Good morning, my name is Bridgette and I'll be your conference facilitator. At this time, I would like to welcome everyone to Two Harbors' Third Quarter 2016 Financial Results Conference Call. All participants will be in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer period. I would now like to turn the call over to Tim Perrott, Senior Director of Investor Relations for Two Harbors.

Thank you, Bridgette, and good morning to everyone; and thank you for joining our call to discuss Two Harbors' third quarter 2016 financial results. With me on the call this morning are Tom Siering, our President and CEO; Brad Farrell, our CFO; and Bill Roth, our CIO. After my introductory comments, Tom will provide a brief recap of our quarterly results, and an overview of our strategy; Brad will highlight key items from our financials and Bill will review our portfolio performance. The press release and financial tables associated with today's call were filed yesterday with the SEC. If you do not have a copy, you may find them on our website or on the SEC's website at sec.gov. In our earnings release and slides, which are now posted in the Investor Relations section of our website, we have provided a reconciliation of GAAP to non-GAAP financial measures. We urge you to review this information in conjunction with today's call. I would also like to mention that this call is being webcast and maybe accessed on our website in the same location. Before I turn the call over to Tom, I'd like to remind you, that remarks made by management during this call and the supporting slides may include forward-looking statements. Forward-looking statements reflect our views regarding future events and are typically associated with the words such as anticipate, expect, estimate, and believe or other similar words. We caution investors not to rely on duly on forward-looking statements; they imply risks and uncertainties and actual results may differ materially from expectations. We urge you to carefully consider the risks described in our filings with the SEC, which may be obtained on the SEC's website at sec.gov. We do not undertake any obligation to update or correct any forward-looking statements if later events prove them to be inaccurate. I will now turn the call over to Tom. Tom?

Thank you, Tim and good morning everyone. We hope that you had a chance to review our earnings press release that we issued last night. As you can see, we delivered strong results in the quarter and made significant progress on our strategic initiatives. We drove solid increases in book value, core earnings and comprehensive income. our success this quarter is reflective of our team’s disciplined approach to risk management and smart portfolio choices, both of which are key aspects of our value proposition to our shareholders. In support of our strategy, we also made progress on several of our initiatives focus on streamlining the business model, redeploying capital to maximize returns and then improving efficiencies. All of these efforts place us in an excellent position as we head toward the end of the year and into 2017. Looking at the highlights of our financial results as reflected on Slide 3, we delivered a total return on book value of 4.2% in comprehensive income of $136.5 million or $0.39 per share. GAAP net income was $0.34 per weighted average share and core earnings were $0.24 per weighted average share. Our rates, credit and commercial strategies all contributed to our performance as Bill and Brad will detail for you later. I would like to spend a few moments discussing our strategic mindset and current areas of focus. This is shown on page 4. Simply put we employ a flexible model that allows us to allocate capital in a manner to maximize shareholder returns over the long-term. The most important component of our approach is the way we manage risk. We focus on generating high returns leading to strong dividends while keeping our conservative risk profile and protecting investors' capital. In fact despite all the recent discussions regarding our potentially higher interest…

Thank you, Tom. Let's turn to Slide five, our book value at September 30th, was $10.01 per share which represents an increase from June 30 book value of $9.83 per share. Comprehensive income increased to $136.5 million this quarter driven by higher leverage and strong underlying yield across our RMBS in commercial loan portfolios and favorable valuation gains in our non-agency RMBS. Bill will expand upon this overall portfolio performance in a moment. Please turn to Slide 6, core earnings were $0.24 per share in the third quarter representing a $0.02 per share increase over the prior quarter. Core earnings principally benefited from higher overall leverage in the portfolio and lower expenses. Our average debt-to-equity increased from 3.6 times to 4.1 times quarter-over-quarter as we continue to find investment opportunities in agency RMBS, MSR and CRE. Offsetting our net interest income growth, we realized higher MSR amortization consistent with our expectations in an increased prepayment speed environment. I would also note that our other operating expense were $14.8 million compared to $17.6 million in the second quarter of this year. This nominal decrease of $2.8 million and the core related drop in expense ratio from 2.1% to 1.7% was driven by a lower amortization of restricted stock awards quarter-over-quarter, and some early reduction in compensation charges due to GAAP accounting for the restructuring. The other operating expenses do not include $1.2 million of recognized restructuring costs included in the financials. Consistent with our prior quarter earnings discussion, the full effects of the discontinuation of the mortgage loan conduit and other expense efficiencies across our business will not be fully realized until 2017. With that in mind, we continue to anticipate our expense ratio in 2017 to stabilize and the 1.6% to 1.8% range as we support our investment opportunities including…

