July Hugen - Director, Investor Relations Tom Siering - President, Chief Executive Officer Brad Farrell - Chief Financial Officer, Treasurer William Roth - Chief Investment Officer.

Mark DeVriesark - Barclays Douglas Harter - Credit Suisse Trevor Cranston - JMP Securities Daniel Altscher - FBR Joel Houck - Wells Fargo Rick Shane - J.P. Morgan Brock Vandervliet - Nomura Securities Michael Widner - KBW.

Good day, ladies and gentlemen, and welcome to the Two Harbors Investment Corp Third Quarter 2015 Financial Results. [Operator Instructions] As a reminder, this conference call may be recorded. I'd like to hand the conference over to Ms. July Hugen, Director of Investor Relations. Ma'am, you may begin..

Thank you, Sayed and good morning. Welcome to our third-quarter 2015 financial results conference call. With me this morning are Tom Siering, President and Chief Executive Officer; Brad Farrell, Chief Financial Officer; and Bill Roth, Chief Investment Officer.

After my introductory comments, Tom will provide a recap of our third-quarter 2015 results, Brad will highlight some key items from our financials, and Bill will review our portfolio performance in operation and businesses. The press release and financial tables associated with today's conference call were filed yesterday with the SEC.

If you do not have a copy, you may find them on our website and the SEC's Web site. This call is being broadcast live over the Internet and may be accessed on our website in the Investor Relations section under the Events and Presentations link.

We encourage you to reference the accompanying presentation to this call, which can also be found on our website in the same location. Reconciliation of non-GAAP financial measures to GAAP can also be found in the appendix of the accompanying presentation.

We wish to remind you that remarks made by management during this conference call and the supporting slide presentation may include forward-looking statements.

Forward-looking statements reflect our views regarding future events and are typically associated with the use of words such as anticipate, target, expect, estimate, believe, assume, project, and should, or other similar words. We caution investors not to rely unduly on forward-looking statements.

They imply risks and uncertainties and actual results may differ materially from expectations. We urge you to carefully consider the risks described in our filings with the SEC, which may be obtained on the SEC's website at www.sec.gov.

We do not undertake any obligation to update or correct forward-looking statements if later events prove them to be inaccurate. I will now turn the call over to Tom..

Thank you, July. Good morning everyone and thank you for joining our third quarter 2015 earnings call. Please turn to slide 3 for an overview of our financial results and current market considerations.

Our book value of September 30 was $10.30 per share, in the third quarter we realized a comprehensive loss of 92.8 million, or -$0.25 per weighted average share. Core earnings were $0.22 per weighted average share while we incurred a GAAP loss of $0.09 per weighted average share.

In the third quarter, we repurchased 1.4 million shares of the company’s common stock at an average purchase price of $8.96 per share, an aggregate cost of approximately $12.5 million. As we have mentioned in the past, management remains committed to repurchasing shares would not make sense economically for our stockholders.

The Fed’s decision not to raise interest rates lead the volatility in the market, it remains possible that the Fed raises rates in late 2015 or early 2016 and currently the market suggests that there is likely a 60% probability of December rate hike.

Unemployment at 5.1% September remains relatively low but it is clear from the Fed’s statements that all benchmarks will becoming less as determine as they evaluate rate decisions. The job and housing markets have been stable and we anticipate them remaining same for the foreseeable future.

Home price appreciation was up 6.4% on a trailing 12 month basis according to CoreLogic and we expect pricing gains of approximately 4.7% over the next 12 months.

That being said given the recent volatility in the market, we believe that it is prudent to remain considerably position with respect to interest rate exposure and continue to focus on transitioning capital to our new business initiatives which is a perfect rate decide for.

In the third quarter, we sponsored two prime jumbo securitizations remaining our total securitization count through the first nine months of 2015 to ’16 with the seven field sponsors subsequent the quarter end.

