Two Harbors Investment Corp. (TWO) Earnings Call Transcript & Summary

Good morning and welcome to the Two Harbors Virtual Annual Meeting. I would now like to turn the call over to Steve Kasnet, Chairman of the Board of Directors. Please go ahead, sir.

Good morning. I am Steve Kasnet, Chairman of the Board of Directors of Two Harbors Investment Corp. On behalf of the Board and Executive Officers of Two Harbors, it is my pleasure to welcome you to our 2020 Annual Stockholders Meeting. At this time, I call the meeting to order. I would like to begin our meeting today with a few comments on the global coronavirus pandemic. In the past few months, our nation and world have experienced unprecedented societal and economic conditions as a result of the pandemic. First and foremost, our thoughts are with those most affected by COVID-19, especially those who have lost loved ones, and the heroes, who continue to battle the pandemic on the front lines. Throughout this crisis, the Board of Directors and management have remained committed to protecting all of the company's stakeholders, including, most importantly, our people and our stockholders. With respect to our people, we have implemented mandatory work-from-home measures, and I'm pleased to report that day-to-day operations have continued with minimal disruption. In March, the pandemic produced extreme and rapid volatility and market dislocation. Our management team took decisive action to effectively navigate through these conditions. The team derisked the portfolio and established a strong defensive liquidity position, thereby preserving sufficient excess liquidity and protecting stockholder value for the long term. Much uncertainty remains as to how the pandemic will continue to impact the nation and the economy. However, the Board believes that the company will be able to withstand future volatility, and, on the other side of this crisis, once again, drive long-term stockholder value. I will now move on to the formal meeting agenda. During today's meeting, our common stockholders as of the record date for this meeting will be able to vote their shares and submit questions online at virtualshareholdermeeting.com/TWO2020. The polls for voting on each of the items of business are currently open and will remain open until I announce their closure later in the meeting. If you have previously voted by proxy and do not wish to change your vote, your vote will be cast as you previously instructed, and no further action is needed. If you are a record holder and wish to change your vote or have not already cast your vote using our electronic voting system, you may cast your vote online at the virtual meeting website. Access to the meeting website requires the control number listed on the notice of availability of proxy materials that you received prior to this meeting. If you do not indicate the number of shares you intend to vote on your electronic ballot, your electronic ballot will automatically represent all the shares that you are entitled to vote at this meeting. Stockholders who are entitled to vote also have the ability to submit questions online during the meeting, and we welcome your inquiries. Our Board of Directors, executive officers and representatives from our registered public accounting firm, Ernst & Young, are attending today's virtual meeting and will be available to respond to questions in the Q&A portion of the meeting. I would now like to take a moment to introduce the other members of our Board of Directors who are joining us on this webcast. Thomas Siering, Chief Executive Officer, President and Director; Spencer Abraham, Director; James Bender, Director; Karen Hammond, Director; Reid Sanders, Director; James Stern, Director; and Hope Woodhouse, Director. We also have several members of the company's senior management team with us today, including William Greenberg, co-Chief Investment Officer; Matthew Koeppen, co-Chief Investment Officer; Mary Riskey, Chief Financial Officer; Rebecca Sandberg, General Counsel and Secretary; and Margaret Karr, Investor Relations. We are also pleased to have with us today Reece Devlin and Dayo Olateju, who are representing our independent registered public accounting firm, Ernst & Young. The Board of Directors has appointed Chris Sundberg of Broadridge Financial Solutions to serve as the inspector of elections at this meeting. Ms. Sundberg executed the oath of her office prior to the start of the meeting. A detailed agenda and the rules of conduct for this meeting are available on the meeting website. In order to ensure an orderly meeting, today's proceedings will be conducted pursuant to the requirements set forth in the rules of conduct. I would now like to introduce to Two Harbors' General Counsel and Secretary, Rebecca Sandberg, who will serve as Secretary of this meeting. Rebecca, you may proceed with the report of the Secretary.

