Two Harbors Investment (US:TWO)2021-02-10 16:54Financial Data and Key Metrics Changes - The book value increased to $7.63, representing a 5.8% quarterly return on book value, driven by outperformance of lower coupon TBAs and improvements in specified pool payouts [10][25] - Comprehensive income was $113.5 million, or $0.41 per common share, with an annualized return on average common equity of 22.1% [25] - Core earnings rose to $0.30 per share from $0.28 in Q3, while interest income decreased from $89.7 million to $72.5 million due to lower average balances and higher agency amortization [26] Business Line Data and Key Metrics Changes - The MSR purchase program saw a year-over-year growth of over 136%, reflecting the strength of the company's platform [17] - The portfolio yield decreased to 2.26% from 2.42%, primarily due to higher agency RMBS prepayments [28] - The economic debt to equity ratio declined to 6.8 times from 7.7 times, indicating a decrease in risk [32] Market Data and Key Metrics Changes - The company noted that RMBS spreads are at very tight levels, warranting caution, while low funding rates and continued Fed involvement are tailwinds for the market [18] - The company experienced a decline in the 2% coupon roll specialness due to the Fed's focus on forward month purchases [39] Company Strategy and Development Direction - The company is transitioning to self-management, which is expected to deliver significant annual cost savings and enhance returns on future capital growth [21][22] - The strategy focuses on maintaining a portfolio with low exposure to mortgage spreads, leveraging the agency plus MSR portfolio construction to provide stable expected returns [52][53] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the forward outlook, highlighting strong capital and liquidity positions, and the attractiveness of the agency plus MSR strategy in the current tight spread environment [59] - The company anticipates that asset yields will decline over time to market rates, with net portfolio spreads converging to levels consistent with return expectations [30] Other Important Information - The company raised the common stock dividend by 21% to $0.17 per share, reflecting confidence in the forward outlook [11] - The company has built a sizeable liquidity position, with $1.4 billion in unrestricted cash and $215 million in unused committed capacity on MSR asset financing facilities [31] Q&A Session Summary Question: Can you talk about the relative sizing of your MSR and agency portfolio today? - Management noted that the relative sizing of the MSR depends on interest rates and pricing, and there is no specific target for the terminal size of MSR [62][64] Question: How do you think about the current sizing of the flow program relative to the expected run-off? - The flow servicing being acquired is largely offsetting the run-off, and the size is market-dependent [65] Question: Can you provide a book value quarter-to-date? - Management indicated that book value was up a little north of 2% so far in the quarter due to spread tightening [70] Question: Can you help us understand Slide 11 in terms of MSR pricing? - The price multiple of new flow being acquired is slightly above a three multiple, with marginal tightening in MSR spreads having a small impact on pricing [72][74] Question: Can you talk about where subservicing costs are right now? - Sub-servicing costs have been stable, with costs for performing loans in the $6 to $7 per loan per month range [82] Question: Can you give some market color around the competition for bulk transactions? - The competition for bulk packages is competitive, and pricing is situational, with a preference for the flow market due to established relationships [87] Question: Is there any timeline for resolution on the Pine River litigation? - Management stated that the situation is active and cannot provide further details, but believes the suit is without merit [95] Question: Do you think that significant compression of primary secondary spreads is already reflected in MSR valuations? - Management confirmed that compression in primary secondary spreads is reflected in current MSR pricing [100]