Good morning. My name is Sonia, and I'll be your conference facilitator. At this time, I would like to welcome everyone to Two Harbors' Third Quarter 2018 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 Maggie Field with Investor Relations for Two Harbors.

Thank you, Sonia, and good morning, everyone. Thank you for joining our call to discuss Two Harbors' third quarter 2018 financial results. With me on the call this morning are Tom Siering, our President and CEO; Mary Riskey, our Acting CFO; and Bill Roth, our CIO. After my introductory comments, Tom will provide an overview of our quarterly results, Mary 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 may be accessed on our website in the same location. Before I turn the call over to Tom, I would like to remind you that remarks made by management during this conference call and the supporting slides may include forward-looking statements. Forward-looking statements are based on current beliefs and expectations of management and actual results may be materially different because of a variety of risks and other factors. Such statements are typically associated with the words such as anticipate, expect, estimate and believe or other such words. We caution investors not to rely unduly on forward-looking statements. Two Harbors describe these risks and uncertainties in its annual report on Form 10-K for the fiscal year ended December 31, 2017, and in other filings that it makes or may make with the SEC from time-to-time, which are available in the Investor Relations section of Two Harbors’ website and on the SEC's website at sec.gov. Except as may be required by law, Two Harbors does not update forward looking statements and expressly disclaims any obligation to do so. I will now turn the call over to Tom.

Thank you Maggie, and good morning, everyone. We hope that you have a chance to review our earnings press release and presentation that we issued last night. Please turn to Slide 3. This quarter was highlighted by strong core earnings and the tremendous progress we made in the redeployment of capital from the CYS acquisition in the both MSR and non-Agencies. Core earnings including dollar roll income was $0.48 per basic share in the third quarter, representing the return on average common equity of 12.4%. We are especially pleased with this result in a quarter where we were redeploying capital from the CYS transaction. Please turn to Slide 4 for an overview of our strategy. We believe that we operate a superior business model through our diversified rates and credit strategy and our sophisticated approach to risk management. Additionally, we maintain a keen focus on optimizing our balance sheet to enhance earnings and stockholder returns. As a result, we believe that we generate better returns with superior stability in our book value. Please turn to Slide 5. The objective of our strategy is to make our shareholders more money while keeping an acute focus on risk management and minimis exposure to changing rates. With this objective in mind, we thoughtfully exam opportunities for growth and innovation in the mortgage REIT space. In July 2016, we announced that we were discontinuing our mortgage loan conduit program to reduce our operating complexity and cost, and to position us to generate stronger returns for our stockholders. Then in 2017, we formed Granite Point Mortgage Trust, creating a standalone vehicle for a commercial business that we established in 2018. As you can see in this slide despite a flatter curve and higher rates, our dividend and book value ratio has steadily increased and now…

Thank you, Tom. Turning to Slide 6. During the quarter, we incurred a comprehensive loss of $102.8 million or $0.46 per share, which includes the dilution from the CYS acquisition. Our Book value at September 30th was $14.81 per share compared to $15.69 at June 30th. After accounting for our third quarter common stock dividends amounting to $0.47 per share, we generated a return on Book value of negative 2.6%. As we indicated on our August earnings call, our Book value this quarter decreased approximately 2% due to the acquisition of CYS. Additionally, Book value was adversely impacted by wider agency spread, under performance of both higher coupon agencies and specified pools and some exposure to rates. This quarter our Book value was also affected slightly by a non-recurring deferred tax assets write down resulting from the deemed liquidation of a taxable REIT subsidiary. As we turn to Slide 7, let's review our core earnings results. Core earnings including dollar roll income was $0.48 in the third quarter representing a return on average common equity of 12.4%. I would note that certain expenses resulting from the acquisition of CYS are excluded from our core earnings, including the purchase premium, transaction expenses, restructuring charges and the downward adjustments to the management fee. Our earnings power continues to align well with our dividend projections and consistent with our guidance in early 2018, we expect to pay a common stock dividend of $0.47 in the fourth quarter subject to the discretion and approval of our Board of Directors. We anticipate that our other operating expense ratio excluding non-cash LTIP amortization will trend lower as a result of the CYS acquisition. Our expenses in the quarter tick down slightly to 1.3% from 1.4% primarily due to having a larger capital base. Ultimately, we expect…