Thank you, Steve, and good morning, everyone. Today's meeting will take place as described in the agenda. We'll first provide a description of each item of business to be acted upon. We'll then conduct a question-and-answer session to address stockholder questions that are pertinent to the matters to be acted upon at today's meeting as well as to answer appropriate questions regarding the business and operations of the company. I note for the record that the company has received an affidavit from Broadridge Financial Solutions certifying that the notice of meeting, the accompanying proxy materials and our annual report on Form 10-K were mailed beginning on April 7, 2020, stockholders of record at the close of business on March 27, 2020, the record date for this meeting. I also note for the record that copies of the notice of meeting, the proxy statements and the form of proxy were previously filed with the SEC and are available on the meeting website. In addition, I have been advised by the inspector of election that at least a majority of the company's issued and outstanding shares entitled to vote are represented at today's meeting. Finally, some of our comments and responses to questions during the meeting today may include forward-looking statements that are based on certain assumptions and are subject to a number of risks and uncertainties. The risks, uncertainties and assumptions that could affect these forward-looking statements include risks that are described Two Harbors' SEC filings. I'd also like to point out that the information presented at the meeting may include references to amounts that are expressed on a non-GAAP basis. A reconciliation of such non-GAAP amounts to GAAP and other information related to these non-GAAP measures is available on our Investor Relations website at investors.twoharborsinvestment.com.

Thank you, Rebecca. A quorum is present, and the meeting is duly constituted. The report of the Secretary and the presence of a quorum is accepted. I direct that the affidavit of meeting be made part of the minutes of this meeting. We may now proceed to transact the business for which this meeting has been called. Since there were no stockholder nominations or proposals filed in advance of this meeting, the only matters on which the stockholders at this meeting are voting include: one, the election of 8 directors; two, an advisory vote relating to executive compensation; and three, the ratification of the appointment of Ernst & Young to serve as the company's independent registered public accounting firm for the year ending December 31, 2020. I will now address each of these proposals separately. As a reminder, the voting polls are currently open and will remain open until I announce their closure later in the meeting. Proposal 1. The first proposal we will consider is the election of 8 directors. As indicated in the company's proxy statement, the Board of Directors has nominated the following individuals, each to serve as a director until our 2021 Annual Stockholders' Meeting and until his or her successor is duly elected and qualified. The 8 directors nominees include: Spencer Abraham; James Bender; Karen Hammond; Reid Sanders; James Stern; Thomas Siering; Hope Woodhouse; and myself, Steve Kasnet. A majority of all the votes cast at this meeting for a director nominee is sufficient to elect a director. Proposal 2. The second proposal is an advisory vote on executive compensation. SEC rules require public companies to provide stockholders with periodic advisory or nonbinding votes on executive compensation practices. As described in our proxy statement, the company is externally managed by PRCM Advisers pursuant to a management agreement and, therefore, does not have any employees does not pay any cash compensation directly to any of our executive officers. Each executive officer's compensation is comprised of cash compensation paid by the external manager and equity awards granted by Two Harbors pursuant to our equity incentive plan. The amount of cash compensation paid to each executive officer is determined by and is the responsibility of the external manager, and the amount of the equity awards granted to each named executive officer is determined by the company's Compensation Committee and approved by the Board. We are required by SEC rules to seek an advisory vote from our stockholders to approve the compensation of the executive officers listed in our proxy statement. Similar to last year, we are asking stockholders to vote for the adoption of the following advisory resolutions. Resolved, that the stockholders of Two Harbors Investment Corp. approve, on a nonbinding advisory basis, the compensation paid to the company's executive officers, as disclosed in the company's proxy statement for the 2020 Annual Meeting of Stockholders, pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the compensation discussion and analysis and related narrative discussions in the proxy statement. A majority of all the votes cast at this meeting is sufficient to approve this proposal. However, this vote is advisory only and is not binding on Two Harbors or the external manager. Proposal 3. The third and final proposal is the ratification of the appointment of Ernst & Young LLP to serve as the company's independent registered public accounting firm for the year ending December 31, 2020. Although ratification is not required by our bylaws or otherwise, the Board of Directors is submitting the selection of Ernst & Young LLP to our stockholders for ratification as a matter of good corporate practice. Representatives from Ernst & Young are present and will be available to answer questions in the question-and-answer session. The majority of all the votes cast at this meeting is sufficient to ratify the appointment of Ernst & Young LLP to serve as the company's independent registered public accounting firm. The polls have been opened for voting on each of the items of business since the beginning of this meeting and will remain open until I announce their closure later in this meeting following the question-and-answer session. While we allow stockholders to submit their votes, I will turn the floor over to Margaret Karr from our Investor Relations team to lead a question-and-answer session to address questions received prior to or during today's meeting. Stockholders are invited to submit questions during this portion of the meeting via the meeting website. In the interest of time and efficiency, we reserve the right to group questions of a similar nature together to facilitate the question-and-answer portion of the meeting. We may not be able to answer all questions submitted in the allotted time.