I'd like to compliment and thank the entire team the Two Harbors for their efforts and reaching our goal of 6 to 10 securitizations through 2015. Most importantly we are retaining the credit pieces from each of these deals to replace our legacy non-agency securities [indiscernible] for that following naturally pace down over time.

We have been retaining some higher pieces of the capitals when the math is compelling. Concurrent with our earnings release this quarter, we have launched the 8th webinar in our ongoing series titled “Mortgage Loan Conduit & Securitization. This introductory webinar explains the securitization structure and process.

We hope that you will find that instructive. With respect to MSR, we closed on two bulk acquisitions in the third quarter, totaling approximately 6.1 UPB and added three flow sellers. We are very pleased with the progress we have made on investments and commercial real estate debt in the quarter and year-to-date.

The majority of infrastructure was built in the first half of 2015 and we began putting capital by work in a more meaningful way in the third quarter of 2015. We have closed eight loans in the third quarter with the carrying value of approximately $245 million which exceeded our expectations. Please turn to Slide five.

We strive to be an industry leader bringing innovative capital solution to the U.S. real estate market. Our operating businesses are based on this mission and we're quite proud of the offers made with respect to shifting capital to these franchises over the past several quarters.

Looking forward we expect to expand our originator part and network and product offerings while remaining a regular issue in the securitization market place and then active MSR participant through both transactions and flow arrangements.

Moreover we expect to grow our commercial real estate initiative by deploying the remainder of our initial $500 million of equity investment in the fourth quarter of 2015 and into 2016. The evolution of these businesses should drive franchise value and stockholder returns. I will now turn the call to Brad for review of our financial results..

Thank you Tom And good morning everyone. Please turn to slide 6. Book value is $10.30 per share at September 30th versus $10.81 as of June 30th. Our comprehensive loss of $92.8 million in the third quarter was primarily driven by underlies losses on our non-agency securities, swap in swaption positions and MSR portfolio.

The company also declared dividends of 95.5 million or $0.26 per share in the third quarter. Please turn to slide7. Core earnings was $0.22 per weighted share, representing an annualized return on average equity of an 8.1%.

Core earnings was generally in line with our expectation of quarter analysis of core earnings and would like to discuss a couple of the key variances. Interest income was generally flat quarter over quarter but there are a few items to highlight. Interest income from our trading securities or U.S.

Treasuries decreased $4 million quarter over quarter through the sale of a Treasury bond in 2Q. Furthermore, interest income are unavailable for sale securities decreased as amortized cost of our holdings decreased from 12.2 billion to 10.9 billion due primarily to the sale of agency securities.

These items were mostly offset by slightly lower prepayments on certain of our IO securities which resulted in increase in the yield as well as an increase in our holdings of prime jumbo and commercial real estate mortgage loans.

Our swap cost decreased 25.8% during the third quarter for a number of reasons including a lower average notional balance was carried during the quarter due to the agency’s security sales, a Treasury hedge was unwound during the second quarter in conjunction with the previously mentioned sale of a Treasury bond and a few swap were reset at lower rates, resulting a lower interest rate expense.

Finally servicing income decreased 37.2% due to a change in our core earnings MSR, amortization methodology that took effect July 1st, 2015. I would note that future MSR amortization will be heavily influenced by prepayment trends. Please turn to slide 8 for an overview of our financing profile.

I would like to highlight a couple of things on this page. The repo market RMBS continues to ebb and flow with regard to liquidity and borrowing rates as a BASEL-3 regulatory capital reform rose impact the lending appetite of financing providers. That being said, we did not experience any repo funding restrictions during the quarter.

The dynamic nature of the FHLB facility, makes the valuable financing tool that among other things allows us seamlessly work through the national shifts of the repo market along with providing a stable and consistent funding source for our conduit business. Our FHLB advances totaled 3.7 billion at quarter end.

With that I will turn the call over to Bill..

Thanks Brad and good morning everyone. Please turn to Slide 9 as we review our portfolio performance and yield. Our analyzed net interest spread was 2.83% up 4 basis points from June 30th.

