14 47.
Paul: 31 <unk>.
Paul: Including the 45.
Paul: This resulted in a positive four 4% quarterly economic return.
Paul: Please turn to slide seven.
Paul: The company generated comprehensive income of $64 9 million or <unk> 62 cents for weighted average common share.
Paul: First quarter.
Paul: We've slightly amended the chart on this slide.
Paul: How we think about changes in values for the assets and the hedges together rather than in isolation.
Paul: That's interest and servicing income, which is the sum of GAAP net interest expense.
Paul: Servicing income before operating costs was higher in the first quarter or two.
Paul: $2 million.
Paul: Driven by portfolio shifts into higher coupon agency MBS.
Paul: We're borrowing rates.
Paul: We offset by lower float income due to seasonality and lower rates and lower servicing fee income from MSR portfolio runoff.
Paul: The next column Mark to market gains and losses represents the sum of investment securities gains and change in OCI that swap and other derivative losses and servicing asset losses.
Paul: The duration of our O M P S and MSR assets was hedged.
Paul: That's long TBA positions and vacations MSR by net short futures, a payer swaps indications yes.
Paul: $38 4 million dollar difference quarter over quarter was driven primarily by unrealized gains on our MBS TBA positions offset by MSR portfolio runoff.
Paul: Mark to market losses on swaps and futures.
Paul: Operating expenses increased due primarily to higher noncash equity compensation expenses, which typically occur in the first quarter.
Paul: You can see the individual components of net interest and servicing income and mark to market gains and losses on the appendix slide 21.
Paul: Please turn to slide eight.
Paul: Our MBS funding markets remains stable and available throughout the quarter.
Paul: Repurchase spreads normalizing into a tighter historical contacts at <unk>.
Paul: Sofa plus around 20 basis.
Paul: It's a quarter at a weighted average days to maturity for agency MBS repo was 68 days.
Paul: To date in the second quarter repo liquidity Jean rainstorm.
Speaker Change: Sure no disruptions to our financings.
Paul: We shouldn't that sort of M. A S R.
Paul: Our asset and related servicing advance obligations across five lenders.
Paul: $7 billion.
Paul: Outstanding borrowings under bilateral facility.
Paul: We ended the quarter with a total of $950 million in unused MSR assets financing capacity and $47 million unused capacity for service passes.
Nick: I will now turn the call over to Nick.
Nick: Thank you William.
Nick: Our portfolio performed well in the first quarter with both components of our strategy contributing to the positive return at.
Nick: At year end, we commented that mortgage spread volatility would decline and that indeed was the case in Q1, helping to drive our positive hedged our MBS return.
Nick: Our MSR performance was bolstered not only by slower than expected speed, but also a slight tightening of spreads indicative of demand for the asset.
Nick: Jumping back into the deck, please turn to slide nine our.
Nick: Our portfolio at March 31 was $14 6 billion, including $11 6 billion unsettled positions and 3 billion in T V. A S R.
Nick: Our economic debt to equity decreased to six two times.
Nick: Manage our exposure to rates across the curve very closely in the first quarter, we lowered our risk to mortgage spreads and interest rates as you can see in figures two and three.
Nick: At quarter end, we had substantially less risk than when we started the quarter.
Nick: Overall, we decreased our mortgage exposure by 30% and reduced our leverage you can see more detail on our risk exposures in the appendix slide 18.
Nick: Please turn to slide 10.
Nick: Performance of agency MBS Securities was net positive over the quarter RMB.
Nick: M. B S outperformed interest rate hedges in January and February, but underperformed in March as equities and fixed income spread products weakened.
Nick: Performance across the RMB S coupon stack was uneven with higher coupons, both in TBA and specified pools outperforming longer duration lower coupons.
Nick: As you can see in figure one our preferred implied volatility gauge to your options on 10 year rates decreased modestly from 101 to 98 basis points on an annualized basis.
Nick: Both nominal spread in OAS tightened slightly in these metrics as well as the two year tenure implied volatility finished the quarter close to their six and 12 month averages.
Nick: As has been the case nominal spreads and volatility remained well above longer term averages, but option adjusted spreads are close to their long term average for this reason we continue to believe the volatility will need to decline for our MBS spreads materially types of treasuries.