Thank you, Brad. Market conditions were favorable for our strategy during the third quarter, which helped drive both strong quarter earnings and an increase in book value. Looking at Slide 8, you will see that our portfolio allocation was relatively stable quarter-over-quarter. We continued to increase our capital commitment to the commercial strategy and expect the credit capital allocation will decrease slightly going forward, as we wind down the mortgage loan conduit. As of September 30th, our portfolio was 17 billion with 54% of capital allocated to rate, 31% to credit and 15% to commercial. Moving to Slide 9, let's cover a few of the drivers of our portfolio performance. During the quarter, rates drifted higher, and both agency and mortgage credit spreads tightened, positively benefitting both our rates and credit strategies. Consistent with expectations, the rate yield, which included MSR was modestly lower as prepay speeds increased in the quarter. Relatively low rates and seasonal factors contributed to faster speeds during the summer; although we do expect prepays to begin to slow as we move through the fourth quarter. Residential credit performed well also and our legacy non-agency holdings delivered an attractive 9.1% yield. This higher realized yield was due to strong underlying credit performance and in the increase in prepayment as well as from the continued release of credit reserves over the past few years. Consistent with last quarter, our commercial real estate lending strategy, which is comprised predominantly of first lien commercial loans delivered a strong yield of 6.2%. Please turn to Slide 10 to discuss our rates positioning and activity in the third quarter. Consistent with our philosophy of sustaining an overall conservative risk profile; we have maintained a very low exposure to interest rate. We are focused not only on preserving book value and changing…

[Operator Instructions] Our next question is from Bose George with KBW. Your line is open.

Hi guys. Good morning. The first question is just on the agency MSR side, can you remind us how many partners you work with there for the flow business and also on the bulk side, do you see any value or is that an unlikely place for you to participate?

Hey, Bose. Good morning. Thanks for joining us. Yes. We have roughly mid-teens number of flow sale partners that we work with. And the thing we like about the flow sale is, typically we’re able to get that a little bit cheaper than the bulk. That being said, we don’t mind where we look at a lot of bulk opportunities and we do bid on some and occasionally we win some, but it would have to be consistent with the value we see in the flow sale arrangement. The other thing, I was just going to add from a capital allocation standpoint, it works really well, because we do about $3 billion a month and it’s a nice way to deploy capital on the steady basis.

Okay, that makes sense. And then as you’re switching to the Ginnie Mae position to this exit that, so is that purely just the better match on portfolio heads that you mentioned, are there any sort of regulatory reasons where it’s easier not to be in that market?

Not really on the regulatory side, frankly, the new issue conventional’s very high quality, the coupon rates that we’re getting there are quite low in the historical stance, somewhere around 3.7%. It's actually a really good, that really pairs much better with the agency pools. Ginnie Mae was a fairly small part of portfolio, and it had gotten relatively seasoned, it was not as good as the hedge from that standpoint.

Yes, Bose its Tom, good morning. Also there is some operational complexity at Ginnie Mae, but it's not approached them in conventional MSR and as we think about streamlining our business, small winds like that are meaningful.

Okay, thanks. That makes sense. Just one more in the MSR, the mark that you said the $33.5 million, can you just explain that with some of it whereas I guess just a normal amortization reduction to value of the asset?

Yes, I think it's going to be combination of - the biggest driver is going to be your run off and that prepayment behaviors were higher coming off the summer months. There is some element of small amount of market move combined with the Ginnie Mae sale, but the runoff because of prepayment behaviors was definitely the biggest driver of that.

Our next question is from Douglas Harter with Credit Suisse. Your line is open.

