Q4 2023 Two Harbors Investment Corp Earnings Call

Participants

Maggie Karr; IR; Two Harbors Investment Corp

William Greenberg; President and CEO; Two Harbors Investment Corp

Mary Riskey; Vice President and CFO; Two Harbors Investment Corp

Nicholas Letica; Chief Investment Officer, Vice President; Two Harbors Investment Corp

Douglas Harter; Analyst; UBS

Trevor Cranston; Analyst; JMP Securities

Eric Hagen; Analyst; BTIG, LLC

Presentation

Operator

Hello, and welcome to the Two Harbors Investment Corp. Fourth Quarter 2023 financial results conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation, you may be placed in the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Maggie Carr, Head of Investor Relations.
Please go ahead, Maggie.

Maggie Karr

Good morning, everyone, and welcome to our call to discuss Two Harbors' Fourth Quarter 2023 financial results. With me on the call this morning are Bill Greenberg, our President and Chief Executive Officer, Ned Coletta, our Chief Investment Officer, and Mary risky, our Chief Financial Officer. The earnings press release and presentation associated with today's call have been filed with the SEC and are available on the SEC's website as well as the Investor Relations page of our website at Two Harbors investments.com.
In our earnings release and presentation, we have provided reconciliations of GAAP to non-GAAP financial measures, and we urge you to review this information in conjunction with today's call.
As a reminder, our comments today will include forward-looking statements, which are subject to risks and uncertainties that may cause our results to differ materially from expectations. These are described on page 2 of the presentation and in our Form 10 K and subsequent reports filed with the SEC. Except as may be required by law, Two Harbors does not update forward-looking statements and disclaims any obligation to do so.
I will now turn the call over to Bill.