Nick: Of course, we have seen the opposite is implied and realized volatility has increased in the second quarter given the uncertainty around the macroeconomic outlook.
Nick: Reds for agency MBS have widened and spread volatility itself has increased the preelection levels.
Nick: Please turn to slide 11 to review our agency MBS portfolio.
Nick: Figure one shows the performance of TBA as compared to the specified pools, we own throughout this quarter.
Nick: Both steepening of the swap curve plus strong levels of CMO issuance, what's the outperformance of higher coupon MBS.
Nick: In terms of coupon stack activity, we started the quarter with it up in coupon bias swap progressively lowering our risk throughout the quarter.
Nick: We reduced our exposure in 3% to 4.5% seasoned specified pools by approximately $730 million and simultaneously added about $1 7 billion of six 5% specified pools work.
Nick: Our net TBA position.
Nick: To maintain our MSR current coupon hedging we moved our MSR duration related TBA position down in coupon by selling <unk> and buying fives.
Nick: Primary mortgage rates hovered around 7% for most of the quarter.
Nick: With the winter seasonal that play premium prepayment activity was muted.
Nick: Overall prepayment rates for the 30 year agency MBS universe decreased by one four percentage points quarter over quarter to five 6% CPR.
Nick: Figure two on the bottom right shows our specified or prepayment speeds by coupon.
Nick: The decline in speeds quarter over quarter came from higher coupon slowing down.
Nick: Please turn to slide 12, as we discussed the market for investing in MSR.
Nick: The MSR market remains well supported given the high demand for the asset class and limited bulk acquisition opportunities.
Nick: As you can see in figure one transfer volume appears to have normalized pre COVID-19 levels.
Nick: Borrowers remain as locked in is ever happy with their low rates.
Nick: The current mortgage rate around 675% less than 1% of the <unk> of our portfolio has 50 basis points or more of a rate incentive to refinance.
Nick: As you can see in figure two prepays have remained low and steady and below our projections, but the majority of our portfolio with only five and above slightly increasing.
Nick: The slow and steady nature of realized prepayments speeds. However, the lives of very interesting characteristic of the structure of the market and the nature of lock it.
Nick: In particular looking at the Blue line, we do not see prepayment speeds asymptotically approaching some base turnover level of payoffs.
Nick: Historical 12 month prepayment rates for two and a haves or faster than produced by about 1.2, CPR and faster for three of them for two and a half by about one five CPR.
Nick: This shows that even for mortgages that are very deeply out of the money theres still rate sensitivity to the prepayment function.
Nick: This has pricing implications for low coupon MSR and explains why the lowest note rate MSR has been able to trade at historically high multiples.
Nick: Please turn to slide 13, where I'll discuss our MSR portfolio bigger.
Nick: Bigger one as an overview of the portfolio quarter end further details of which can be found in the appendix slide 24.
Nick: In April we committed to purchase $1 7 billion UPC of MSR through two bulk purchases, which are expected to settle in the second quarter.
Nick: Price multiple of our MSR was unchanged quarter over quarter at five nine times and 60, plus day delinquencies remain low at under 1%.
Nick: Figure to compare CPR is across those implied security coupons and our portfolio of MSR versus TBA is.
Nick: Prepayment speed of our MSR portfolio was 4.2, CPR for the first quarter down 7% quarter over quarter.
Nick: Please turn to slide 14, our return potential and outlook slide.
Nick: As you can see on this slide the top half of this table is meant to show what returns. We believe are available on the assets in our portfolio we.
Nick: We estimate that about 65% of our capital is allocated to servicing with a static return potential of 12% to 14%.
Nick: The remaining capital is allocated to securities with a static return estimate of 10% to 15%.
Nick: With our portfolio allocation as shown on the top half of the table and after expenses.
Nick: Attic return estimate for our portfolio is between eight 7% to 12, 3% before applying any capital structure leverage to the portfolio.
Nick: After giving effect to our outstanding convertible notes and preferred stock we believe that the potential static return on common equity was in the range of nine 1% to 14, 7% or perspective quarterly static return per share of <unk> 33 to 54 so.