Net interest spread was positively impacted by generally stable yields across the portfolio, coupled with a decrease in the cost of our swaps and a lower average notional balance throughout the quarter. From a book value perspective both agency and credit spreads wind while swaps tightened versus U.S. Treasuries.

These variables negatively impacted book value and made heading a mortgage portfolio challenging during the quarter. Finally, given uncertainty around potential Fed action, we believe it is prudent to continue to maintain low overall interest rates exposure.

Please turn to Slide 10 to discuss the composition and allocation of capital across the business. As of September 30th, the portfolio was 14.1 billion in assets with roughly 53% of capital allocated to the rate strategy, 43% to the credit strategy and 4% to commercial real estate.

We reduced the capital allocation to agencies in the third quarter, selling approximately 0.8 billion of specified pool [indiscernible] bonds. We also continue to sell legacy non-agency bonds that we believe had reached full value.

Importantly, at quarter end approximately 30% of our capital was dedicated to our operational business up from 23% at June 30th. This allocation includes retained interest from our securitizations, our loan pipeline MSR and commercial real estate loans.

The success of this capital transition is encouraging as we see higher expected returns in these endeavors. Now let's turn to slide 11 and spend a moment on the conduit and MSR.

During the third quarter, we sponsored to two Agate Bay securitizations totaling 606 million UPB with retaining approximately 250 million of AAA and approximately 32 million of subordinate and IO bond. Expected ROE on these retained assets are in the low double digits.

Through our ten securitization life to-date, ABMT 2015-16, we have attracted over forty five different investors and believe this is the result of our Agate Bay brands growing acceptance in the marketplace. Our pipeline which includes loans and interest rate lock commitments was robust at approximately 1.2 billion at September 30th.

Finally, in late October we sponsored ABM T 15-7, a 332 million securitization. We're very pleased with the progress we have made over the past few years in developing this important part of our business. During the third quarter, we launched an expanded credit program targeting more average borrower profile than our prime jumbo program.

This program is in the very early stages of development and we will provide updates as it grows over time. We made significant headway within our MSR business during the third quarter, expanding our flow sale arrangements and adding approximately $67 million in market value via bulk and flow purchases as Tom mentioned earlier.

We believe the long term success of our MSR business will be driven by the organic expansion of our flow sale arrangements within our originator partner network and have concentrated our resources on cultivating these relationships. We look forward to growing our MSR initiative during the remainder of 2015 and in the coming years.

Please turn to Slide 12. We are particularly pleased with the progress we've made in our commercial real estate business. Our capital allocation increased to 4% as we added eight loans during the quarter, for senior and four mezzanine.

At September 30th, we had a total of nine loans on office retail multifamily and hotel properties throughout the United States with a total caring value of 291 million. We finance some of the senior loans with the FHLB subsequent to quarter end and continue to build our multiple financing options to support this strategy.

As to deal flow, we are seeing excellent opportunities available in the marketplace today and are on schedule to deploy the initial 500 million of capital to this business throughout the final months of this year and into 2016.

In closing, we aim to maintain a low risk profile as we transition our capital to what we believe are opportunities for higher quality returns in our operational businesses. I will now turn the call back to Sayeed to take any questions..

Thank you. [Operator Instructions] first question comes from Mark DeVriesark from Barclays. Your line is open. Please go ahead..

Yes, thanks. This is one the first quarter's I can remember where there was a fair amount of volatility and you guys didn't actually materially outperform.

Are there more entries and in terms of books value stability, Bill I think you alluded to some of the causes around spread widening things that made it hard to hedge but could you just elaborate on some of those points? And also talk about what you think the outlook is for some of the drivers that cause the book value volatility?.

Mark, good morning. Thanks for joining us today. So I think, look there was a very challenging quarter as I think everyone, the analyst community and investor community has all seen. I think there's a couple of important drivers.

