Two Harbors Investment (US:TWO)2021-08-05 18:08Financial Data and Key Metrics Changes - At the end of Q2 2021, the book value was $6.42 per share, reflecting a negative 9.6% total economic quarterly return, primarily due to wider spreads on high coupon RMBS [7][20] - Comprehensive income was negative $194.6 million, resulting in an annualized return on average common equity of negative 40.7% [20] - Core earnings were $0.19 per share, an increase from $0.17 in Q1 [21] Business Line Data and Key Metrics Changes - Interest income decreased from $56.1 million to $43.4 million due to a decline in RMBS positions from sales and pay-downs [21] - Net servicing income increased by $3.6 million to $47.4 million, attributed to higher balances, slower speeds, and fewer delinquencies [22] - The realized net spread rose by 28 basis points to 1.93%, driven by a 47 basis point increase in portfolio yield [23] Market Data and Key Metrics Changes - The second quarter was characterized by falling long-term interest rates and wider mortgage spreads despite continued buying of current coupon RMBS by the Federal Reserve [11][15] - The CPI index reached 5.4% in mid-July, the highest in 13 years, indicating inflationary pressures [12] - Banks purchased $100 billion of RMBS in Q2, down from $180 billion in Q1, indicating a decrease in demand [16] Company Strategy and Development Direction - The company plans to deploy capital in the MSR space, having purchased $6.5 billion UPB in Q2 and committed to an additional $17 billion post-quarter end [8][9] - The company maintains a disciplined approach to leverage, keeping it low amid tight mortgage spreads [10] - The strategy includes focusing on high coupon specified pools due to their historical stability and wider spreads [45] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about the potential impact of the Delta variant on economic growth and the overall market environment [13] - The company anticipates robust MSR supply in the second half of the year and is prepared to invest when opportunities arise [42] - Management noted that the market's expectations for prepayment speeds have adjusted, particularly in the high coupon sector [29] Other Important Information - The company issued approximately $256 million of common equity in a non-dilutive transaction, enhancing its liquidity for future investments [9][24] - The percentage of MSR in forbearance declined to 2.2% by loan count, indicating improving conditions [31] Q&A Session Summary Question: Thoughts on longer-term portfolio construction and coupon distribution - Management indicated that they are generally net flat on current coupons and prefer high coupon specified pools due to their historical performance and wider spreads [45] Question: Deployment timeline for raised capital - Capital deployment will be based on a combination of current opportunities and expected spread widening [49] Question: Update on book value quarter-to-date - Book value has increased slightly by around 0.5% through the end of July [51] Question: Expectations for prepayment speeds in primary markets - Management noted that fewer borrowers have refinancing incentives at current rates, which may lead to slower prepayment speeds [56] Question: Current expectations for dollar roll specialness - Management stated that dollar roll specialness is closely tied to Fed and bank buying, and will likely decrease as those activities moderate [60] Question: Hedging profile ahead of potential Fed tapering - The company has positioned itself to be flat on current coupons, which serves as a hedge against tapering risks [62] Question: Risks to high coupon underperformance - Management believes that increased prepayment expectations and government programs have already been factored into prices, making further declines unlikely [67]