Thanks. Good morning. Wondering how much that of the capital, the last Agate Bay deal freed up from the conduit and how much is though so to be freed up?

Yes, so the last Agate Bay, the amount of capital to that was relatively small and if you think about it as $360 million or so securitization and typically, the amount of capital to any one securitization sort of in that 2% to 4% range. So, really fairly small, just to give you a sort of an update on that; we’re on target with our plan to have the conduit wind down substantially complete by the end of the year. we're in the process of redeploying the capital currently and that'll probably continue into the first quarter; so we're right on track with the plans that we discussed on our last call.

And I guess along the lines of redeploying the capital, as we look forward over the coming quarters, given the MSR flow and the attractiveness of CRE, how much of that capital comes from the conduit versus incremental leverage versus kind of needing to reduce either the agency or non-agency MBS portfolios?

So if you think back to what we talked about before; we said somewhere around a $150 million to $175 million of capital to conduit; so CRE if you look at slide 8, that's been going up about 2% per quarter; MSR is a little bit less than 1% amongst what’s called, that 2% a quarter, so it combines about 4%; so you should expect to see the credit strategy, which was 31%, that'll probably go down in the mid-20s or so; and you could probably see the rate strategy, the agency part of that will probably come down slightly.

Got it. Thank you, Bill.

Our next question is from Mark DeVries of Barclays. Your line is open.

First, I just wanted to clarify the guidance around the sales and the exit of the conduit businesses; is that $20 million is that tended to be a format benefit, so expenses plus the benefit from redeploying capital?

Good morning, Mark. It’s Tom. Yes, that's correct.

Okay. And are you still ramping to that as you enter 2017 or is $5 million a quarter kind of a good way to think about the balance debt?

Well, depending on few things including capital redeployment; so we think that's the good guidance for 2017, but there can be some quarterly vagaries in that depending upon primarily the capital redeployment.

Okay, got it. Next, at your CRE business, are you seeing any benefit yet from banks pulling back from the market as a result of some of the content, the comments from the fed around CRE concentrations?

Hey, Mark. It’s Bill. Yes, I mean we haven't discussed that explicitly in the last few quarters, but clearly that is a trend that we've seen and probably, the biggest evidence of that is the fact that if you look at the loans that we're making today and I talked about this before, we are getting higher spreads for the same LTV or similar spreads for lower LTV than we saw say, same time last year. and so that's directly a result of a combination of the fact that there's a lot of activity going on as well as the fact, the CMBS market has a smaller footprint and the banks have a smaller footprint; so it's actually kind of a combination of things, that I mean we're just thrilled, we think it's a great time to be a lender in the space given the credit quality that we can write and the spreads that we're able to get.

Yes. And one thing I would add to that Mark, there's a misconception around these regulatory changes that are affecting the banks. People think that this is a recent commentary by the regulators on the state of the market; in fact these changes were enacted years ago and are just now coming into place. and so, I think that there's some confusion in the market around that and something that we’ve tried to disabuse people of. In other words, this has been years in the making and these changes are just kicking in now.

Got it. And then just one last question on your credit strategies, where are you seeing the most attractive return opportunities and are you looking at any kind of new investments in that area?

So on the credit strategy, I think probably the most exciting thing from the way we see it, if you look at the yield that we've got this quarter, this is on Slide 9, was 9.1%, which is up 80 basis points. and so the thing about them, we talk about the tailwinds supporting the credit strategy for, I don't know a long time, but basically the continued good performance, higher prepays and the release of credit reserves have driven that increase in the yield, and furthermore, we think that those yields, that yield should be fairly consistent on a go-forward basis. And I spoke last quarter that the average life of our holdings is somewhere in that seven to eight year range. so, we're very bullish on that part of our strategy on the credit side. Now in terms of new opportunities going forward, the other thing I would say is that we are still finding some opportunities in the residential space although certainly not what we saw years ago. So I'd say that in terms of going forward that's really what we're most excited about. I'd like to make one last point on that, the other thing that's interesting about that credit strategy is predominantly all of the bonds are floating rate. And so that's one of the contributors I mentioned on the call about our income generating capability in a higher rate environment. That's one of the things that contributes to that as well as some of the other things like CRE and our swap positions et cetera.

