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

Good morning. I'm Stephen 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 2021 annual stockholders meeting. At this time, I call the meeting to order. 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/TWO2021. 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 via 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 ballot will automatically represent all 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. I would now like to take a moment to introduce the other members of our Board of Directors who are joining us in this webcast: William Greenberg, 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 Matthew Koeppen, Chief Investment Officer; Mary Riskey, Chief Financial Officer; Rebecca Sandberg, General Counsel and Secretary; and Paulenier Sims, Head of Investor Relations. We're also pleased to have with us today Reece Devlin, who is 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 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. Today's meeting will take place as described in the agenda. We will first provide a description of each item of business to be acted upon. We will then conduct a question-and-answer session to address stockholder questions that relate to matters to be acted on 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 on or about April 6, 2021 to stockholders of record at the close of business on March 26, 2021, which is the record date for this meeting. I also note for the record that copies of the notice of meeting, the proxy statement and the form of proxies were previously filed with the SEC and are available on the meeting website. In addition, I have been advised by the inspector of elections 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 in Two Harbors' SEC filings. I would also like to point out that the information presented at this 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 Investors website at 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 mailing be made part of the minutes of the 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 the meeting are voting include: one, the election of 8 directors; two, an advisory vote relating to executive compensation; three, the approval of the Two Harbors Investment Corp. 2021 Equity Incentive Plan; and four, 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, 2021. 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. 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 2022 annual stockholders meeting and until his or her successor is duly elected and qualified. The 8 director nominees include Spencer Abraham; James Bender; William Greenberg; Karen Hammond; Reid Sanders; James Stern; Hope Woodhouse; and me, Steve Kasnet. A majority of the votes cast at the meeting for a director nominee is sufficient to elect a director. 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, we have implemented a number of changes to our executive compensation practices following our transition to self-management. Through August 14, 2020, we were an externally-managed company with no employees. Each of our named executive officers' compensation was 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 was determined by and was the responsibility of the external manager, and the amount of the equity awards granted to each named executive officer was determined by our compensation committee and approved by our Board. On August 15, 2020, we completed our transition to self-management and became an internally-managed company. Each of our current named executive officers became employed by us on that date, and we began to pay their compensation directly. In addition, our compensation committee undertook a process of developing and implementing a compensation program that is reflective of our company's financial and strategic objectives. We believe a critical part of our company's success depends on creating, implementing and maintaining an appropriate and competitive compensation program that motivates and incentivizes our executive officers and key employees, both in the near and long term. We also believe that as an internally-managed public company, our compensation program should be designed to align the interests of our executive officers and employees with those of our stockholders. 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. We are asking stockholders to vote for the adoption of the following advisory resolution: resolved that the stockholders of Two Harbors Investment Corp. approved, on a nonbinding advisory basis, the compensation paid to the company's executive officers as disclosed in the company's proxy statement for the 2021 Annual Meeting of Stockholders pursuant to the compensation disclosure rules of the SEC, 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. This vote is advisory only and is not binding on Two Harbors. However, the Board of Directors and the compensation committee will take the results of the vote into account in making future compensation decisions. The third proposal is the approval of the Two Harbors Investment Corp. 2021 Equity Incentive Plan. As described in the proxy statement, the 2021 plan has previously been approved by our Board of Directors, subject to stockholder approval at this annual meeting. If approved by our stockholders, the 2021 plan will replace our existing second restated 2009 in the equity incentive plan, and no new awards will be granted under such existing plan. Stockholder approval of the 2021 plan will ensure the continued availability of equity compensation as a key component of our compensation program. As discussed in the compensation discussion and analysis section of the proxy statement, we believe the use of equity compensation aligns the interests of our directors, executive officers and employees with our stockholders, plays an important role in executing upon our pay-for-performance philosophy and serves as an effective retention tool for eligible participants. The 2021 plan provides for the issuance of up to 17 million shares of our common stock via grants of common stock, restricted common stock, phantom shares and other equity-based awards. The 2021 plan also includes certain additional modifications relative to our existing equity incentive plan that are reflective of current equity compensation best practices. In order to approve the Two Harbors 2021 Equity Incentive Plan, the number of votes cast for the proposal must exceed the aggregate of votes cast against the proposal plus abstentions. The fourth 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, 2021. Although ratification is not required by our bylaws or otherwise, the Board of Directors is submitting the selection of Ernst & Young 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 section. A 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. Before moving on to the question-and-answer session, I would like to invite Bill Greenberg, our President and Chief Executive Officer, to share a few words regarding the events of the past year and certain developments related to our business. Bill, you may proceed.