William Greenberg

Thank you, Maggie, and good morning, everyone, and welcome to our fourth quarter earnings call. Today, I'll provide an overview of our quarterly and annual performance. Then I will spend a few moments discussing the markets and finish with an update on round Point's operations. Mary will cover our financial results in detail, and Nick will discuss our investment portfolio and return outlook.
Let's begin with Slide 3. Our book value at December 31st was $15.21 per share, representing a positive 2.0% total economic return for the quarter eye exam was $0.39 per share, representing a 10.3% annualized return. In the fourth quarter, we issued 7.0 million shares through our ATM program, raising 97.8 million in common equity. Taking a step back and looking at 2023, I'm proud of what our Company achieved for the benefit of our stockholders, both through the active management of our portfolio and our capital structure and through the addition of our new operational platform. In February, we raised $176 million in common equity and allocated all of those funds to investments in MSR which increased our capital allocation to this asset class to 62%.
Without a doubt.
However, the highlight of our year was the acquisition of round point mortgage servicing, which reinforced our commitment to MSR as a core and essential part of our business.
Please turn to slide 4 for brief discussion on the market. Fourth quarter of 2023 was punctuated by continued volatility in rates and spreads on the back of a stronger than expected September jobs reports, coupled with the outbreak of war in the Middle East, interest rates moved steadily higher in early October at its peak, the 10-year treasury yield briefly touched 5%, approximately 40 basis points higher than it was at the beginning of the quarter and abrupt turn of sentiment followed in early November after Chairman, Powell's optimistic assessments of the Fed's efforts to bring down inflation and engineer a soft landing interest rates quickly reversed course and declined 36 basis points over the next three trading sessions. Supportive economic data in November as well as dovish Fed commentary drove the market to pricing as many as six interest rate cuts in 2024, the entire yield curve responded as the 10-year treasury rate finished the quarter at a yield of 3.88%, 59 basis points lower than it started at the beginning of the quarter and the two year treasury rate declined 79 basis points to 4.25%, resulting in a net 10 basis point steepening of the yield curve. You can see these changes in figure one on the slide from peak to trough the 5-year and 10-year treasury yields. It moved a jaw-dropping 120 basis points in the quarter. It's interesting to look at these rate moves in a historical context, which you can see in figure two on the bottom of the slide market practitioners often quoted measures of realized volatility as the variance or standard deviations of historical price movements are sometimes their percentage changes, and that's meaningful for those who are adept in statistics in this chart, we aim to show something simpler and we believe more intuitive. We simply look at how many days over the past 20 years had a move in the 5-year treasury rate of more than 10 basis points in 2023, the market experienced more than 50 days of such move. That is the 5-year rate move more than 10 basis points and more than 20% of the trading sessions during the year. This was the second highest instance of this metric right behind 28 during the great financial crisis for essentially a decade prior to 2022. There were only two years where there were 10 such days. Many years during that period had less than five. There are of course, many differences between then and now. But this time series plot is meant to provide some perspective and the market that we have been managing.
Please turn to slide 5 for a brief discussion on round Point's operations. We closed the acquisition of FrontPoint effective September 30th and have been actively integrating our systems and people potential transfer of our servicing to round points platform is expected to occur on February first, and we will have one final cleanup of 60,000 loans in early June. As shown in figure one in all, we expect the total number of loans on the runoff platform to be just north of 900,000, making it the eighth largest conventional servicer in the country, transferring almost 1 million loans in this timeframe is quite an accomplishment. And the team at round point has done an excellent job of keeping up with the expanding portfolio while maintaining a commitment, delivering exceptional service to every homeowner. Since the closing of the acquisition, we have made large strides in integrating round points functions, operations and overall platform into Two Harbors. We continue to see this acquisition as providing a lot of opportunity going forward for our shareholders in particular, we still believe that the round points servicing platform should benefit the combined company by approximately 25 million in pretax income in 2024, the result of both incremental revenue and cost figure.
Two on the bottom right of this slide highlights our top key strategic initiatives for round point for 2024. Our first focus is to render additional cost savings and economies of scale from the platform. This involves being smart about our technology, knowing when to buy versus build and just streamline processes and create additional efficiency.
Second area of focus is to develop the best in class direct to consumer originations channel to provide recapture on our portfolio but note rate on our MSR portfolio is below 3.5%. And so with mortgage rates north of 6.5%, we are a long way away from serious refinancing activity unless interest rates fall precipitously, we think that we have the time to build the platform that we want. We have hired a very experienced individual to lead this efforts we've spent his entire 30-year career building and running direct to consumer businesses. We are in the process of expanding the team, and we expect to be able to begin making loans in the second quarter. The ability to create something from scratch without any legacy issues or risks is tremendously exciting, and few companies get the chance to do that with a direct to consumer origination platform. We also expect to be able to offer our borrowers second liens, home-equity loans and other ancillary product.
Lastly, we are keenly focused on the growth of round points. Third, subservicing business as of year end, round points serviced a total of seven through third party clients, including one new clients added in the fourth quarter. This new client is the operator of a newly formed MSR exchange, which matches MSR buyers and sellers. While they have yet to add any new loans to our platform, we are optimistic about this new partnership. Additionally, there has been increasing demand and activity from institutional investors for participating the MSR market for separately managed accounts. The opportunity exists because the market has never before seen our risk profile like the current MSR asset class with most of the universe being far away from the refinance window, we believe the best way to grow subservicing business is by being the subservicer of choice for this new capital. We think there are many reasons why we are a great partner for this new capital, and we are actually working to ensure that we have the ability to support various structures. And indeed, we recently signed a term sheet to sell a small pool of our own MSR to a nontraditional market participants on a servicing retained basis, which will bring the number of true third subservicing clients to eight once that deal closes.
Bringing this all together, let's discuss how we are thinking about our portfolio of securities in MSR and our operational platform in the current environment. While agency spreads are attractive, especially in a historical context, the market is in the midst of transitioning from a period of Fed tightening to one with a more neutral posture. And one where we think spreads on RMBS are roughly fair. Therefore, we do not think this is a great time to climb far out on a limb in terms of risk or leverage.
Second, the current environment reinforces why MSR is such a valuable asset in our portfolio, having low prepayments and convexity risks and producing a highly positive cash flow at attractive yields, whether or not the Fed cuts three times or six times or zero times in 2024. We still expect prepayment speeds on our MSR portfolio remains slow for quite some time. So we are preparing for the unexpected with the development of our direct to consumer recapture channel. The nature of our portfolio construction means that when MBS underperformed, our capital allocation will outperform pure agency strategies. And when MBS outperform, our portfolio will underperform pure agency strategy. This is by choice and by design. A good example of this can be seen in just the last two quarters. While we expect to have underperformed pure agency strategies this quarter as MBS tightened, we significantly outperformed last quarter when they widened our high capital allocation to MSR act as a balance to our portfolio and agency spreads fluctuate.
Looking further ahead, we are forging a path that lies not merely in watching mortgage spreads flicker by on the screen, but rather through the financial investment in an asset class MSR where we can more meaningfully impact our results through our actions. The uniqueness of Two Harbors is that we are not a pure agency-only reach. We have built our portfolio with the intent of delivering high-quality returns, not just over the next quarter or even the next rate cutting cycle. But over the long term, despite interim interest rates and spread volatility, ours is not a stagnant portfolio and we constantly evaluate opportunities across our core competencies, all through the lens of creating sustainable shareholder value.
With that, I'd like to hand the call over to Mary to discuss our financial results.