Nick: Remember these numbers reflect our portfolio and spreads at quarter end.
Nick: It would be higher today, given that spreads are wider.
Nick: We made a small update to this table this quarter by expanding the factors that we vary in determining the range of prospective static returns per basic common share.
Nick: <unk>, we had determined the range by varying prepayment rates and funding rates.
Nick: Day. In addition, we have chosen to very portfolio leverage rather than only using the spot value keeping in mind that this slide is meant to be a medium term estimate of return potential.
Nick: Post quarter end dramatic shifts on tariff policies have triggered speculation on broad global asset allocation shifts away from dollar based assets and heightened concerns about the effects of stagflation on fed policy.
Predictably equity and fixed income volatility have spiked.
Nick: Since April 2nd the 10 year Treasury yield has traded in a whopping 70 basis point range and the yield curve between two and 10 year treasuries has steepened by about 20 basis points.
Nick: Wap spreads also fell precipitously to all time tight before widening back.
Nick: While recent talk of tariff walk box have to some degree calmed the markets there.
Nick: Still remains a large amount of economic uncertainty all but guarantee continued bumpy road ahead.
Nick: But from dislocation there is also opportunity.
Nick: Volatility will continue to be a headwind, we manage our portfolio for the long term.
Nick: Being mindful of the current environment, we are keeping our portfolio leverage and risk at muted levels until there is more clarity on the economic path forward.
Nick: However, we continue to see attractive Levered returns on agency MBS and our portfolio of low weighted average mortgage rate MSR should continue to generate stable cash flows over a wide range of interest rate scenarios.
Nick: Thank you very much for joining us today and now we'd be happy to take any questions you might have.
Nick: Thank you.
Nick: Like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow the signal to reach our equipment again press star one to ask a question. Please.
We will take our first question from Doug Harter with UBS.
Doug Harter: Oh, Thanks, just given the volatility can you give us an update on on book value.
Doug Harter: Through April and then also are you know any changes you might have made in our portfolio too.
Doug Harter: To sort of adjust for the current environment.
Doug Harter: Yeah.
Doug Harter: Yeah sure good morning, Doug Thanks for the question.
Doug Harter: As you know it's been quite a volatile April with all the activity Thats happened Nick mentioned some of those in his prepared remarks.
Doug Harter: Rate volatility spread volte, and so forth, but I think we've been able to to manage that pretty well and so that through last Friday, we were down about three 5% I'll, let Nick take the portion of the bridge to change the portfolio.
Speaker Change: Hey, Doug Thank you for the question.
Speaker Change: We have modulate the portfolio since the beginning of April as again in my prepared remarks, you know, we did take our risk down.
Speaker Change: By the end of the first quarter and we actually lowered it even further.
Speaker Change: Into early April just with some of the news coming out it seemed to us that there that we were in for about a greater amounts of volatility and some weakness in assets.
Speaker Change: But since we have actually raised it a little bit from where we were you know where you know we ended the quarter.
Speaker Change: You know in around six two debt to equity you know, we got as low as some of the in the low fives and we're now back up you know approaching six again.
Speaker Change: You know that's really been a function of seeing the developments and some of the you know some of the actions coming out of.
Speaker Change: D C.
Speaker Change: And are you know around the markets you know there has been a little bit of a de escalation in our opinion in terms of the rhetoric and clear recognition that <unk>.
Speaker Change: Some of the actions that have been proposed have had a dysregulation or effect on the market, especially the bond market and you know we take it we take it.
Speaker Change: So hard that some of that has you know.
Speaker Change: As has calmed the markets down and spreads have widened, particularly in terms of mortgages versus swaps, where you know the majority of our hedges and you know.
Speaker Change: While they certainly don't look as wide as they did at some of the really peak wide periods of this interest rate cycle like in late 'twenty, two or late 'twenty. Three for example, they have widened out to a decent degree and present, a better opportunity than they were at the end of the quarter.
Speaker Change: But you know there's still a lot of unknown things ahead, and and even even with all of this you know when when and if that all of the tariffs and trade policy gets settled.
Speaker Change: Theres clearly still some effects are going to happen in terms of the fed and how they're going to react to.