Thank you, Mary and good morning, everyone. The investment team made excellent progress reallocating capital from the CYS acquisition this quarter, which I will highlight in more detail shortly. First though let's review our investment portfolio, quarterly performance and risk positioning. As we turn to Slide 9, you can see that at September 30th, our portfolio grew to approximately $28 billion. Our capital allocation was 76% to our rate strategy and 24% to the credit strategy. This shift towards the rate strategy was consistent with our expectations when we acquired CYS' agency portfolio. Please turn to Slide 10. In the third quarter interest rates rose, the curve flattened and agency mortgage spreads were mixed, both MSR and credit performed well. MSR increased in value as rates rose and spreads widened and residential credit continued to benefit from strong yields and stable spread. The main driver of our performance this quarter was the addition of over $10 billion of agencies when the CYS acquisition closed on July 31st. In August and September, we recycled these holdings into higher coupon 30 - years as we believed these assets offer more attractive returns. During those two months, the higher coupons underperformed as did some of our existing specified pool holdings negatively impacting our book value, Extracting the impact of the merger and the related agency pool performance from August and September, we estimate that our book value would have been down less than 3% in the quarter. As we continued to redeploy capital from agencies into MSR and non-agency securities, we expect to generate better returns, a higher net interest margin, lower leverage and greater book value stability. Let's turn to Slide 11 to review the quarterly activity in our rate strategy. In addition to the growth in agency securities we added TBA…

[Operator Instructions] Our first question comes from Doug Harter of Credit Suisse. Your line is now open.

Thanks. I guess as you think about portfolio rotation of the CYS acquisition going forward, does the widening that you've seen since the closing of the acquisition kind of change your appetite there? Or do --and I guess how do you balance the risk of kind of rotating out of agency kind of at the wides is headed. Just I guess thoughts around that.

Hey, Doug. Good morning. Thanks for joining us, great question. So, yes, obviously with agencies being wider that's a consideration. We've also seen non -agencies as I mentioned on the call are also somewhat wider in October, which roughly if you compare the widening in each, the relative attractiveness hasn't changed. So it doesn't change our appetite for non-agencies. The other thing is if you look at our expected returns on the combination of MSR and agencies that's widened commensurate with the change in agency spreads because that's obviously part of that strategy. So we like the return expectancy on the combination of MSR and agencies, plus it also is a much lower risk profile with regard to agency spreads. So I would say that going forward despite the widening we've seen in agencies, you should still expect us to see to grow the MSR and non-agencies based on current valuation.

Thank you and the next question comes from Bose George of KBW. Your line is now open.

Hey, good morning. Actually one on book value, when you think about the 4% decline you noted quarter today, was that also somewhat higher than expected given the portfolio mix kind of where it stands right now relative to kind of where you want it when everything is sort of fully allocated post a transaction?

Yes. Well, I can break that down for you pretty simply right. Rates are up a bit which is a small contributor if you look at our slide I think it's 12 that gives you the exposure. The basis is as you know substantially wider which contributes, if you look at our disclosure somewhere in that 2% to 2.5%. And then credit also being somewhat wider is another roughly 1%. So what we saw as in October is sort of extreme volatility stocks. I think everybody on this call knows we're down 10% at one point. So a substantial amount of volatility which fed into sort of all asset classes. I would note we have some credit bounced back somewhat here in early November, which is encouraging but that's sort of -- everything that has occurred is consistent with our positioning and what we disclosed in the deck. I hope that answered your question.

Actually it did, but I guess what I was trying to think about or ask also was the -- was whether the position --because in your commentary about the decline last quarter or in 3Q you noted that some of it was also the positioning relative to the acquisition. So if you strip that out that that would have been whatever less than 3%. So the question really was the 4% decline here could we make a similar comment where you're still transitioning so if you --you just said it would have been lower.

Yes. That's correct. I mean as you know we took on over $10 billion of agencies in July 31st which from a timing standpoint right before the agencies widened. And obviously that it is what it is, but yes, I think if you strip that out the numbers would be less.

Okay, great thanks. And then actually you sort of discussed this but in terms of the incremental opportunities where is kind of best place right now?

Yes, sure. So with the agency widening arm the expected returns are still low double digits, but there --I mean if you add 100 or 200 basis points to 10 or 11 you still get low double digits. They're not like 15 to 20. Agencies plus MSR though is getting close to the mid double digits, and that sort reflects that on my comments to Doug's question. And then non -agencies, the baseline as we've discussed before is high single digits with those being somewhat wider. They're still so still high single digits, but we're in that for as you know is the total return opportunity which we think is well into the double digits.

Thank you. Our next question comes from Trevor Cranston of JMP Securities. Your line is now open.