Mary Riskey

Thank you, Bill and good morning. Please turn to Slide 6. The Company generated comprehensive income of $38.9 million, or $0.4 per weighted average share in the fourth quarter our book value was $15.21 per share at December 31st compared to $15.36 at September 30th, including the $0.45 common dividend resulted in a quarterly economic return, a positive 2.0%.
Before turning to slide 7, I'd like to call your attention to appendix slide 30, where we have included the customary information on re-taxable income and the tax characterization of our dividend distributions. For additional information regarding the distributions and tax treatment, please refer to the dividend information found in the Investor Relations section of our website.
Please turn to Slide 7. Eye exam for the fourth quarter was $38.2 million, or $0.39 per share, representing an annualized return of 10.3% lower eye exam quarter over quarter was impacted primarily by spread volatility and related portfolio activity.
Moving to Slide 8. Let's look at some detail of the quarter-over-quarter variances in eye exam. Axsym is lower quarter over quarter by 11.1 million. This was driven primarily by decreased income on RMBS from lower balances and moving our mortgage investments down in coupon. Additionally, eye exam was affected by certain year-end expense accrual adjustments. As a reminder, eye exam reflects our daily adjusted holdings over the quarter. There can be quarterly distortions in eye exam by coupon positioning, timing of MSR cash flows, funding rates and leverage and expense adjustments. But we believe that it is the most helpful way for our investors and analysts to understand the current quarter return contributions. I see them as complementary to the return potential and outlook slide later in the presentation, which reflects our view on prospective returns.
Please turn to Slide 9. Rmbs funding markets remain stable and liquid throughout the quarter with ample balance sheet available spreads on repurchase agreements widened slightly into the fourth quarter and year end with financing for RMBS between silver plus 23 to 25 basis points. At quarter end, our weighted average days to maturity for our agency repo was 48 days a days maturity are typically lower at December 31st as we intentionally roll repos past year end to avoid any disruption in funding that can occur in December post quarter. End, we've rolled repos at very attractive spreads, given that even longer-term repos are pricing in five to six rate cuts into 2024, currently about 16% of our repos have floating rate. We finance our MSR across five lenders with $1.6 billion of outstanding borrowings under bilateral facilities and $296 million of outstanding five year term notes. We ended the quarter with a total of 591 million unused MSR financing capacity and $168 million unused capacity for servicing advances.
I will now turn the call over to Nick.