Thank you, Steve, and good morning, everyone. We greatly appreciate your interest in Two Harbors and your attendance at today's meeting. We were not alone in facing numerous challenges since our annual meeting last year. Our country witnessed the ongoing economic and social impact of the COVID-19 pandemic, the social unrest and call to action on social justice issues and a contentious election process and unprecedented attack on our capital. Our country is resilient, and I believe that while these have been extremely difficult times, we will emerge stronger for it. The past year has also been one of significant change and resiliency for Two Harbors. In response to unprecedented market conditions at the onset of the pandemic, we took decisive action to sell our non-agency portfolio in order to derisk the balance sheet and fortify our liquidity position. Since that time, we have honed our strategy to focus on the pairing of agency residential mortgage-backed securities and mortgage servicing rights, which has been a core part of our investment strategy for many years. Our Agency plus MSR strategy is unique and designed to generate attractive risk-adjusted returns while reducing exposure to fluctuations in interest rates and mortgage spreads. Separately, last August, we completed our transition from external management to internal management. We believe that as an internally-managed company, we have the opportunity to deliver additional value through significant annual cost savings and enhanced returns on any future capital growth. In addition, we believe internal management provides greater transparency and aligns more closely the interests of management, the company and our stockholders. Throughout these challenges and changes, our Board of Directors and management team have remained committed to protecting the company, its stockholders and its people. We believe that the company is well positioned for success in the coming years, and we are very excited and optimistic for the future. I will now turn the call back over to Steve.

Thank you, Bill. The polls have been open 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 the meeting following the question-and-answer session. While we allow stockholders to submit their votes, I will turn the floor over to Paulenier Sims, Head of Investor Relations, to lead the 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, and good morning, everyone. We received a couple of questions from stockholders in advance of today's meeting that I will address to the management team in a moment. As Steve indicated, stockholders are invited to submit questions via the meeting website during this Q&A session. Here is the first question we received. Given the current uncertainty in the interest rate environment, can you speak to your strategy over the next year?

Thank you, Paulenier. I'll answer that question. The interest rate market has been uncertain. We began the year at very low levels of interest rates and have since seen interest rates rise substantially in the first quarter and continue somewhat. This has mostly been driven by expectations of the economy reopening and expected future growth, which has continued as well. Sitting here today, we feel that the risks to higher rates remain reasonably balanced with those to lower rates, and so we keep our exposure relative to interest rates pretty close to flat. However, continued growth in the economy will ultimately lead to a removal of accommodation by the Federal Reserve at some point. Currently, the Federal Reserve and large banks are buying large amounts of mortgage-backed securities, which have distorted the relative value proposition in those securities. Our portfolio, which includes MSR, is uniquely positioned to be able to weather the Federal Reserve's removal of that accommodation and the potentially wider spreads which will accompany that effect. We run our portfolio with low exposure to mortgage spreads. We continue to be able to do that through the addition of more mortgage servicing rights, and we expect to be able to generate attractive long-term returns over time as a result.

Thank you, Bill. Our second question relates to the company's MSR portfolio. You mentioned on the most recent earnings call that the company expects to continue to deploy capital to MSR. How large do you think your MSR portfolio can grow? And is there an optimal size relative to your overall portfolio?

Sure. This is Matt Koeppen speaking, and I'll take that one. We are definitely intending to grow that portfolio. There's no hard limit or cap really on how much MSR we might own, but we tend to think about ranges of investment that suit any given market environment, and we don't have a specific hard target, that those ranges can be a function of our overall liquidity management and our sensitivity to interest rate movements that might unfold and other factors. Having said all that, at the moment, we're in a very strong liquidity position and are looking to deploy some of that into MSR, where the expected returns continue to be attractive.

Thank you, Matt. At this time, I do not see any additional questions in the meeting queue. Accordingly, I will conclude the Q&A session and turn the call back over to Steve to close the polls and announce the voting results. Steve, you may proceed.

Since there is no further discussion, I declare the polls for each matter voted upon at this meeting closed at 10:21 Eastern time today, May 19, 2021, 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 the voting results. I have 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, William Greenberg, Karen Hammond, Reid Sanders, James Stern, Hope Woodhouse and myself. 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 2022 annual stockholders meeting and until his or her successor has been duly elected and qualified. I've 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. I've been advised by the inspector of elections that a majority of all the votes cast at this meeting voted in favor of the Two Harbors Investment Corp. 2021 Equity Incentive Plan. 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'd like to thank you for attending today's virtual Annual Meeting of Stockholders. We appreciate your support and the confidence demonstrated by your investment in Two Harbors. This meeting is now adjourned.