Hi, thanks, good morning. One more question related to book value sensitivity and the capital reallocation from the acquisition. So looking at slide 14 where you show sort of how things have transitioned since the deal and where they were prior to the deal. Can you share your thoughts on how long you think it will take presuming the target is to get back to the MSR allocation and the credit allocation where there were maybe around June 30th? The way things are today how long do you think it will take to get the portfolio back to that sort of balance?

Yes, good morning, Trevor. Thanks for the question. Yes, so I guess I make a couple comments on that. In terms of our run rate as you know we bought roughly $500 million of non-agencies for the last few quarters, and we're seeing good opportunity. So that's adding about 1.5% of capital per quarter to credit. MSR, we're seeing tremendous opportunity in MSR, and as you can expect by adding all these agencies and not being redeployed MSR sensitivity to agency spreads is just higher, And that's something that will be mitigated as we move forward. In terms of our activity there, we view ourselves as being really actually on or ahead of plan because we're having somewhere between 0.5% to 1% of flow. But there's a substantial amount of bulk activity. We've already closed on one transaction this quarter. There are numerous, very large packages that are out for bid that we're taking a look at. So we could actually make a pretty big dent in the deployment there even this quarter or the following quarter and get back to the mid- 20s very quickly. So I mean we're very optimistic on our ability to make great headway. Like I said, we believe that we're generally ahead of plan, but I would say that our December 31st numbers should look like we've made great progress.

Great, that's helpful. And so follow-up question on the MSR acquisition opportunity particularly on the bulk side. Obviously, it sounds like there's a fair amount of supply and availability of assets, but can you maybe give us some more color on what you guys are seeing in terms of competition for the assets among other investors and maybe else are some commentary on how you've seen valuations trend on bulk pools over the last few months? Thanks.

Yes, sure. So as we talked on prior calls annual volumes typically run well north of a $100 billion. I would say for this quarter we're already seeing north of $50 billion in numerous different packages. And I think as I mentioned on a call part of that is due to higher rates. We're coming into the year-end origination margins et cetera. So from that standpoint there's really tremendous opportunity, and that's on top of our monthly flow volume that we're doing about $2 billion or so a month. In terms of competition and valuation that hasn't really changed much from what we've seen the last few years. Typically, you'll have maybe 10 to 15 participants get a package and maybe four or five or six will show up, and if you want to win, you need to be on the market. It is competitive even though there are not a lot of players. It is definitely competitive from a price standpoint. Yields haven't really changed that much. It's interesting despite some of the volatility we've seen in other areas of the capital markets servicing valuations really haven't changed that much in the past three to six months. I'd say bulk packages baseline yields are in the 6% or so plus or minus, and flow volumes typically come in a 100 basis points are more cheaper than that. So from that standpoint to get a positive yield on your hedge that has negative duration and hedges mortgage spreads especially when mortgage spreads are wider that the combination of that package is very compelling to us. The other thing and Mary mentioned this is that as we continue to see improvement in financing terms that greatly enhances the attractiveness of the combined package.

Our next question comes from Stephen Laws of Raymond James. Your line is now open.

Hi, good morning. Number of questions have been touched on but wanted to follow up on the portfolio. Bill could you maybe talk about how actively you're looking at that CYS portfolio from the breakdown I saw earlier this year. I think they had about $5 billion of 15-year fixed-rate, I don't see that in your 9/30 portfolio. So you can maybe talk about the decisions you've made there and really what's left to do on that front or is it just more sourcing of non-agency, RMBS and MSR at this point to drive the shift and mix.

Yes. Thanks for joining us, Stephen. Good to talk to you again. So all of the exposures that we inherited from the acquisition which are pretty much 15 years in ARMs. That's all been converted to 30-year agency primarily higher coupon. I kind of mentioned that on the call and that was sort of during the widening that occurred which is what we talked about a little bit earlier. So there's really nothing left to do on that. The thing that we're really working on now is basically pushing down the agencies as we redeploy the capital from that into the MSR and non-agency. So it's really the latter of what you mentioned is opposed to the former.

Okay and it looks like you increase that non-agency about $300 million, looks like pricing is roughly flat versus last quarter. You continue to see pretty attractive opportunities there here mid quarter and what's the pipeline of a new investment activity look like on the non-agency front?

Yes. The last quarter I think gross we added close to $500 million, and we're running between $102 million and $100 million a month. Flows in that market have actually been quite good. There's been --I mean we're focusing on and as you know, the low dollar price which is the point there is because we're looking for the price appreciation as performance improves over time, which is what we've seen occur and we believe will continue to occur. So we've actually seen really good opportunity, and as I mentioned somewhere between and $102 million -$100 million a month has been our run rate of adding bonds.