Nicholas Letica

Thank you, very. Please turn to Slide 10. As Bill discussed, there was no lack of volatility in the fourth quarter following the rise in interest rates in October, mortgage spreads under-performed widening by about 20 basis points rates reversed course in November, and spreads tightened back by about 35 basis points. This tightening trend continued in December with the Fed's strongly signaling that the period of rate hikes was over. Ultimately, current coupon mortgage spreads on a nominal basis finished the quarter at 118 basis points, tighter by 33 basis points. This is at the tighter end of the 2023 range of 100 to 167 basis points. You can see this in figure one, though the spread is still much wider than the longer term. Non-qm average of 80 basis points reflects an environment of high realized rate volatility and tepid demand from depository institutions being at the tighter end of the range is likely the result of the market's expectations of more than five Fed rate cuts priced in for 2020 for a steeper forward curve and lower forward implied volatility.
Putting all that together, while we are positioned to benefit from spread tightening, we still see enough risk to, as Bill said, not go out on a limb as anticipated, reporting prepayment rates broadly declined by 16% in the fourth quarter. This decline reflected weaker seasonals and effective mortgage rates of over 7%, the highest in 20 years, despite 30-year mortgage rates falling by 70 basis points over the quarter to 6.4%, 96% of mortgages remained outside the refinance window.
One thing I'd like to detail today is how decreasing rates and increasing prepayments could affect our portfolio of MSR. Let's look at this in more detail and Figure two shows projected prepayment rates for our MSR versus a typical current coupon MBS in varying interest rate scenarios being about 300 basis points out of the money prepayment speeds in our MSR remain very insensitive to falling rates. In fact, less than 1% of our balances at 50 basis points or more a rate incentive to refinance the green line in this chart represents our portfolio of MSR. As you can see, even with an instantaneous 200 basis point decline in rates, speeds are projected to only increase to 10 CPR, compare that to the current coupon who speeds could top 60 CPR. I'm sure some of you are thinking that although 10 CPR is still absolutely slow, it's a big increase in what we are experiencing now, that's true, but those expectations are also built into how we actively hedge our MSR.
Turning to the MSR marketplace, as is typical, the pace of sales slowed in the fourth quarter was 53 billion offered in the bulk market. This brings the total MSR offered for the year to just under 500,000,000,020 23 finished as the second most active year in the MSR market falling just behind 2022, total of $525 billion lower supply in the fourth quarter did little to effective traded spreads of MSR speeds remain well supported as evidenced by sellers typically receiving a high single digit number of them.
Now let's turn to Slide 11 and discuss our portfolio positioning and activity in the fourth quarter. At December 31st, our portfolio was $14.6 billion, including 11 billion of settled positions on the top right of this slide, you will see a few bullets about our risk positioning and leverage as spreads widened in October and our book value decline. We responded by selling some MBS actively lowering our leverage to protect against further losses. Our average leverage for the quarter reflects this decreasing to 5.8 times from 6.3 times at Q3 end following optimistic signs from the Fed in November, we strategically increased our risk and added leverage to the portfolio. This decision proved to be effective and captured most of the tightening of spreads through year end. Our quarter end economic debt to equity was six times for similar reasons that we have outlined in prior calls. We continue to think it is prudent to maintain a neutral leverage position. We don't believe that we need to add more leverage to generate strong returns. As you will see in a few slides when we detail our return outlook.
Please turn to Slide 12 to review our agency portfolio Figure one shows the composition of specified pool holdings by coupon and story. And on Figure two, you can see the performance of TBAs and the specified pools we own throughout this quarter, we migrated the portfolio down in coupon by replacing approximately 2.5 billion, 4.5% and 6.5% TBAs with an equal amount of 2.5% to 4% TBAs in order to take advantage of the sharp cheapening of lower coupons that occurred in October additionally, we enhanced liquidity by rotating approximately 1.4 billion to 4.5% specified pools into same coupon TBAs. At quarter end, about 70% of our MBS holdings were in specified pools that we believe offer better relative value than TBAs figure. Three on the bottom right shows our specified pool prepayment speeds decreasing to 5.4 CPR in the fourth quarter from 6.7 CPR in the third quarter. As you can see from the chart on aggregate, speeds for these predominantly discount pools were materially faster than TBAs, hence, providing more return.
Please turn to Slide 13. Our MSR portfolio was 3 billion in market value at December 31st, which includes the addition of 829 million UPB through flow purchases in the quarter as rates declined in the quarter, the price multiple of our MSR declined from 5.8 to 5.6 times. The prepayment speed of our MSR dropped by 22% to an historically low 3.8 CPR. And our expectation is the prepayment rates were deeply out of the more money mortgages will continue to remain at historically low levels through 2024, providing a tailwind for the strategy. Post quarter end, we signed two term sheets, one to purchase 3 billion UPB of MSR to settle in the first quarter and another to sell 1.5 billion UPB on a servicing retained basis at current spread levels, we prefer investing capital and hedged MSR rather than hedge Securities.
Finally, please turn to Slide 14. Our return potential and outlook slide. The top half of this table is meant to show what returns we believe are available in the market. We estimate that about 62% of our capital is allocated to hedged MSR with a market static return projection of 12% to 16%. The remaining capital is allocated to hedge RMBS with a market static return estimate of 10% to 11%. Lower section of the slide is specific to our portfolio with a focus on common equity and estimated returns per common share with our portfolio allocation shown in the top half of the table and after expenses, the static return estimate for our portfolio is between 8.9% to 11.5% before applying any capital structure leverage to the portfolio. After giving effect to our outstanding convertible notes and preferred stock, we believe that the potential static return on common equity falls in the range of 9.9% to 14% or a prospective quarterly static return per share of 38 to $0.53.
Thank you.
Very much for joining us today. And now we will be happy to take any questions you might have.

Question and Answer Session

Operator

Thank you.
And now please ask your question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two, if you'd like to remove your question from the queue. One moment, please while we poll for questions.
Our first question is coming from Doug Harter from UBS. Your line is alliance.

Douglas Harter

Thanks.
And can you talk about what were kind of the factors that are leading you to see the lower returns in the agency MBS hedged with rates and kind of other participants are seeing still seeing kind of 10s returns and kind of hoping you could sort of offer your opinion as to why you're seeing 10% to 11%?

Doug, thanks for the question?
Yes, over the quarter, while spreads did tighten over the quarter, as you know for us specifically, we and again, this is due to the lens of our spreads and how we construct our portfolio on that page and the capital structure of the portfolio, but some which you know can cause differences from person-to-person their institution institution. But in addition, to all those things we did. As you can see from our other slide, we didn't materially go down and compound over the quarter, and these are nominal spreads. And when you go down at some time in mortgages, you can't you do lose spreads. So it's a lot of this spread potential is driven by the coupon selection for mortgages, and it is also just to remind everyone that it is a it is a moment in time, right is just a snapshot of the portfolio at the end of the quarter and it so happened that last quarter from our from relative value reasons, we did think that it made sense to go down in components as we went through the quarter and that creates that gap does negatively impact the return potential of that segment of the portfolio. But it is by no means something that we think is long-term in nature in the sense that as you go. As you well know, we do move our coupon exposure around quite a bit from quarter to quarter. And in fact, over this quarter we have gone back up in coupon. And if we were to rerun this projection today, you would see it are materially higher return projection on that segment of the portfolio. So it really is just a snapshot at the end of last quarter reflects predominantly down in coupon bonds.