Speaker Change: Either a slowdown in the economy or a pickup in inflation and we do feel like there again. There is good reason to believe the volatility is not going to be going down you know in any real material way for the foreseeable future.
Speaker Change: Great and then Nick if I could just clarify I believe you said in your prepared remarks that the return potential would be higher today because of wider spreads just wanted to make sure I heard that correct.
Speaker Change: Yes, that's correct I mean, we estimate that where spreads were again I think we did this as of Friday.
Speaker Change: It would be about three cents on the return potential just with spreads being water.
Speaker Change: Great I appreciate that thank you.
Doug Harter: Thanks, Doug.
Speaker Change: We will take our next question from Trevor Cranston with citizens JMP.
Trevor Cranston: Hey, good morning.
Speaker Change: Can you guys talk a little bit about.
Speaker Change: The big merger or acquisition between rocket Mr. Cooper, and how you think that sort of impacts the competitive landscape in the servicing market and potentially a bulk MSR purchases occurred as well. Thanks.
Speaker Change: Yes sure.
Speaker Change: Certainly an exciting development in the market in terms of its real life impacts, though I think they may be more muted than then.
Speaker Change: The headlines might might appear.
Speaker Change: Those guys were active buyers of MSR, So I think that.
As a combined entity I think that demand will stay.
Speaker Change: Stayed the same as being.
Speaker Change: As being equal to what the individual led to some of the individual demands.
Speaker Change: The bid is probably a little bit better than it was because now you have the maximum of the two individual bits right. So I think it will be a little bit more more competitive.
Speaker Change: Then it was.
Speaker Change: On the margins, though I don't think it's a wholesale change.
Speaker Change: The securities markets has reacted somewhat with regards to prepayment speeds.
Speaker Change: In terms of pools that were serviced by Cooper B B.
Speaker Change: <unk> modulator to Oh.
Speaker Change: Prepayment speeds being in line with more rocket speeds. So we've seen an impact there. So I think the impact generally are our non zero, but it's not it's not market change the dynamics in the servicing market.
Speaker Change: Largely the same as what it was there still as we said as we said in the prepared remarks, the supply of MSR is.
Speaker Change: Is back to pre Covid levels.
Speaker Change: And that's not going to change that.
Speaker Change: Got it okay. That's helpful.
Speaker Change: And then.
Speaker Change: Could you maybe provide a little.
Speaker Change: Color around the.
Speaker Change: Change your head to the previously announced CFO.
Speaker Change: Transition thanks.
Speaker Change: Yeah, well, whereas we now see that we are willing to allow has been appointed chief financial officers that are interim Chief financial officer. We're thrilled to have him here William has added so much value and he has been terrific.
Speaker Change: And we're happy to have and we continue to benefit from Olive Williams experience and we're happy that that's.
Speaker Change: I'm really going to say Bob.
Speaker Change: Okay I appreciate the color. Thank you.
Speaker Change: We will take our next question from Bose, George with K B W.
Hey, guys good morning.
Speaker Change: Quick follow up to Doug's question, just on the impact on them.
Speaker Change: Im spread so you said up three three cents is that both the high end and the low end or just volatility do anything just in terms of what happens to that range.
Nick: Hey, Bose this is Nick.
Bose: Yes, it's a high end and low end, then it's a little bit of a rough rough rough estimate, but yeah. So three cents on both sides.
Nick: Okay, Great and then just.
Speaker Change: With the new target range et cetera can you just talk about the comfort level with the dividend.
Speaker Change: Yeah, I mean, well I mean, you can you can see what the you know.
Speaker Change: What were you know what we're projecting.
Speaker Change: We are comfortable with the dividend with spreads where they are in our composition of our portfolio.
Speaker Change: You know what the split spreads having widened this quarter end and again, bringing our risk back up now that we feel like you know, it's a little bit of a safer passage.
Speaker Change: We feel confident about supporting the dividend here with our portfolio.
Speaker Change: Okay, great. Thanks.
Speaker Change: Thanks, Bob.
Speaker Change: We will take our next question from Eric Hagen with BT IAG.
Eric Hagen: Hey, guys. Good morning, we're just looking at the book value sensitivity for the change in a tightened.
