Good morning. My name is Marian, and I'll be your conference facilitator. At this time, I would like to welcome everyone to Two Harbors' Fourth 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 session. Today's conference is being recorded. I would now like to turn the conference over to Maggie Field with Investor Relations for Two Harbors.

Thank you, and good morning, everyone. Thank you for joining our call to discuss Two Harbors' fourth quarter 2018 financial results. With me on the call this morning are Tom Siering, our President and CEO; Mary Riskey, our CFO; and Bill Roth, our CIO. After my introductory comments, Tom will provide an overview of our quarterly and annual results, Mary will highlight key items from our financials, and Bill will review our portfolio performance and strategy. 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 on 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 the 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 describes 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 to review our results. This quarter despite our best risk management and hedging efforts our book value declined to $13.11 per share. The greatest impact to our book value resulted from spread widening on higher coupon agency securities which is primarily what we own in our weight strategy. While this book value performance was below our expectations, we believe there is substantial opportunity in 2019 to invest at these latter spreads. Bill will discuss this further in his remarks. Core earnings were $0.49 per common share representing a return on average common equity of 13.8%. We are quite pleased with this result. Though the fourth quarter was challenging 2018 overall was a transformative year for our company. We acquired CYS, generated strong core earnings, declared dividends above the cohort average, drove our expenses lower and achieved substantial scale and operating efficiency in our MSR platform, which should help drive strong returns going forward. Please turn to Slide 4. Over the past several years we have worked hard to position the company to make more money for our stockholders. We believe that we have been quite successful in this regard. As you will recall in 2016 we completed a thorough review of our entire business and decided to discontinue our mortgage loan conduit in order to reduce our operating complexity and cost. In 2017, we enhanced our balance sheet through one convertible debt offering and three preferred stock offerings. That year we also formed and spun out Granite Point Mortgage Trust as a standalone publicly traded vehicle for our commercial real estate lending business. In 2018, we acquired CYS…

Thank you Tom. Turning to Slide 5, let's review our financial results. During the fourth quarter, we incurred a comprehensive loss of $307.9 million or $1.24 per share. Our book value at December 31st was $13.11 per share compared to $14.81 at September 30th. After accounting for our fourth quarter common stock dividend of $0.47 per share, we generated a return on Book value of negative 8.3%. Book value was primarily impacted by wider agency spreads and the underperformance of higher coupon agencies as well as through softening in residential credit. As we turn to Slide 6, let's review our core earnings results. Core earnings including dollar roll income was $0.49 in the fourth quarter representing a return on average common equity of 13.8%. Core earnings this quarter benefited from the payoff of a discounted legacy non agency bond which contributed about $0.02 to core earnings. Core earnings also benefited from an increase in servicing income driven by MSR portfolio growth. Our other operating expense ratio excluding noncash LTIP amortization was 1.1% down from 1.3% in the third quarter. This is consistent with our expectations and we anticipate our expenses should remain stable in the low 1s in 2019. Let's turn to Slide 7 to review our taxable income and dividend distributions in 2018. This year the REIT generated taxable income of 490.3 million our dividend declarations of 444 million resulted in the distribution percentage of 90.6%. The tax characterization of the dividends distributed by Two Harbors will be treated as ordinary income for our stockholders. 46.3 million or approximately $0.19 per share will be carried into 2019 for future distribution. All these metrics align with our financial projections and tax planning efforts throughout 2018. For additional information regarding the distribution and the tax treatment please reference the dividend information…