And I might just add, Doug, good morning. By the way, is that the down in coupon movement in the portfolio that Nick mentioned, we did that from a from a relative value perspective because we thought the total return potential of those of those mortgages would be better than some of the AT1 coupon ones as we moved a portion of the portfolio there. So the lower return potential is a is an artifact of you will, if you will, even though we thought the total return was going to be better by making that move.

Douglas Harter

Got it.
And just around that total return comment, I guess, how do you think about the timeframe for kind of capturing that total return? And how do you think about the trade-offs on there between current and total return and time to on direct costs?

Yes, that's a good question. And one that we talk about frequently on when we're making these decisions, I'd say generically, we're thinking about months, right in terms of seeing seeing the relative value opportunity play out over time, but it's certainly not days on. We're thinking about longer timescale than that. And we generally expect them to occur on less than a year or so. I'd say the timescale is generally a few months.

The other thing is what I mentioned about the return potential calculation, as I'm sure you guys know, there's a lot of technicalities in our market and how people look at things. You know, we tend to look at things, our spreads and we look at them versus the entire curve rather than just looking at things versus a blend of, for example, the five 10 market share curves inverted. So if you do run mortgages against the whole curve, you tend to get tighter spreads than you do. If you just look at something versus the longer end of the curve. And that's I think that also was a factor that plays into how we look at things versus others. And of course, it's just dependent on the leverage that we're seeing also. I mean, that's a big factor as to how those numbers get determined. But it's really, as I said, a moment in time and and it is Southern will move around, as you know.

Operator

Thanks.
Thank you.
Your next question today is coming from Trevor Cranston from JMP Securities.

Trevor Cranston

Your line is Nahla.
Thanks.
Good morning. I'm sorry, another question on the on the return potential slide. You guys have been earning a pretty decent amount of float income on the MSR portfolio and when we look at the forward return projections on slide 14, does that incorporate the impact of lower forward Fed funds on the float income component of the MSR and and also funding expenses.
And I guess generally if you guys, you guys can just comment on kind of how you think about the impact of lower Fed funds being on the portfolio as a whole thing?

Yes, good morning.
Thanks.
Thanks for the question, Tom. So yes, the downward sloping on a curve is incorporated into the float earnings of the MSR asset and of course, the entire subject of float is one that we actively hedge the interest rate risks of, right, so that I wouldn't say that that we experienced a windfall when rates rose and we won't experience a large decline in book value when when and if rates fall, because we're hedging that exposure.
Right?
And so that is also the answer to the question of what happens to our portfolio if the Fed cuts and if funding rates are short term rates fall, right? Is that because our portfolio is hedged across the curve, right on we did see and as a result, our portfolio returns and how that slide of the return potential is really constructed dependent really on the spread right between the asset and and the I'll say, longer term rates, but outstanding, what Nick just said about not being one point on the curve, that's true of every point that we hedge on the curve. But that's a complexity on the spread of the asset relative to the risk-free curve that matters and not and not the funding rate itself. And so I'd say to zero to order that hedge. And if you want to talk about it more completely, I think it actually the returns would go down slightly because of the risk-free rate that's earned on the equity but let me go to your base question.

Those calculations all assume that the forward curve is realized. So we do that. Those are all embedded in the calculation.

Trevor Cranston

Right.
Okay.
That makes a lot of sense.
And then, Bill, you talked about some of the opportunities for growth in the servicing business in particular. I was wondering if you could maybe expand a little bit on that and talk about sort of how you see on the magnitude of potential growth on the subservicing side of things specifically over the next couple of years?

Yes.
Sure.
Well, you know, as I said in my remarks, the interesting thing that's happened in the sub servicing market over the last year or two is that on rates have risen so much in the in the mortgage universe as has been well described by us and others on has and has an average dollar price of 80 and is yielding more than 300 basis points out of the money. And so the risk characteristics of the asset is something that hasn't really been seen before. Probably you see it a little bit on the chart that Nick talked about from his presentation where we showed the relative S curves from the portfolio. On page, of course, I'll touch on what our where where where we show that if rates fall 200 basis points on page 10 on that, the prepayments on our portfolio that aren't expected to increase very much on it has very low prepayment sensitivity has very low convexity, right? And so it's just a risk profile has not been seen before. And as a result, we're seeing lots of interest from market participants. We are not the usual cast of characters that are buying MSRs. And there's been lots of structures that have been created in the marketplace in order to help those nontraditional market participants invest in the MSR market. And I think there's lots of reasons why we are the best subservicing partner for those new investors, chief among them, being that that we have 200 billion of our own servicing. That is at round point. And we will be subject to the exact same of results of the subservicing platform, round point as any third party clients that we bring into. I'm not like to say that we are managing subservicing and for MSR investors by MSR investors, meaning that we know exactly what MSR investors like to see and trying to extract the value from the cash flows and so forth. There's other reasons as well. We're well capitalized institution on a which provides the wherewithal to invest in and invest in infrastructure and deal with any any market uncertainties that occurred. And so I think for all those reasons, and this is one area that we're going to focus on as being able to grow our subservicing business and from that perspective, yes.