Eric Hagen: Tightening in spreads and I realize that in April maybe it's changed a little bit but for a 25 basis point move.
Eric Hagen: Move we made maybe expected the sensitivity to be a little bit higher is there a way to flesh out kind of like what's going on with the sensitivity in the MBS portfolio versus the Msr's.
Eric Hagen:
Eric Hagen: So you think that this spreads up 25 basis points in the deck, we showed minus minus four 9%.
Speaker Change: Yes, I'm actually looking at a tightening in spreads yeah, yeah, so like I like the the utmost 4%.
Eric Hagen: Four 1% you think you think that should be higher.
Eric Hagen: Maybe a little bit I mean, just for a 25 basis point move in spreads.
Eric Hagen: That's pretty meaningful right yeah well.
Eric Hagen: Yes, well you know I mean.
Eric Hagen: As you know you know if you go back down to slide 14.
Eric Hagen: Right, we say that 65% of our capital is allocated to <unk>.
Eric Hagen: The hedged servicing.
Eric Hagen: Strategy part of the portfolio and only 35%.
Eric Hagen:
Eric Hagen:
Eric Hagen: These allocated to hedge securities. So so when MBS spreads.
Eric Hagen: Do something.
Eric Hagen: The MSR part of the portfolio doesn't react really at all because that is incorporated quickly and immediately.
Eric Hagen: To the MSR values.
Eric Hagen: Alright, guys to Williams, our market prices itself. It works and so and so by definition right are all else being equal you would think that that our portfolio would have 35% of the spread.
Sensitivity exposure to a portfolio without MSR.
Eric Hagen: Theres somewhat differences between capital structures and so forth. So there's like differences, but as a base case, that's where I would start let's say whatever spreads do we would be 35% of what workloads without Amazon.
Eric Hagen: And that is true when spreads tightened and thats true when spreads widen.
Speaker Change: Nick would you add anything to that yes.
Nick: Yeah, Eric So I would just I would point you to the fact that if you look at our net mortgage exposure.
Speaker Change: In my comments and if you look at it quarter over quarter.
Nick: Our net mortgage exposure, which is on page 17 of the deck.
Nick: I think was down to about $5 5 billion when you take out the effect of the MSR.
Nick: Which was down significantly and we talked about this before and you know the amount of duration of the amount of spread duration you have a mortgage with a mortgage portfolio. It does depend on where you are in the coupon stack too right. If we had all of that $5 billion.
Nick: In two and a half there threes as opposed to having the majority of it more up in the stack you would have more spread exposure there.
Nick: It's it's it's the notional amount and where it's located on the coupon stack that determined that sensitivity and I I think that if you distill down.
Nick: The net mortgage exposure is lower number one and two we did we did have a little bit more of a shift up in coupon and both of those things will will decline the amount of spread sensitivity, but again that was something that we very intentionally did by the end of the quarter, because we were sort of hunkering down getting into the second quarter with all of these changes flowing through.
Nick: The macroeconomic world.
Speaker Change: Yeah, Okay. That's helpful.
Speaker Change: I think that prompts a follow up question I mean, do you feel like the like MBS spreads have essentially kind of reset wider as a result of tariffs and this new range for volatility and how do you feel like spreads would maybe respond if the fed looks more likely to cut rates from this point.
Speaker Change: They I mean, they have reset a little bit I mean, they haven't gone nuts in terms of spreads like by hour if thats a technical term.
Speaker Change: But.
Speaker Change: You know actually if you look at like Treasury spreads there.
Speaker Change: They are pretty close to where they were at the beginning of the year swap spreads mortgages. The swaps are wider but like I said earlier, they're not like get all time there. They are good in there and we like him here and that's why we're getting a little bit you know, we're putting on pulling back on some risk and being opportunistic in and adding some assets here and there that we think look really good.
Speaker Change: But.
Speaker Change: They're they're far from they're far from where they were at sort of the peak points in time and the way we look at the world everyone looks at the World differently. We you know as you know, we really look at our securities across the coal yield curve with partial durations, we tend not to use sort of a spot.
Speaker Change: Numbers and that's the way, we hedge our book and run our book.
