Good morning. My name is Jennifer, and I will be your conference facilitator. At this time, I'd like to welcome everyone to the Two Harbors First Quarter 2024 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Maggie Karr.

Good morning, everyone, and welcome to our call to discuss Two Harbors First Quarter 2024 Financial Results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer; Nick Letica, 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. 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 expectations. These are described on Page 2 of the presentation and in our Form 10-K and subsequent reports filed with the SEC. Except 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.

Thank you, Maggie. Good morning, everyone, and welcome to our first quarter earnings call. Today, I'll provide an overview of our quarterly performance. Then I will spend a few moments discussing the markets and finish with an update on RoundPoint operations. Mary will cover our financial results in detail and Nick will discuss our investment portfolio and return outlook. Let's begin with Slide 3. Our book value at March 31 increased to $15.64 per share, representing a positive 5.8% total economic return for the quarter. Our results were driven by the performance of our RMBS portfolio in a declining volatility environment and MSR, which experienced lower-than-expected prepayment speeds. MSR continues to benefit our portfolio with a very attractive yield, combined with limited prepayment risk and low interest rate sensitivities. As we have previously emphasized, our high capital allocation to MSR acts as a ballast to our portfolio when agency spreads fluctuate. I'm confident that our portfolio design and current allocation between MSR and Agency RMBS positions us well for what we expect to be a higher for longer interest rate environment. Please turn to Slide 4 for a brief discussion of the markets. Stronger-than-expected economic data and sticky inflation readings pushed interest rates higher in the quarter and led the market to the realization that higher for longer rates is the most likely path. Employment report came in stronger than expected in each month of the quarter, averaging gains of 281,000 new jobs per month. Similarly, both consumer and producer price indices surprised higher with 3-month annualized core CPI, a metric closely watched by the market and the Fed, reaching 4.5%, its highest level since June 2023 as seen in Figure 1. At the start of the year, Fed funds futures implied more than 6 interest rate cuts in 2024.…

Thank you, Bill, and good morning. Please turn to Slide 6. Our book value increased to $15.64 per share at March 31 compared to $15.21 at December 31. Including the $0.45 common dividend results in a quarterly economic return of positive 5.8%. As a reminder, total economic return is the primary metric we consider as an indicator of our performance. We repurchased approximately 485,000 shares of preferred stock in the quarter, lowering the ratio of preferred stock to total equity. Please turn to Slide 7. The company generated comprehensive income of $89.4 million or $0.85 per weighted average common share in the first quarter. MSR values increased during the quarter on higher rates and spread tightening, offset somewhat by the RMBS allocated as a hedge. RMBS values decreased as a result of rate movement, more than offset by gains on swaps and futures, which is consistent with the mortgage spread tightening that we observed in the quarter. Net interest expense of $42 million was favorable $3 million to Q4 from lower average borrowing balances and lower cost of funds, partially offset by lower RMBS interest income from net sales. Net servicing income of $159 million included $134 million of servicing fee income and $32 million of float and ancillary income, offset by $7 million of third-party subservicing fees and other MSR-related servicing costs. Overall, net servicing income was unfavorable to Q4 by $7 million on lower float income due to seasonality of escrow balances and lower servicing fee collections, partially offset by lower third-party servicing and other MSR-related costs as we continue transferring loans to the RoundPoint platform. Please turn to Slide 8. RMBS funding markets remained stable and liquid throughout the quarter with ample balance sheet available. Spreads and repurchase agreements tightened slightly with financing for RMBS between SOFR plus 18 to 24 basis points. At quarter end, our weighted average days to maturity for our agency repo was 88 days. We financed our MSR across 5 lenders with $1.6 billion of outstanding borrowings under bilateral facilities and $296 million of outstanding 5-year term notes. We ended the quarter with a total of $602 million of unused MSR financing capacity and $135 million of unused capacity for servicing advances. I will now turn the call over to Nick.

Thank you, Mary. Please turn to Slide 9. Our portfolio at March 31 was $14.7 billion, including $11.3 billion in settled positions and $3.4 billion in TBAs. We maintained the belief that now is not the time to go out on a limb in terms of risk or leverage given the current market conditions and level of spreads. And as a result, we kept a neutral risk profile with ending economic debt to equity of 6x. Over the quarter, we shifted our mortgage exposure up in coupon, which we will detail in our agency portfolio commentary. This benefited the portfolio and resulted in lower spread sensitivity, as you can see in the spread exposure summary chart on this page. Please turn to Slide 10. In the first quarter, despite a 30-basis-point rise in rates on the 10-year treasury and less optimism about the Fed cutting rates this year, volatility declined, driving positive performance for RMBS. Though still high by historical standards, realized volatility across the yield curve fell from the prior quarter as did implied volatility. Our preferred gauge implied volatility on 2-year options on 10-year swap rates declined to about 98 basis points annually, close to the bottom end of its range since the beginning of 2023. The nominal spread to treasuries for the current coupon finished at 119 basis points, essentially unchanged over the quarter. As you can see from Figure 1, the spread continues to closely track implied volatility and remained well above the 50th percentile of long-term history. Spreads for current coupons were aided by lower-than-expected supply, strong fixed income fund inflows and tame prepayment rates. Although the overall performance of RMBS was positive in the first quarter, performance varied widely. Belly and higher coupons outperformed lower coupons and specified pools outperformed TBAs. Specified pools broadly…

[Operator Instructions] We'll go first to Doug Harter with UBS.