First of all, obviously mortgages dramatically underperformed, agencies that is swap spreads went negative to Treasury, these are things you guys all know. Credit had a tough quarter, residential credit outperform high yield dramatically but still suffered.

Additionally, we've kept our interest rate exposure really quite close as you know and the market rallied quite a bit. So we didn't benefit from the rally. After the Fed announced that there is a sort of a waffling back before the end of race and raised race, they are not going to raise race.

And so there's been a lot of volatility and if you are long duration you benefited from that but if you weren't and you were pretty close to home then you didn't benefit so I think that sort of one of the important differentiator.

So as you know looking back historically, we typically keep a pretty tight our interest rate exposure and so when you do get this quarter through the market rally , we don't intend to plan on benefiting from that but conversely when it goes the other way, we would expect the outperform..

Okay that's helpful and If I remember correctly during the taper tantrum you guys are pretty smart enough in front of that and you actually hedged the spread widening by just delivering selling down your agency positions.

Are you the point now where 40 odd compliance is limiting your ability to potentially hedge again further agency spread widening by selling down even more?.

That's a great question. That's something we obviously pay extremely close attention to and you that's not something that we're ever to get remotely close to breaching. Obviously if you sale an agency pool, and the whole pool your number goes down but keep in mind the denominator goes down as well.

So that's not something that you should really spend a lot of time thinking about because that's not a test we're likely to come close to worrying about on our side..

Thank you. Our next question comes from Douglas Harter from Credit Suisse. Your line is open. Please go ahead..

Thanks, I guess I was sort of following on the volatility you saw on the hedging side, are you looking at kind of the construction of your hedges and would you consider changing that hedging more with treasuries against agencies or will you stick with swaps?.

Good morning. I mean if we have started the third quarter over again, yes but going forward that's a really tough question to ask because historically credit products typically track much more closely with swap tan they do with Treasury. You also have balance sheet considerations and funding considerations.

If you switched whatever 15 billion or swap hedges to 15 billion to treasuries your balance sheet goes up, you have to borrow those. So the combination of the fact that historically swaps. In the short run obviously we've seen some dislocation but historically that’s a really a great proxy for spread products..

Great.

And for a while you've been relatively lowly levered against the agency, the agency portfolio not liking the market, obviously with spreads widening, are you closer to liking the market and potentially adding there or do still sort of see yourself staying more cautious?.

Just to give an idea agency spreads, we saw sort of ROEs and then we've talked about this before sort of in the mid single digits, maybe a little bit better, I’d say today they wind up, there may be mid to high single digits but frankly there's a number of reasons which we would not intend to increase that exposure and in fact be more likely to move capital away as you saw in slide 10, the agency exposure is going down.

And the reasons are first of all and most importantly the returns we are seeing in these CRE, MSR and the conduit, are all in the double digits and that stuff we have a lot more control over. And so just on a mathematical basis that's much more attractive than agency.

Second of all the extend that the Fed does, finally increase interest rates at some point. There's a possibility that they decided that on the follow that they might start to not reinvest in agency mortgages.

They've been the biggest driver of the nominal spread tightening that we've seen over the last several years so you could certainly see that reverse itself. So the combination of relatively unattractive returns and the potential for a wider spread going forward, you should see that bucket continue to drop as opposed to increase.

I want to make one more comment on that, swap spread versus Treasury. Given that they've moved so negative the other point, I think it's worth mentioning is that if we were going to do that this would not be the best time to make that switch..

Doug, at the beginning of the quarter with the benefit of hindsight, they would have been great but it seems like a very tricky entry point to these law bills. There's really some funky dynamics going on between the interest rates and treasuries. So I think the hedging or treasuries you would need to approach with great caution..

I mean what do you think would get that relationship to normalize or is this could we be looking at kind of an environment where we're kind of out of step with normal for a while?.