Trevor Cranston

Okay, that's helpful.
Thank you.

Operator

Your next question is coming from Eric Hagen from BTIG.

Eric Hagen

Your line is now live.
As the morning goes. So how do you feel like you controlled for recapture in the MSR without an origination platform? And how has security you feel like that is and do you have an estimate for how much MSR you might need to buy if mortgage rates were like 50 or 75 basis points lower than they are today?
I'm not sure I understood the second question, but the first question is, but the answer to the first question is that we have a we as we said in our prepared remarks, we have hired an experienced professional to begin the build-out of a recapture or portfolio defense strategy on in order to provide that not only to our own to our own portfolio, but also to many third party clients that we have on that process is ongoing. We're hiring people, we're filling roles. And as we said in the prepared remarks, we expect some to be able to be making loans in Q2.
Again, looking at page 10 and looking at how far out of the money our servicing portfolio is on, we feel like we have time there's no particular urgency to this, although we are certainly acting with with due haste in order to build it on as quickly, but as prudently as we can on and again, the main point here is we're not going to be a a retail originator. We're not going to be a somebody's going to compete with the largest guys out in the world. The point of this thing is really to protect our servicing portfolio to defend our portfolio to perform recapture on our portfolio. And we're really excited about the opportunity and the ability to be able to build this thing from scratch.

And Eric, if I can build on this is Nick. I will build on what Bill said. I think to your second question which I also didn't fully understand, but as that slide shows the dollar versus one page 10 partners who are very smart money and be done with a reasonable value stays low so we're not there. We're going to be very, very surprising if we were to see a wrapper rapid amortization on our on our MSR asset and so on. We are as we also said in our prepared comments, and I we really like the of the current strategy. As you know, we like it right now. It looks great rate of return potential So we our intention is no new capital as we have to keep adding to it. But we don't really see paydowns being a big issue for the near future.

Okay.

Operator

Yes.

Thanks for fleshing that out. You guys talked about a neutral leverage position. But if you do see growth opportunities in the MSR, I mean, is there room for that to change and what are the parameters for the change, especially if the Fed cuts rates, I mean, do you feel like you would still run with this level of leverage and how much flexibility. Do you feel like you have there?
Perfect.

In terms of leverage?
Yes, definitely, we are running and we think it's a neutral territory, as we said, again, in our prepared remarks, spreads are at the tighter end of recent ranges. And we think that price in a lot of what the market expects the Fed to do perhaps too much, but there's still no fault there, still volatile finance ahead of us, and we think spreads are kind of two sides right now. We know so well, look, lots of things can change this year that there are we are we have a year coming up with a big election coming up and a lot of ramifications and geopolitical tensions and other things, you know, so we're hoping that we're going to just see where the market takes us and what makes the most sense, but for the near future. And then we kind of see ourselves as being in this kind of leverage posture.

Got it.

Operator

Thank you.

Thank Your next question is coming from Kenneth Lee from RBC Capital Markets. Your line is Allied.

Good morning.

Thanks for taking my question on in terms of the I extend the report in the quarter. Wonder if you could just further expand upon the portfolio activity that you mentioned in the prepared remarks that potentially impacted IXM in the quarter?

Operator

Thanks.

Sure.

So as discussed here, we did some we did go down a coupon, which of was it wasn't it wasn't a factor that took our item down for the quarter, our 1404 for the quarter as well as Yes, as we mentioned, we did sell some mortgages when things wind down in October, which was which we thought was prudent just given the environment at the time. And as you know, as you'll know from our prior calls, we've been talking about the fact that going into last quarter, we the market was different than it was prior. And we just feel like there was money managers had pretty impressive, pretty big overweight in the market and they were so volatile. That's ahead of us. So we decided in that in that time slice of cake to reduce our exposure to mortgages. And that Rich mentioned comments and marinate. We did have reduced balances for the portfolio for a period of time and a little lower leverage. All of those things did impact our high income for the quarter, but as I discussed, we did we did buy back some mortgages, bring back our leverage up, and we have also gone back up in coupon since the end of the quarter. So all of those things enough for this quarter, we think will have a positive effect in the other direction.