Speaker Change: But answer your last question if the fed cuts I think that's going to be good for mortgages I mean, a steeper yield curves are typically good for mortgages. It brings more investors into the into.
Speaker Change: And to the into into into fixed income in general and I think that would be stimulative to mortgage spreads.
Speaker Change: Got it that's helpful. Thank you guys.
Speaker Change: Yeah.
Speaker Change: Thanks, Eric.
Speaker Change: We will take our next question from harsh Kumar.
Tony: Tony with Green Street.
Speaker Change: Thank you.
Speaker Change: So it sounds like you think that volatility at least in the near term.
Speaker Change: It doesn't mean that debate.
Speaker Change: Especially on the life side, perhaps and given maybe the more deeper negative convexity in the portfolio has historically been more.
Speaker Change: Jenny activity that good.
Speaker Change: The static could've done estimates that we should be thinking about.
Speaker Change: Hey, harsh how are you doing yeah, I mean look at the we know.
Speaker Change: A lot of them.
Speaker Change: Realized volatility is never good for you know a hedge mortgage portfolio. So we clearly you know ourselves and I'm sure. Other other REIT cervix been experiencing more convexity costs than they would under other circumstances.
Speaker Change: You know we have been as you know and we've been keeping our risk pretty tight.
Speaker Change: Through this whole time period.
Speaker Change: I think this is a time period, where you have to be.
You know very cautious about about taking on any sort of excess risk in the portfolio, but.
Speaker Change: The.
Speaker Change: There is compensation for it of course, and the fact that spreads have widened right. So I mean, it's it is there.
Speaker Change: There are pluses and minuses to it yes, convexity costs are going to be higher when you have more realized volatility but.
Speaker Change: Thankfully spreads have widened in concert with that which which should mitigate some of that convexity cost.
Speaker Change: Okay. That's helpful.
Speaker Change: And then maybe as you've been stepping back into.
Speaker Change: Getting more spread exposure maybe towards the back half of April is it.
Speaker Change: Fair to assume that go up in coupon bias still remain for battery.
Speaker Change: Book value across the coupon Saturday.
Speaker Change: Yeah that is fair to assume you know, we we really do.
Speaker Change: What's the issue with lower coupons for me as I think they trade in such such a technical way that.
Speaker Change: Failure across the curve is on an OAS basis at least is.
Speaker Change: It's fairly evenly distributed but I.
Speaker Change: Hi, there.
Speaker Change: Like everything else there are tradeoffs, but the lower part of the stack continues to be extraordinarily technical on the way it trades.
Speaker Change: And I think can trade in ways that are not necessarily intuitive. So at the moment, we do like being more up in coupon and down in coupon.
Speaker Change: Got it thank you.
Speaker Change: Okay.
Speaker Change: Thanks harsh.
Speaker Change: We will take our next question from Rick Shane with J P. Morgan.
Speaker Change: Great Britain JJ on for Rick.
Speaker Change: Hey, Jade.
Speaker Change: Your your static return estimate on slide 14 appears have widened a bit can you talk about what drove that and how has varying your leverage and packages measure compared to last quarter.
Speaker Change: Yeah sure. Thanks for the question.
Speaker Change: As Nick said in his prepared remarks, we added this other dimension.
Speaker Change: Of changing the portfolio leverage.
Speaker Change: A little bit to the lower and upper end of those ranges and really that was a reflection.
Speaker Change:
Speaker Change: When we're when we're dynamically and actively managing the portfolio.
Speaker Change: Especially as we have been this quarter.
Speaker Change: It is important.
Speaker Change: Felt it was important to show the range of <unk>.
Speaker Change: Expected static returns projected static returns that are available over the medium term in a in a sort of equilibrium style leverage portfolio as Nick said, we closed the quarter with leverage at six two we got down as low as low fives and we're back up towards the high fives right around six now so.
Speaker Change: It seems like it would be not.
Speaker Change: Not as as informative to be to show the static return estimates moving around so much as we actively manage the portfolio in order to take advantage of dislocations and opportunities in the market and so and so we've made the higher and lower end of the range.
Speaker Change: They also include some leverage range.
Speaker Change: Range is basically at the low end of the range something like six at the high end of the range something like seven right. In addition to the changes in the funding spreads.