I hope it's the latter, I mean frankly a lot of it's just driven by the financing markets. Government reposed trading about LIBOR. So I think the movement is swap spread, the treasury is highly a function of that financing markets. I don't know what turns that around but going into year-end you can certainly see some reasonable volatility.

Now it could be the case that once we get past year end you see sort of a little bit more normal conditions in the financing markets for government collateral in which case swap spread could definitely start to move. I don't know if they got positive but they certainly start to move wider..

These are very usual conditions right now Doug..

Understood. Thank you..

Thank you. Our next question comes from Trevor Cranston from JMP Securities. Your line is open. Please go ahead..

Thanks. Couple questions on the MSRS.

First, can you give us a sense of kind of the origination capacity of the flow sellers you've been adding both during the third quarter and subsequent quarter and so that we can get a sense of kind of the special volume that could be coming on to the books?.

Good morning Trevor. Thanks for joining. Yes, its little hard to get into exact numbers currently because we added, we basically went from one relationship earlier this year, currently we're at six and we intend to grow that through the remainder of this year and into next year. So it's a little hard to get into sort of a glide path if you will.

I think the one thing that's probably we're saying is if we've said this now for the past several years that we could easily see 20% of capital in the MSR asset which is roughly 800 million and so we're only a little bit about half of that.

So certainly we have a lot of runway to continue to add and it's also, I mean I don't know maybe rates go lower but certainly rates are reasonably low. So we don't think it's also a bad time to do that as well..

Yes, I will just say Trevor that our seller network is expanding and so we would be reluctant to quantify a run rate in here for you but it's something that we're working on obviously developing and we have quite a bit of capacity for MSR..

Okay, got it, fair enough. And I know flow sellers is the kind of a key component of the strategy long term but given the spread widening we saw across a variety of products over the last couple quarters, did you go see a material change in the pricing level of bulk MSRs and are you seeing those as more attractive over the near term? Thanks..

So as you know we're primarily focused on new issue conforming and the answer is no, we didn't really see any material change. So the interesting thing is just because agencies widen to swap.

They actually didn't do so poorly against treasuries and if you look at the mortgage rate, it's actually been reasonably stable for the last, bulk of this year frankly.

So we really haven't seen dramatic change in the mortgage rat and without a huge volatility you wouldn’t expect to see MSR widening much and in fact valuation has been relatively constant..

Got it. Okay thank you..

Thank you. Our next question comes from Daniel Altscher from FBR. Your line is open. Please go ahead..

Thanks and good morning everyone. Bill, I think you start to touch over this and spend some time with Doug around what happened with swaps in the quarter.

You showed such a little bit but can you just give us your view generally just as to what you things going on here that really caused the, I guess the historical deviation and what we would expect to see in swap versus treasuries?.

Dan, good morning. I mean I think there's sort of two key drivers.

One of the drivers specially for longer day spreads as we've seen a huge amount of corporate issuance?.

Yes..

What corporation do is typically, they issue fix and then I'll swap it back to floating and they can manage their exposure along the curve.

So clearly see a tremendous amount of receive interest and they're not going to go out and buy treasuries that just doesn't make any sense for a corporation do so pressure on the longer and a lot of that's been driven by corporate issuance on the received side.

And then the other thing is shorter dated swap spreads have been much less volatile although they've obviously been under pressure and as I mentioned earlier on the financing side with GC trading much cheaper.

If you run the math right typically government collateral trades very low lying rate and therefore swap spreads need to be wider but when GC cheapening up then therefore the cost of having a Treasury position, easily swap position changes and so swap spreads come in..

That’s something like one of the chief determinants of the value right thing is going to be the law that you can finance and right now that the market for GC has been sloppy..

Thanks that's helpful to discuss that.

I want to talk a little bit just about FHLB, do you have any updates on the, I guess the policy or the regulatory side as to where FHFA may be going or if there's anything towards end this year we could be looking for? Or is going to sit with what we have and know nothing?.