I might just add a couple more thoughts if I can, which is even even without portfolio activity, there is natural variation in the in the backward-looking eye exam that occurs just from some timing of cash flows. You know, MSR is not a bond it doesn't pay at a fixed coupon every month. Price of some people pay their mortgage payment and therefore they're servicing on the 31st of the month. And therefore, they don't have to pay any for the next month or sometimes they paid on the first and then the 30th. So there's two in one month versus another. There's all kinds of interesting timing of cash flows on the MSR asset that occur, right.
And also, of course, you know, we know that the eye exam, the backward-looking eye exam also reflects actual prepayment speeds So prepayment speeds come in slower than we thought or slower than projected. That will be a benefit if they come in faster than expected, that would be done. So even without any portfolio activity. There's natural variation at at the at the quarter end on media. We think of all of that being considered or take into consideration the forward looking projection on slide 15, there is a good estimate of what we think the portfolio we learned and as Nick said earlier from that snapshot at the end of the quarter is actually lower than it would be if the rents today by a couple of hundred basis points probably and so on. Given all that and how that corresponds the dividend, we feel pretty good Kroger culture.
Very helpful there.

And just one follow up on the potential expansion on the round point, the DTC channel, wondering how should we think about potential need for investments or spending along with those efforts?

Operator

Thanks.

Yes, we think that we think the capital investment for that activity will be pretty low. The intent is not for us to originate these loans and hold them.
All right. We will we will do what was is normally done at these sorts of things which will originate loans and sell them directly to the agencies right and we'll keep the servicing for ourselves, of course. And the idea is that this is just going to replace the servicing that otherwise would have runoff, right and would have disappeared and the benefit of having it in-house and having the recapture thing is that we can keep the servicing. We keep the loans on the round point platform rather than having them refinance away, right? So that's the whole idea of what we're trying to do.

I'm with this direct-to-consumer channel Dacheng.

Very helpful there.

Thanks again.

Operator

Yes.

Thank you.

Your next question is coming from Bose George from KBW. Your line is now.

Good morning.

Actually, could we get an update on your book value quarter-to-date?

Yes. As of as of the close of Friday, we think that book value is up between 1.1% and 1.5% and Okay, great.

Thanks. And then in the range in your target sort of eye exams, the what takes you to the high end versus low end? Is that a lot of bit prepayment expectations or just curious, and it drives that range pay bonuses and we thank you for the question.

We have the various factors that go into that range among them would be or your prepayment assumptions as well as in our some of our funding assumptions and those are things that are our primary primary drivers of that range.

Okay, thanks. And then just in terms of where that number is intraquarter, did Bill, did you say it's going to back up a couple of hundred basis points.

Is that what you said?

Operator

Yes.

Again, as Nick and I both said, it moves around with the portfolio and so forth. But actually given our current current coupon distribution and so forth, yes, that's about the right magnitude focus on security side of the portfolio, not on the combined thing. If you look at the RBS part, which is 10 to 11. That's probably 200 basis points higher given our portfolio right now, but not in the overall.

Okay.

And the overall it would you could you characterize them as the overall well, you just multiply by the relative capital allocations of that, so that 38% times the size of the tumor.

And okay, okay, great. Thanks.

Operator

Yes.

Your next question is coming from Rick Shane from JPMorgan. Your line is now live from.

Thanks, guys for taking my questions this morning. I'm just wanted to talk a little bit about on the use of the ATM during the quarter. I'm curious if this is going to be something we should expect going forward more aggressively when we do the math, it looks like you did the offering a little bit below $14 per share on an even on a sort of mark to market basis. If we go back to your comments last quarter at this time about where this where book value was intra-quarter, it looks like the offerings were dilutive to book modestly.

Can you talk about the rationale for that, please?

Yes, sure. Thanks, Rick. It is correct, right. We also saw that as modestly dilutive to book on the rationale is the same as what we said when we raised capital in in February of 2023. We think that it is most at a sort of mechanical level that that even at a slight discount to book the dilution of the expenses on means that the return on the investments of that solution is still quite high, certainly higher than our cost of capital in the you know, I'd say mid double digits by that I mean, 30%, 40%, somewhere in that in those sorts of numbers on. And also, as we always say, we have to have had something to do with the money and we think we do, right, which is to buy more MSR with that money in February, of course, we did that right away today. We're looking for for pools on to buy that fit our criteria. But with the round Point acquisition, the earnings that we make on new MSR purchases are greater than the existing MSR that we have in our portfolio because the marginal cost of service goes down with the more loans that we have on the platform and so on, it's really very powerful, a set of mass. They are to take that money and invest in us and invest in new MSR where we are the servicer and we get the benefits of economies of scale that we thought that paying a slight dilution today was well worth it for those reasons.
Got it. Thank you.

And then on there was some repurchase of the prefs as well on is that just an arbitrage when you see the implied yield on the prefs approaching the yield on the common you'll step in? Or how should we think about that?

What Trovix it seems like it was across all three of them it.