Thank you, Steve. Our first question is, how are you thinking about your dividend going forward, given what has transpired in the past few months? Will you reinstate your dividend?

Thank you, Maggie. This is Tom Siering. I'll start on that, and then hand it off to Mary Riskey. So presently, we are not in a position to provide guidance on future dividends. Having come through a historically tumultuous time in the markets, we want to take time to evaluate our future dividends in light of the current compensation of our portfolio and the expected returns available. Mary?

Thank you, Tom. As we have consistently stated, when establishing our quarterly dividend, we look at many variables. These include sustainability, earnings power, impact to book value and REIT taxable income. Over time, the dividend reflects the economic return of the business. Together with our Board, we will evaluate the quarterly dividend based on our current portfolio, and we fully intend to comply with REIT distribution requirements.

Thank you, Mary. So our second question is, do you expect COVID-19 to continue to affect your business? What are you doing to mitigate the effects going forward and increase the stock price?

Yes. Thanks, Maggie. This is Tom Siering again. So I'll start, and then ask Bill Greenberg and Matt Koeppen to add comments. We took very decisive action in March. As Steve mentioned, first, we prioritized our people and implemented mandatory work-from-home measures across our company. Our people have adapted well, and we are able to execute our day-to-day business with very little disruption. Secondly, from a portfolio management standpoint, we focused on derisking our portfolio in order to establish and maintain a strong liquidity position. As a result, we satisfied all margin calls and did not have to enter into any forbearance agreements with our lenders. Our liquidity position continues to be quite strong, and we are confident in that going forward. Bill? Matt?

Yes. This is Bill Greenberg. I'll add a few comments. The COVID-19 will certainly continue to affect our business in the months to come. The most visible manifestation of that will be in the mortgage forbearances that are affecting our MSR assets and portfolio. We are currently experiencing mortgage forbearances, right in line with other industry benchmarks, of right around 7% on our GSE portfolio, although importantly, about 4.2% of all of our loans in forbearance are currently paying on their mortgages and have made their full May payments. So our effective forbearances are lower than the 7%. We have -- as Tom mentioned, we have a strong liquidity position. We're sitting with around $1.2 billion in cash, and we think that is more than sufficient to be able to manage through the advancing obligations that we have in front of us and somewhat. As that continues to unfold and we get more clarity, which we're getting with every day that passes, we feel more confident that we'll be able to return our portfolio to a more steady-state construction, where we think we can generate returns in the low mid-double digits, but that will take a little bit of time until we're able to return to that profile.

Great. Thank you, Bill. We have now concluded our Q&A session, and I will hand the meeting back to Steve.

Thank you, Maggie. Since there is no further discussion, I declare the polls for each matter voted upon at this meeting closed at 10:26 Eastern Time today, May 21, 2020, and direct the inspector of elections to tabulate the ballots. Please wait one moment while we confirm the results. We will now proceed to announce voting results. I've been advised by the inspector of elections that the following 8 nominees have received a majority of all the votes cast for election as directors: Spencer Abraham; James Bender; Karen Hammond, Reid Sanders; James Stern; Thomas Siering; Hope Woodhouse; and myself, Steve Kasnet. Accordingly, each of these individuals has been elected as a director of the company to serve for the term expiring on the date of the company's 2021 Annual Stockholders Meeting and until his or her successor has been duly elected and qualified. I have been advised by the inspector of elections that a majority of all the votes cast at this meeting voted in favor of the advisory vote concerning the company's executive compensation. And finally, I have been advised by the inspector of elections that a majority of all the votes cast at this meeting voted in favor of the ratification of the appointment of Ernst & Young as the company's independent registered public accounting firm. The inspector of elections will furnish the secretary a written report of the final vote count with respect to the matters voted on today, which shall be included in the minutes of this meeting. I want to thank you for attending today's virtual Annual Meeting of Stockholders. We appreciate your support and the continued confidence demonstrated by your investment in Two Harbors. The meeting is now adjourned.

Thank you. This does conclude today's conference call. You may now disconnect.