Fantastic and then lastly maybe a little bit of comment on the TBA market. Looks like a significant contribution from the dollar roll income. Can you talk to how that looks now and any specialness there and what you are seeing in that opportunity?

Yes, sure. So I'd say there are a couple things I'd say about that. First of all, I would say that the $9 billion as a percent of totals probably I'll never say never but it's probably it's definitely at the higher end of what our percentage would be. I think you should expect to see that come down. If you think about moving the CYS agencies into third years, the simplest way to do that was to focus on TBAs, and then you figure that those would go down over time as that capital gets redeployed into MSR and non -agencies. The second thing is in terms of specialness, over the course of the last several quarters, we've seen some reasonable specialness in the higher coupons 4.5 to 5. For the most part, those rolls trade closer to carry today. So don't think --there's nothing --I don't think you should expect to see any major contribution from specialness at least currently. But, as we know, that can change but I think the bigger point is that you should expect to see our TBAs as a percentage of our total move lower as that capital gets redeployed.

Our next question comes from Rich Shane, JP Morgan. Your line is now open.

Hey, guys. Thanks for taking my questions. Look, given the acquisition and the plan to transition those assets you are in a unique situation that your duration is longer than it's been. It really for any point in several years. You also highlighted an expectation of higher rates obviously spreads uncertain but highlighted the possibility of wider spreads. You are effectively reducing that exposure into that market which makes sense but there's a fair amount of mark to market risk and realize loss potential as you sell into that. Is there a strategy available to hedge out some of risk in the shorter term?

Hey, Rick. Good morning and thanks for joining. I'd say a couple things. I mean this is really if you look at slide 12 of the deck this really is sort of a main thing I would point you to. From a rate standpoint, we attempt to be as neutral as possible. You'll see on the top left there that our exposure to 25 basis point moving rates is only 1% which --it's low ,it's not zero but it's pretty low. And I don't think that's terribly inconsistent with our historical positioning, but you certainly shouldn't expect to see that increase if anything we would expect to keep that fairly low. In terms of the second point, it really relates to spreads which you can see at the bottom part of that slide. I mean that the reality is we added all these agencies and whether spreads had widened or tightened. We just have a bigger exposure until that gets recycled. There's effectively two ways to hedge that. Either sell them all and hold cash, which isn't really the mandate of what we're in business for as a mortgage REIT, or we go out and buy a whole boatload of MSR which if you want to buy it at the right price at the market price that takes a little time. And as you can see we've made some really good headway. Like I said, our MSR allocation is the same as it was when we announced a transaction in the spring, but we expect that to move up into the 20s and be back into the mid 20s in not-too-distant future. So I mean that's interesting -- no, I just-- look, the positioning is pretty well laid out and I think we're making good headway on the mortgage spreads standpoint.

Yes. Hi, Rich. It's Tom. If you look at our interest rate exposure, it's very consistent with our historic profile. So our attitude towards rates has not changed. We want to be as rate neutral as is practical.

No, look, I know the rate strategy hasn't changed in any way. I think what is happening here is that you have you have emphasized focus on more bespoke, less liquid assets both credit sensitive and growing the MSR hedge book as opposed to the sort of plain vanilla strategies of owning agency mortgage-backed and hedging them in the swaps market. We know that you guys could go out and put a swap position on very quickly. But you're in this sort of inflection point where that transition is going on and I just wonder about the vulnerability as that occurs.

Well, I mean-- if I mean --let's face it, it's the rate contribution to performance this year has been fairly small. Mortgages have widened over a point since the beginning of the year and roughly 70% of that has been in the last two months. So if you're a mortgage REIT and you own mortgages and agencies are widening whether you've got your rates hedged or not that's going to show up in your results. Our focus, as you know, is to have less exposure to the mortgage spread, mortgage basis by having MSR for two reasons. One, it generates a higher expected return than just agencies hedge with rate. So we think we get paid for that plus we have reduced spread risk. And so that's where we're headed. We are where we are right now as a result of the acquisition, and that's fine. We have much higher capital base much, more ability to take advantage of opportunities, but we firmly believe that our approach and our strategy work. And it has shown to work over time and that's where we're headed.

And obviously to a wider agency spreads suggest higher earnings going forward.

Thank you. And ladies and gentlemen, this concludes our question -and- answer session. I would now like to turn the call back over to Mr. Siering for concluding remarks.

Thank you, Sonia. And thank you everyone for joining our call today. We are very excited about the opportunities ahead for our company. We look forward to speaking with you again soon. Have a wonderful day.

Ladies and gentlemen, this does conclude today's conference call. You may all disconnect.