Okay, got it. Thank you.

Thanks, Mark.

Our next question is from Trevor Cranston with JMP Securities, your line is open.

Hey thanks, good morning. A question on the MSR portfolio that's expected to continue to grow into next year, can you talk about how you guys think about the size of that portfolio relative to the current size of the agency book, and then also how you think about kind of the optimal mix in terms of balancing the MSR versus the slot book of the hedge? thanks.

Hey, Trevor. good morning. Yes, so I mean I guess I'd say a couple of things, we're at obviously a very low rate environment there have been. The MSR we're getting every month is are very low coupons, which we would expect to be around for a long time and would obviously be a great benefit to it in a higher rate environment, not only from an increase in value, but just lower prepays are going to drive higher income. So we’re very excited that we’re ramping this at roughly $3 billion a month of notional. Now in terms of sizing, we talked overtime about how this could be 20% of our portfolio fairly easily, we are not really that close to that as you can tell by the market value the MSR still some 500 million and 20% would put you up around 700 or more. And so we feel like we have a very good runway there. In terms of sizing, it’s really; we talked before about sort of approximate hedge ratio five or six to one for new issue in terms of that. So we still have quite a bit runway in terms of that and you have a sort of vis-à-vis our agency holdings.

Got it. okay, that’s helpful. And then one more question on the agency portfolio, some of your peer companies have talked a bit this quarter about having found attractive value in the TBA dollar role market can you guys comment on you guys are kind of seeing the relative value between spec pools and TBAs currently?

Sure, yes, I mean the Fannie 3 role has been special for a number of months. So, certainly that’s something it's not massively special, but a little bit special. In what we do is we look at our positioning in TBAs versus specified pools in terms of how special is the role, how long that we think it will exist, and then alternatively how much do we have to pay for prepayment protection. As a result, especially to the role, prepayment protective stories have been trading fairly cheap. So really, it’s a tradeoff of how long you think something is going to be around versus getting prepayment protection that will obviously be around from the life of the security. That’s not typically been a huge area of focus for us relative to the MSR and pools together, which we think drive sort of a low-to-mid double digit gross ROE, CRE in that same bucket. So, really, we’re mostly focused on really driving that as opposed to tactically trading specified roles.

Okay. Keep up good work.

Thanks, Trevor.

Our next question is from Joel Houck with Wells Fargo Securities. Your line is open.

Thank you and good morning. So, if you look at the relative 2016, there is a very strong and consistent with what we’ve seen out of others, and spread volatility or interesting rate volatility has been well behaved figuring the latter half of the year, and the credit spreads that generally narrowed with the exception of early part of the year and around BREXIT. So if you’re looking out in 2017, can you maybe talk about pros and cons, or maybe handicap spread volatility remaining low and credit spreads due to remaining tight or getting tighter, and how you think about those two dynamics, obviously a fairly large exposure in both the rates and credit strategy, I think that would kind of be helpful to hear your thoughts on that?

Yes, sure. Thanks for joining us, Joel. Well, I think there's two parts to that question I think, so let me just attack each of them. First of all on interest rate, I think it's really important that to reiterate what we said on the call; our interest rates exposure is extraordinarily low, not only from a book value standpoint, but also from income standpoint; we believe that it's the fed raises rates; our income will be relatively unchanged. so, in a higher income in higher environment; as I said just a few minutes ago, we're going to benefit from the floating rate side of non-agencies; commercial real estate and swaps, and we're going to get positive benefits from MSR; slower prepays as well as additional float income. So, from a rate standpoint, as we look into 2017, we're very comfortable with our earnings power generating capabilities as rates move higher. The second part of your question was related to spreads; and I would say that we like any asset management that focuses on - anything is not a treasury if you will; our subject to changes in spreads. the most important thing I think I would point out is that MSR is a mitigant against spread widening. So to the extent that people are expecting the spreads might widen in a higher rate environment; MSR offset that, because that's looking at the mortgage rate, not the treasury of the swap rate. so, we believe that our book value volatility as spread widened would be dampened by the fact that we have MSR in place.

