Operator: Thank you. Next question is coming from Arren Cyganovich from Citi. Your line is now live.
Arren Cyganovich: Thanks. The question I have is more on the spread tightening that happened in the fourth quarter. I believe that you typically have your portfolio to benefit from spread tightening. Why did the book value not benefit from the spread tightening that happened in November and December?
Nicholas Letica: Arren, well, I mean it did, if you look at the progression of our – for 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, about 6% at that time. And yet we ended up the quarter at up two. So there was a material reversal, and there were things in the quarter, such as our ATM issuance and other things that did impact our TER [ph], and it would have been higher, for example, if we hadn’t done that. But we did, as mentioned in the comments, we did decide, I think prudently at the time, to sell some mortgages in October as the book value was declining. And then we did immediately in November when there was a sentiment change, start buying them back.
But when you engage in that kind of activity, it does tend to impact your book value. Now, mind you, if you look at our risks, at the end of last quarter, we had something like average return of mortgages, something like 6% positive book value for 25 basis point tightening in mortgages, and which is not the same as some of our peers that are just more purely an agency spread play. As we’ve discussed, our capital structure, where we have 38% of our capital in mortgages and the majority of it in hedged MSR is going to not give us the same amount of volatility and exposure to mortgage spreads in both directions. Right? In the third quarter of last year, we vastly outperformed our peers when mortgage spreads widened, and then this prior quarter was the opposite.
And that’s by construction. And it is why you’re not going to see the same kind of numbers out of us, generally speaking, compared to some of our other peers when you have mortgages spreads as they move around.
William Greenberg: Yes, I just had a couple of comments, I think Nick said the salient point, which is that our capital structure, our asset allocation rather only has 38% of our assets allocated to RMBS. So if a pure agency 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 your or various other things that 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, 62% of our capital structure. And we think the RoundPoint acquisition is going to be able to add even more revenue to that part of the strategy.
Right, and then the RMBS, which is 38%, serves to hedge the interest rate risk and the mortgage risk of the MSR portfolio, and also to provide a store of liquidity for rainy days and so forth. But the result of that is that we just have less exposure to mortgage spreads than portfolios. Without agency MSR and we like that. And that’s the strategy that we’re pursuing and we think it’s really good.
Arren Cyganovich: Okay. Yes. And then on the direct to consumer build out, sounds like you’re doing that organically versus going out to acquire something. What’s the benefit of doing that versus going to buy something that’s existing? And then in addition to protecting the MSR, would you be marketing outside of your existing servicing mortgages, or would it be kind of just more specifically targeted at your own book?
William Greenberg: Yes. The benefits of building versus buying are the same as any kind of decision like that. Same as about remodeling your house rather than buying an existing one. You get the thing that you want. Right. And with this environment and lots of other structures out there, or companies out there that are upside down on costs or are built for a different environment, or have legacy risks of some kind, we don’t want to be involved in any of that. We’re going to build the platform that we want that’s perfectly suited for our needs. Right. And I don’t feel like we are stressed for time here because of where the gross wackies of our portfolio and the current outlook of rates. We’re just miles and miles away from being able to refinance.
And so we have the time. It’s not going to take forever to build this thing. As I said, 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. We’re going to have no legacy issues or risks, and we’re going to focus on recapture on our portfolio. That’s the main thing of what we’re doing here. You ask whether we’re going to go out and try 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 recapture of our portfolio.
Arren Cyganovich: Okay. Got it. That sounds better. Since the alternative would be pretty expensive, I’d imagine. All right. Thank you.
William Greenberg: Yes, exactly. Thanks very much, Arren.
Operator: Thank you. We reached end of our question-and-answer session. I’d like to turn the floor back over for any further or closing comments.
William Greenberg: Just want to thank everyone for joining us today. And thank you as always, for your interest in Two Harbors.
Operator: Thank you. That does conclude today’s teleconference webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