First, hoping you could give us an update on how book has performed so far in April. And then sort of in that context, given spread widening, is that enough to kind of change your kind of outlook on the market and moving off a neutral stance?

Doug, thanks for joining us today. So far, in April, as of last Friday, we estimate our book value to be down between 1.5% and 2%. I'll let Nick answer the question of how he thinks that's changed our outlook and positioning.

Doug, thank you for the question. This is Nick. So no, it really has not changed our outlook or positioning. It is -- spreads have widened out a little bit. They continue to be within the range that they've been for the year. And as we've talked about, we still -- we believe that the construction of our portfolio or our capital allocation as it stands between MSR and securities is where we would like it to be. And I would say that there has not been a sufficient amount of disturbance or widening in the mortgage market to really change our outlook on spreads. We remain somewhat defensive about spreads relative to others, I would say. We continue to believe that while mortgages from a longer-term value -- longer-term perspective, do have value. In the near term, the market is subject to these bouts of volatility as we've seen for this quarter already. And although things have changed to some degree with regard to the range of spreads, the range of spreads do seem to be tighter than they were at some periods in the last 2 years. The market is still subject to these shifts in sentiment about the Fed and mortgages definitely react to it. So we would -- we continue to have -- as you see from our numbers, we continue to have exposure to -- positive exposure to spreads tightening, which again is likely the long-term trend. But in the near term, we prefer to keep our mortgage exposure in a neutral range.

I guess just a follow-up on that. I guess, how willing are you to kind of be opportunistic and more tactical kind of during those bouts of volatility sort of trading the range, if you will, versus kind of holding the longer-term neutral defensive position.

Look, we respond to markets as they develop. Every day is a new day in the markets, as we know. So we're absolutely positioned to take advantage of spreads if we believe they are opportunistically wide, we will do so. But in the current market, as said, if you look at the spread range and how it's done over the last couple of years, and we still believe we're well within that range and like the portfolio construction as it is right now.

We'll go next to Trevor Cranston with JMP Securities.

Following up on the question about performance in April. Can you comment on whether or not there's been any significant changes to the portfolio in April in terms of coupon composition in particular?

No, no, there has not been -- the -- our portfolio from quarter end has changed very little to date.

Got it. Okay. And then given the outperformance of spec pools relative to TBAs over the last few months, can you give us an update on how you sort of think about the relative value between specs and TBAs right now?

Sure. Spec pools, a lot of that is governed by how roles are in the TBA market, frankly. We're always, of course, comparing where pools are trading to TBAs and making relative value judgments. And as you guys know, we do tend to move our position in the coupon stack around not infrequently. Right now, I would say, to elaborate on your first question a little bit, we don't see a compelling reason to move our exposure right now. The value proposition across the stack is pretty flat. We do like the higher coupons right now, just the lower coupon market is -- seems to be fairly well priced and there have been these -- as we noted in our commentary, there has been some amount of selling related to some bank portfolio reallocations. We think that could persist in lower coupons. So we have not moved our outperformance over the quarter -- we have not moved our positioning materially over the quarter from where we were at the end.

We'll go next to Bose George with KBW.

Can you remind us what are the drivers that sort of push you to the high end or the low end of the target range or range you're providing?

The drivers are primarily -- Bose, the drivers are prepayment and funding rates.

Okay. Great. And then actually, given -- just can you talk about the comfort level with your dividend? It's -- I guess it's slightly below the midpoint of the range. So does that suggest a level of comfort there?

Yes. The dividend, as you can see for our return projection, it's squarely within the range of those outcomes. And yes, we feel good about being able to support the dividend on a go-forward basis.

We'll go next to Jason Weaver with JonesTrading.

I noted your comments expecting lower supply. Where do you see incremental returns on new MSR today and where the relative value looks like between, say, production coupons and seasoned deals?

Yes. Thanks for the question. We see the value proposition being low coupons and high coupons to be pretty flat. The range of returns is probably on an unlevered, unhedged basis in the low teens. Levered and hedged, we think it's mid-teens probably. One of the things that we've observed in the market, and there's been lots of demand in the market, the servicing has been very well bid this quarter, is that the recapture assumptions that are embedded in some of the higher coupons can be pretty high, pretty efficient. And so this is something to keep in mind as we look at the relative values between high coupons and low coupons. But every pool is different. Every situation is specific, and we're willing and able to participate across the -- right across the sector in terms of coupons. As we noted in our prepared remarks, we bought a small pool post quarter end. We continue to be active in the market and active bidders. And we're being very disciplined on the price that we pay in order so that we can get returns that we think are worthwhile in the market.