Thank you, Mary, and good morning everyone. 2018 was a challenging year to be a mortgage REIT. This is particularly true in the fourth quarter as agency mortgage spreads widened, interest volatility was high and credit assets were weaker. Please turn to Slide 9, as shown on the left our portfolio is comprised of agency RMBS and TBAs as well as MSR and legacy non-agency securities. We were primarily positioned in higher coupon agencies in the fourth quarter because we view these as a better risk return opportunity. While higher coupons have had more near term volatility over time, we expect to have a greater return holding these assets. Despite the fact that these coupons underperformed in the quarter as we will discuss shortly we believe they were attractive heading into the fourth quarter and are more attractive today at wider spreads presenting the best long-term opportunity. Further based on the Fed's recent remarks around interest rates, we could see lower interest rate volatility going forward which should be good for mortgages. On the right hand side of this slide you can see our capital allocation as of March 31, July 31, which was the date of the CYS acquisition and December 31. The deployment of capital from CYS unfolded according to our plan as we shifted capital from agencies into MSR and non-agencies. As always, we actively evaluate our capital allocation going forward based on the best market opportunities. Let's turn to Slide 10, to take a more detailed look at the performance of agency RMBS this quarter. As you can see in the chart on the left-hand side of this slide throughout 2018 the agency mortgage basis widened fairly dramatically. On the right-hand side of this slide you can see price underperformance by coupon in the fourth quarter…

[Operator Instructions] We will take our first question from Bose George. Please go ahead.

I wanted to touch on you said returns on agencies compared with MSR are in the midteens. When I look at your existing return on your portfolio the $1.88 overbooked mart-to-market book value of say $13.60 or something like that. It works out to a gross ROE essentially in the midteens. So are returns in the market better than your existing portfolio? Or would you say they are in line?

This is Bill. Well, I would say two things. First of all our expected returns as I mentioned on agencies just hedged with rates are in the low double digits and as you noted, combined with MSRs in the mid double digits. And then on credit is more of a total return or expected total return story which we have discussed in the past and we see that being in the double digits. The returns that we realized on the portfolio currently are driven partly by that and also partly by the historical cost associated with what we hold. So I would say that the most important thing that we think about it what the market returns are as we redeploy capital that either comes in or as we move from sector to sector.

Okay, but I guess what I was getting to is what the incremental capital when you think about it does it boost the return on the existing portfolio because now it is obviously a high return I would say on the existing portfolio as well?

Yes, I would say that, given the wider spreads that are in the market today as we talked about on the call yes, I would say the answer is yes.

And then just switching to leverage. Can you talk about leverage actually first at the corporate level with the decline in common your preferred and your converts now are I guess 30% ish of total capital. Is that a level that you guys are comparable with or just any thoughts there would be great?

Sure, Bose this is Tom. We are comfortable with our leverage, we are comfortable with our equity capitalization as it exists today. Obviously it's something that we always keep our eye on.

And then actually one macro question, just obviously there is lot of market chatter about the Fed potentially slowing runoff of its portfolio. Just to get your thoughts on if that’s something that the Fed could end at some point in '19 or '20. And also just how you think that impacts mortgages do you think the Fed keeps running up MBS and buys treasuries or do they, how do you think they play that whole thing?

Yes, I think our view is in line with your last comment there, which is that to the extent that they would be inclined to pursue that strategy. It would be more likely that they revert to either a primarily -- primarily owning treasuries or almost exclusively. So I think our view is that it's likely that mortgages continue to decline and so I think that would be our alignment I think it would be in alignment with that your last comment was.

We will now take the next question from Doug Harter. Please go ahead.

Given the widening you saw in the fourth quarter, would this be a time where you would want to own agencies without the MSRs to get the potential recovery in those? Or do you not think that we can get a snap back from that widening?

Well, I have a couple of comments on that. First of all, I think most people on the call know that the markets have stabilized and we have seen some retracement which is contributed to the comments about our book value, and just overall markets in general. That being said, spreads are certainly still a lot wider than they were three months ago. So in terms of including servicing we still think that over a long period of time owning servicing helps us to manage our spread risk and by and large our MSR hedge pairs very well with the current coupon which is represented generally a mortgage spread risk. But I would say that we continue to see tremendous opportunity in the higher coupons. They were attractive all going into the fourth quarter but we think they are even more attractive today. The short story is they have more yield, they have more spread, they have shorter durations, so they are cheaper to hedge and being if they're not being produced as the Fed's portfolio runs off there's not supply of higher coupons. So we think there they over time should be less susceptible to supply pressures there. So I would say yes, we continue to like them, we do like them on their own but building MSR still we think is a very compelling story in terms of managing risk and generating yield.