Hey, yes. So as you know, we've been for the last for a long time. We've been managing our capital structure and we do consistently constantly evaluate where our crops are trading relative to our assets and where that arbitrage lies. And I think and as you guys know, from prior times and that we have been seeking a all else being equal to reduce our share, perhaps as some of our total loans as a percentage of our total shareholder equity. So those things last quarter, they did align and the prefs as we did. So we did buy back a little over 200 to 200,000 shares of press, which is that activity will continue to do should they trade at an attractive level, as you said, relative to where our investments are.

Operator

Okay.

That's it for me, guys.

Thank you, sir.

Your next question is coming from Arren Cyganovich from Citi.

Your line is now live base. And then the question I have is more on the spread tightening that happened in the fourth quarter or I believe that you typically have your portfolio to benefit from spread tightening. What did the book value not benefit from the spread tightening and then November and December?

Eric?

Well, I mean it did you know the the if you look at the progression of our yard in the quarter at our last quarterly call, which I think was right at the end of October, beginning of November, we reported an approximate book value decline of about 6% at that time, and yet we ended up the quarter and that's up to so there was a material reversal and other things in the quarter such as such as our ATM issuance, no things that did that did impact our TRS would have been higher, for example, if we haven't done that, but we did it. As mentioned in the comments, we did decide, I think, prudently at the time to to sell some mortgages in October as well. As the book value was declining. And then we did immediately in November when there was a supply chain start buying them back. But you know, when you when you engage in that kind of activity, it does tend to impact the book value. Not mind you if you look at if you look at our risks at the end of last quarter, we had something like a time in order to accomplish that, something like a 6% positive book value for a 25 basis point tightening in mortgages and which is not the same as some of our peers that are just more purely an agency spreads play. As we've discussed our capital structure where we have 38% of our capital in mortgages and the majority in MSR is going to not give us the same amount of volatility and exposure to mortgage spreads in both direction of driving them in the third quarter of last year, we vastly outperformed our peers when mortgage spreads widen in the prior quarter was the opposite, and that's by construction. And this is why you're not going to see the same kind of numbers. One of us, generally speaking should convert some of our other peers when you have mortgages, breadth of growth.

Yes, I said I've touched on a couple of comments. You know, I think Nick said on the salient point, which is that our capital structure, our asset allocation rather than only has 38% of our assets, allocates RMBS of a pure AC strategy is going to return 10% in a quarter like this, we only have 38% of that. So it's going to be high 3% sort of number. And then there's other things on top of that in terms of how people hedge or various other things that could go into impacting that. But the point is that our portfolio is by choice meant to emphasize maybe overemphasize the MSR part of the portfolio is 62% of our capital structure. And we think the round Point acquisition is going to be able to add even more revenue to that part of the strategy.

Operator

Right.

And then the RMBS, which is 38%, right, serves to hedge the interest rate risk in the mortgage risk of the MSR portfolio and also to provide historic liquidity for rainy days and so forth. But the result of that is that we did we just have less exposure to mortgage spreads, then portfolios without agency MSR, where we are without agency MSR. And we like that on. And that's the strategy that we're pursuing.

And we think it's really good.

Okay.

And then on the direct to consumer build-out, sounds like you're doing that organically versus going out to acquire something. What would that's reminiscent of doing that versus going to buy something that's existing.
And then would you be in addition to protecting the MSR, would you be marketing outside of your existing on servicing mortgages?

Or would it be kind of just more specifically targeted at your own at your end, yet the benefits of building versus buying the same is as any kind of decision like I say it is about, you know, about remodeling your house rather than buying an existing one. It's great you get the thing that you want right? And with this environment and lots of lots of other structures out there are companies out there that are upside down on costs are built for a different environment or have legacy risks of some time. We don't want to be involved in any that we're going to build the platform that we want. That's and that's perfectly suited for our needs.

Right?

And I don't feel like we are stressed for time here because of where on from the gross value of our portfolio and the current outlook of rates, we're just miles and miles away from being able to refinance. And so on we have the time it's not going to take forever to build this thing. As I said, no, it's going to be just measured in months, right, not years. And so we have the time we're going to build exactly what we want on. We're going to have no legacy issues or risks, right? I'm going to focus on on recapture on our portfolio. That's the main thing we're doing here. You asked whether we're going to go out and tried to market to the whole world and so forth. That's really a very different business model than what we have in mind. We're really focused on portfolio defense and the capture of our portfolio.
Okay, got it.

That's the Johns Benderson. The alternative would be pretty expensive about Emageon, but I think Yes, Jack, thanks very much, and thank you.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

I want to thank everyone for joining us today, and thank you as always, for your interest in Two Harbors.

Thank you.
That does conclude today's teleconference webcast. May disconnect your lines at this time and have a wonderful day. We thank you for your participation today.