Okay. That's helpful. And then I'm just curious, outside of the interplay between MSR and Agency RMBS, are you making any additional changes to your hedging approach given that we were coming to a consensus view of a higher longer term -- higher for longer environment with potential volatility ahead?

No, I don't think so. We've always had an approach of keeping our interest rate exposures low generally. And so embedded in that is the full range of the portfolio and whether the MSR has more or less interest rate risk, which hedges the MBS. That just gets put into the mix and the calculations that we do in order to figure out how much other hedges we need in our portfolio. But we're generally trying to keep our interest exposures low. We don't feel that we have particularly in edge and knowing which direction interest rates are going. And so we keep our exposures pretty flat, as you can see from our disclosures, the kind of sensitivities that we show.

All right. And just one more and I'll drop back in the queue. Are you seeing any changes in the willingness of counterparties to extend additional MSR financing?

No. In fact, the opposite. We're seeing lots of demand for new balances on the MSR side, we're seeing new participants enter the market regularly. There's lots of MSR financing supply out there in the market.

We'll go next to Rick Shane with JPMorgan.

Look, most of my questions have been asked and answered. I do have a housekeeping question simply because you guys have tweaked the way you report line items, and we need to reconstruct our model a little bit. You historically broke out other interest income from securities income. Can you break that out for us? And also, what was the converts expense on the quarter?

Sure. Rick. So I will just note that the details of the interest income and interest expense will be included in our Q, which will be filed today. You can also find the breakdown on Page 21 of the deck on our portfolio yields and financing costs. So specific to your question, convertible senior notes, quarterly expense was $4.6 million. And what was your other question?

What was the other interest income line?

Let's see. I believe it was $17 million. Yes. So on '21, you can see RMBS interest expense of $100.6 million. So the remainder would be other.

Okay. Terrific. Sorry to do that, but it just saved us a lot of hassle with the model.

We'll go next to Eric Hagen with BTIG.

Following up on the MSR financing. I mean, do you see that maybe leading to improved economics or terms that you get in the market? And do you think your counterparties are giving you guys credit for having brought in the subservicing function?

Eric, thanks for the question. In terms of, I think, whether spreads will evolve, the answer to that it's a definite maybe. I don't know, we haven't seen that yet, but these things typically have a way of doing that when there's lots of competition and so forth. Tighter spreads is often one byproduct of that. One thing to keep in mind, however, though, is that our financing facilities generally, these are not overnight repos kind of thing. These are generally longer-term facilities. And so it takes a little bit longer for these things to reset and so forth. But as these things come up, we do renegotiate rates as they occur. And in fact, the last couple of facilities which have recently come up for renewal. We did actually renegotiate to lower rates. So that is beginning to happen. And could it happen more? That remains to be seen. And your other question in terms of whether our lenders are giving us credit for the subservice -- for the servicing operations. I'm not sure what you mean by that and how it affects our lending profile or how lenders view us, but all our lenders are aware that we brought our servicing in-house, and that's incorporated into their analysis and the rates they give us and then the credit analysis that they do. So yes.

Yes. Okay. That's helpful. I mean you guys are always very thoughtful on the mortgage market just generally. I mean, do you feel like there's a lot of risk at this point that the Fed could actually sell Agency MBS from its portfolio? That was a conversation at one point. I mean, do you even see that being a risk on the table at this point? And then like adjacent to that, I mean, how much risk do you think is priced into the mortgage basis that the Fed actually hikes rates at some point this year?

Eric, this is Nick. No, we do not think that there is a risk that the -- that there's any sales and mortgages out of the Fed. As far as the -- as far as whether things are priced in, the market is very efficient. So it's an extremely hard thing to say. I would say that the -- overall in the first quarter and to today, we've seen a little bit more of a muted response out of the mortgage market than we had in period -- in prior periods of volatility or kind of surprise volatility and higher rates. So I think that's a function of the fact that the market still does believe that -- I think the market does overall believe the -- that the Fed will still cut at some point this year. But I do think that the spreads have been reasonably well calibrated to Fed expectations. But like we've said, the things have stayed in a range. And we like the long-term exposure of being long mortgage spreads, but you have to balance that against this near-term volatility that can seemingly pop up at any time. We're not done with the volatility in the market, that's for sure.

And at this time, I'll turn the call back to Bill Greenberg for closing remarks.

I'd like to thank everyone for joining us today. And as always, thanks for your support.

This does conclude today's conference. We thank you for your participation.