Hey Doug, good morning it's Tom. Also it's important to know our key takeaway here is MSR did its thing in the fourth quarter as shown on Slide 11of our investor desk. So we do think it's an important part of our strategy going forward and still a very attractive asset on a standalone basis and certainly coupled with agencies.

Bill if you could just walk through obviously I know the fourth quarter was kind of a challenging quarter for most asset classes. But what were the factors that led the up end coupons to underperform so substantially kind of given the factors as to why you think they are attractive if those are on place before what kind of led to that significant underperformance?

Yes, you never really know, but I think we would highlight a few things that the fourth quarter was obviously very much of a risk off environment. Markets as you know can act irrationally and misprice assets when there is fear. Volatility was obviously substantially higher. And frankly that the combination of risk off and people not really looking for assets that were cheaper or offer relative value just the impact of the higher coupons a lot more than other sectors.

Alright, makes sense, thank you.

We will now take the next question from Stephen Laws. Please go ahead.

You talked a little bit about the market from Q4 and opportunities today, when you compare the opportunity for new investments and agency versus the opportunity on the credit side, which one is relatively more attractive? I know from the mix standpoint maybe need a little bit more credit to get back to that pre Suez acquisition allocation. But how do you compare the two as far as putting the dollar to work today?

That’s a really good question. I would say this, they're both attractive but in different ways. And the reason I say that is because the yield and the carry and the sort of spot or static return that you can get from the agency sector is much more compelling today as a result of the widening that we saw not just in the fourth quarter but just over all of 2018. The non agency sector to us is more of a total return story and so when we find the deep discount legacy bonds that we think can drive our total returns in the double-digits we are going to buy those. You can't just necessarily go out and buy a whole ton of those because some of them are more stable some of them are high dollar price et cetera and as we talked about on the call when these things get near par they have already we have realized the upside so those will be either paid off or we would sell them and recycle them. The agency market is extremely deep and very easy to deploy capital in quickly. So we like them both. The agency strategy that part of it is much more readily acceptable but we still continue to plan on buying nonagency bonds that have the upside that we think exists there.

Stephen, to your point, there is no doubt that agencies have become relatively more attractive in the current market environment and that's something that we are very mindful of as we allocate capital going forward.

Flipping to the funding side, can you maybe just talk about the repo market and your counterparties, I think if I remember from the last conference call you guys added roughly 10 new counterparties with the CYS transaction. Just how the counterparties are acting especially to the volatility in Q4? Is there any changes? And how they approach funding your portfolio?

Sure, Stephen, I'm going to let Mary handle that one.

So we do have a total of 45 counterparties you're correct we added about a net 10 with the CYS acquisition. We have not observed really any disruptions in the repo market continued to function efficiently for us. We had outstanding with 33 counterparties at 12/31 but again no disruptions.

And in respect to funding Stephen, you wouldn't even know the market volatility exists it's just business as usual. Markets are wide open and fund being abundant in all the asset classes in which we invest.

Yes, that’s what I was expecting that, but wanted to, it's always good to hear it confirmed. So I appreciate that.

We will take the next question from Rick Shane. Please go ahead.

Hey guys, thanks for taking my questions this morning. I want to make sure we understand the non agency credit markdown. Were there credit events into specific things which drove this was it concentrated IN specific securities or was this more generally spread widening across the growth?

Bill is going to take that. It's really just a function of risk off environment in the fourth quarter but Bill can give you more color.

We saw -- well, as Tom said all credit markets were wider in the fourth quarter, IG high yield, CRT, CLO, you name it. And legacy nonagency actually modestly outperformed some of those other markets, but nonetheless there are still 40 to 50 basis points wider. And it was just general spread widening there was no deterioration in credit performance of the underlying pools in fact they continued to perform very much in line with our expectations. So it had nothing to do with changing performance and it was just general credit widening.