Obviously, the MSR you pointed earlier is going to grow particularly relative to the agency to at least the capital allocated agency - is the size of the MSR now where you are comfortable in a spread widening around or could it be - I think clearly you're more comfortable now than you were a year ago, but kind of maybe talk about the relative size in terms of kind of like a macro hedge I guess?

Yes. I mean, look, in the extreme if your thought spreads are going to widen, that's all you thought and you have all MSR and nothing other...

Right.

Look our belief is that agencies paired with MSR is not only a higher yielding strategy; but it's also a much lower risk strategy in terms of the spread risk. So, where we are now, the MSR portfolio has plenty of room to grow; and that's why we're particularly focused on it. Not only because it's a great hedge, but because we're getting very low coupons on the MSR. these are brand-new loans, which we think will perform very well in not only rising rate environment, but also in a spread widening environment.

All right, great. Thank you very much.

Yes Joel, and just one thing, this is Tom; I'll just add one thing about the credit book. we're really happy with our legacy non-agency portfolio; the fundamentals the technicals in that space, we think are just rock power. And what I mean from that is I guess, we've discussed why we'd like that those so much. I mean the agent portfolio has many benefits. And as a result of that we're starting to see prepayment speeds increase from very modest levels to slightly higher levels, but we are enthusiastic that those prepayment speeds may increase in the future, and with respect to technical factors, the fast money crowd has totally left that space or almost entirely left that space. and so who has left holding that a real money long-term holders, and as a result of that the technical factors in the market are really favorable to us. Thanks for your questions.

Thank you for bringing that out.

And our next question is from Jessica Levi-Ribner with FBR & Company. your line is open.

Good morning. thanks for taking my question. I was wondering I missed if you said what kind of capital allocation you could give to the CRE portfolio?

hey, Jessica. Thank you. This is Bill. Yes, if you think about what we’ve talked about was you know roughly if you look at Slide 8, that’s pulling up about 2% a quarter. so certainly, we could be into the 20s. at this time next year, which depending on the continued opportunity, which currently we see as being very attractive. we would intend to continue at that kind of a pace.

Okay. I know that broadly, there is a lot of good opportunities, good yields with attractive LTVs and all that, but are there any areas of the market that you are more cautious on that you perhaps are not lending to and how can we think about that?

Yes. that's a great question, there has been stuff written about hotels here or there, or high end condos in New York City et cetera. I mean if you look at the mix of what we're lending to, it's typically, our stabilized LTV is in the mid-60s, initial LTV is a little bit over 70s. so, we're going in with about 30 points of sponsor equity, we’re very focused on, more focused on cash flow at the outset as opposed to taking more real estate risk in other words, deals where there's not really cash flow, but you're counting on the value of the property. So while there's certain parts of whether it's Florida or midtown of the condos everybody likes to talk about those. I mean we're just not really focused on that, on those areas, we're really frankly focused on deal-by-deal, does it make sense are the coverages there and are we going to get a good return and get our money back.

And for instance, we always keep an eye for instance on our hotel exposure, just because that has a lot of big detailers of the economy generally. So, if you look at in our portfolio, this looks closure to those deals we have just small point of exposure to that space.

And anything you like a lot?

Anything we like a lot.

What we like in the MSR opportunity is very abundantly we are very enamored of relatively non-agency book of the commercial real estate. Trending set is abundant. We are enthusiastic about all those things and importantly, we should note that we’re quite said about their prospects for 2017. So we’ve made a lot of progress in streamlining our business. We are redeploying capital to more lucrative spots. and so beside the fact that we had a very solid quarter and in my eyes, we’re very enthusiastic about 2017 and the prospects for the company for our earnings and for our shareholders.

Fair enough. Thank you very much.

You bet, Jessica.

I am not showing any further questions. so, I'll now turn the call back over Mr. Siering for closing remarks.

Thank you, Bridgette. We will be releasing a format of webinar on mortgage servicing rights in the next couple of weeks. We will make you aware when this is available. Thank you for joining our third quarter conference call today. And we will look forward to speaking to you soon. Have a wonderful day.

Ladies and gentlemen, this does conclude the program. And you may now disconnect. Everyone have a great week.