Speaker Change: Prepayment rates that we've been doing that for some time and so that's the source of why that's widen out a little bit, but we think it gives them more reflective view as to what the portfolio really is.
Speaker Change: Okay. That's super helpful. Thank you that's all for me.
Speaker Change: Yes. Thank you.
Speaker Change: We will take our next question from Merrill Ross with Compass point research.
Speaker Change: Good morning Merrill.
Speaker Change: Jane question.
Speaker Change: Okay.
Speaker Change: For me that one is liquidity.
Speaker Change: <unk> maintained high liquidity need to just put some numbers around that.
Speaker Change: Yeah.
Merrill Ross: Good morning Merrill.
Speaker Change: We maintained our.
Speaker Change: Our liquidity is very high levels from the end of the year.
Speaker Change: And we're maintaining a awful lot of cash.
Speaker Change: Capacity in our borrowing.
Speaker Change: Okay.
Speaker Change: And on the recapture.
Speaker Change: You said it well.
Speaker Change: 79 million.
Speaker Change: Well said.
Speaker Change: Hello and recapture.
Hum.
Speaker Change: What what's the nature of that how much of it was me capture.
Speaker Change: So it is slow and Oh yeah.
Speaker Change: Did that meet your expectations.
Speaker Change: Thank you.
Speaker Change: I ran off.
Speaker Change: My follow is ever so slightly.
Speaker Change: I'm, just wondering if you're holding your own against.
Speaker Change: Well no.
Speaker Change: Sure I'll start.
Speaker Change: Yeah. Thanks for that question Merrill.
Speaker Change: The organic recapture coming from our direct to consumer.
Speaker Change: Channel is still very low it's still in its nascent stages.
Speaker Change: You know as as Nick said in his remarks, if I could put a finer point on it only about 0.5% of our portfolio is refinancing both from a rate and term perspective right now.
Speaker Change: And so there's very little ability to.
Speaker Change: <unk> captured some of them. However, we are seeing.
Speaker Change: Within that 0.5% right. We are seeing some increased activity in our direct to consumer channel there and so I'm very optimistic about what we'll be able to do when we bring the platform to scale right. We are hum.
Speaker Change: And I think.
Speaker Change: We will be able to achieve some really good numbers there once we get there.
Speaker Change: We have been active in the bulk market and small size right and able to replenish the portfolio somewhat as well as be being participating in the flow market and so we're we're we're confident that we're going to be able to maintain our our servicing portfolio or even grow it.
Speaker Change: Over time.
Speaker Change: And we think we're going to be using all of the tools that are available to us.
Speaker Change: In both the bulk inflow markets and eventually the DTC once that gets or more upscale in Italy.
Speaker Change: Alright, thank you.
Speaker Change: It's the last one this is quite small but.
Speaker Change: You had mentioned.
Speaker Change: <unk> been interested in the Ginnie Mae market do you see.
Speaker Change: Price dislocation.
Speaker Change: Is.
Speaker Change: Sure.
Speaker Change: No.
Speaker Change: Retail and generation.
Speaker Change: These are being weak.
Speaker Change: Yes.
Speaker Change: I think it's I think it's it's it's many factors I mean, we are taking the beginning stages AUM in order to to get involved in that market.
Speaker Change: But the rationale is our number one just to have the ability to.
Speaker Change: Participate in.
Speaker Change: The broader aspect of the servicing market rather than just conventional <unk> to be able to service in sub serviced for Ginnie Mae's. It is slated.
Speaker Change: Slightly cheaper, it's a little bit more.
Speaker Change: More opportunity, there and I think being able to to be a more full service mortgage originators by servicer.
Speaker Change: Hum.
Speaker Change: But it requires us to be involved in <unk>. So we've taken the beginning steps in order to in order to do that.
Speaker Change: Thank you.
Speaker Change: Cool.
Speaker Change: There are no further questions at this time I will turn the conference back to Bill Greenberg for any additional or closing remarks.
Speaker Change: I want to thank everyone for joining us today.
Speaker Change: He was always to our shareholders.
Speaker Change: Your interest and I look forward to talking to you again next quarter.
Speaker Change: This concludes today's call. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: [music].