No idiosyncratic event or events at all, within our portfolio. Zero.

The way that was written we could have interpreted it both ways and that’s how I thought of spread widening but I wanted to make sure. One other question just thinking about the negative [indiscernible] if we move to a more benign rate environment could you have continued underperformance of the tight coupon securities if we move to a more benign environment?

It's impossible to predict the future, I mean typically we would expect to see in a more benign interest rate and less volatile environment we would expect to see the securities that were most impacted which should be those that have more negative invested to your point to actually do better because if you lower volatility you are going to realize the returns as much higher. So that’s the way. And I think we made a comment or I made that comment on the call that given the Fed's comments a few weeks ago it's more likely that that will be the case.

I mean if you look at the environment in the fourth quarter right, it was one of those times where fear trumps logic and then people are just going to seek shelter but in the more benign environment things tend to retrace to their value. So, we are reasonably comfortable over time that these higher coupons will fall in line with their true value.

We will now take the last question from George Bahamondes. Please go ahead.

Just two questions from me. The first I noticed you added about 30 billion of MSR in January following about 36 billion of MSR in 4Q. Can you just touch on maybe what that environment looks like from a flow and bulk perspective and how you are thinking about that this year relative to what it looked like for you in 2018?

The MSR market is actually very active, very robust lots of activity and there is really two -- as you know we have two channels we have the flow channel where we have number of originators that we continue to get MSR from every month and then in the bulk the bulk market last year, total volumes were north of 200 billion and so far in the first quarter we are already seeing bulk packages that would imply north of 200 billion on an annualized scale on an annualized basis. So in terms of -- we still see opportunity there, I go back to Tom's comments about the value of MSR. The one thing I would say is I think you mentioned about the 30 somewhat billion that we added in the first quarter, I think you meant the fourth quarter. We didn’t make any comments on the first quarter but nonetheless, we expect this year to be another strong year for building that platform.

Got it, I may have misread it's like 13 the 30 billion and both your transactions in January so that was to the broader market kind of so that was confusion from my end. Thanks for clarifying that.

Sorry, for that being confusing. Yes that’s …

Second one just on book value performance have you seen that recover a bit quarter to date any comments around how book value may have performed now that we're in the early part of February.

Yes, in my comments earlier we mentioned that we have seen spreads tightened modestly in both the agency side and the credit side and then book value in January we estimate to be up around 4% before accruing for any dividends.

We will now take our next question from Trevor Cranston. Please go ahead.

Just a couple of quick ones. First on the overall portfolio leverage, can you guys comment on how you are thinking about that? And how much you might be willing to increase that in light of the investment opportunities you are currently seeing?

Our economic debt to equity now includes obviously TBA position was down slightly still on the low 7 at the end of the year. I think we are actually very comfortable with where we are but on a go forward basis as we add more servicing you may expect that number to trend lower and that’s consistent with the commentary we made right after the CYS acquisition because the leverage bumped obviously adding more agencies and then as we redeployed we expect that to trend lower. So I think we are still of that mindset.

And then looking at the agency portfolio breakdown on Slide 22, I was wondering if you could maybe comment on the net TBA positions specifically I was wondering if you could give a rough sort of coupon split of that bucket just to help us for modeling purposes.

I have made two comments, first that can move around in coupons and in size and if you look back historically those numbers have bounced around depending on the opportunities we are seeing. But high level, you know we are currently primarily positioned in the higher coupons which as we said before, we thought were attractive going into the quarter and now are substantially more attractive. So overall we plan to maintain that exposure in the higher coupons for the time being.

Got it, okay, that helps. Thank you.

I'll turn the call back to Mr. Siering for concluding comments.

Thanks, Marian. Thank you for joining our conference call today. We are very excited about the opportunities ahead for the company. Have a wonderful day.