We really don't have anything new to report on that. So I wish I could provide you with some of news but we really having no fresh formation on that. Our relationship with them more and continues to be excellent and that's a non-issue but we have nothing new to report in respect of the propose rule making changes..

Okay, no that's fine and then just one of the one.

What was in I guess last quarter slide deck and I didn't see this quarter was kind of a reconciliation or a quick chart that showed, I guess distribution relative to the taxable income, reproduced in this quarter so Brad is there may be an update as to where you sit on a casual income side versus distribution side?.

Brad, you are going to take that one now?.

I appreciate the question.

Last quarter as you noted we did provided some additional disclosure that we thought was very instructive at that point in time in the year about how we were kind of thinking about the latter half of the 2015 cycle and specifically calling out and making people aware of the realized gains and their impact but really we don't intend to have that be a consistent disclosure but we will obviously update at year end but we just didn't think the disclosure was very valuable this quarter given that we had really achieved our objective in disclosing that last quarter..

Thank you. Our next question comes from Joel Houck from Wells Fargo. Your line is open please go ahead..

Good morning. I hate to beat up this swap spread issue there but take another crack out it.

It sounds like your obviously in hindsight, the hedging strategy would have been different but you're reluctant to move to treasuries which is understandable but the question is, is that a sign that you believe this unusual behavior of swaps over the treasuries, is it more transitory? Or is there something more systemic about this that might last into next year? I'm just curious is your thoughts on that then I have a follow up..

Empirically this is certainly an aberration and whether or not is sustain is difficult to say. As Bill pointed out two drivers of the corporate insurance and financing rates in respect of treasury collateral and it's difficult to say whether that's an ongoing phenomenon or not we saw but empirically this is certainly an aberration going on spreads..

Okay, fair enough now.

Would it not be also fair to think that maybe given the discount to book that given the uncertainty with agency and I think Bill mentioned that you have plenty of room to take down the agency book for [indiscernible] purposes do that shrink that book and be more aggressive in stock buybacks given the discount that’s opened up on a price to book basis?.

Yes, we are committed to buying back shares when I make some of economically for our shareholders and obviously we bought shares in the quarter and will continue to buy shares and want to makes sense for our stockholders. That is our commitment. .

Well I guess, maybe if I could more directly I mean now it seem to be a good time if you're worried about the Fed potentially shrinking, its balance sheet and spread widening and agencies given the uncertainty over how to hedge that it would seem to me that a good thing for shareholder that would be to be more aggressive in buying back stock and shrinking at least the agency part, I think your earlier comments were that the risk reward is much more favorable while side of agency, I don’t if you may disagree with that that? I'm just questioning, how the overall corporate strategy here to think up with what we're hearing in the conference call?.

Sure. Absolutely. I'm going to say this and I mean this very respectfully, it's not in the best interest of our shareholders to discuss with granularity our strategies around repurchasing shares.

So we are committed to buying shares, I want to make sense economically and we understand the math and the talk with more granularity of the math, we don't think it's in the best interest of our shareholders because obviously we want to not give guidance where we might be buying shares back and my job is to take care of shareholders and I believe that it's best just not to discuss with granularity strategies around that..

Okay this is the last question, can you maybe give us an update on your, with respect to the commercial real estate initiative, what infrastructure you have behind that in terms of origination and how you're sourcing commercial real estate loans?.

Yes as we mentioned, we've built out the team in the first half of this year, there's roughly a dozen professionals in that group, basically includes originators, underwriters, folks that are working on transaction management and so basically what we're doing is sourcing loans to either directly with borrowers that our group has had relationships with over the years or through the real estate brokers, a lot of the market is brokered as you probably know.

And you we have a tremendous pipeline, we look at a lot of the deals, lot of deals don't make the cut but those that do we spend a lot of time diligence thing, underwriting going out to see the property run in the numbers and then hold back some amount of them fall through the hoop and we close them and fund them. So it's very classic.

It's a very classic structure with the originators and underwriters, basically doing the work..

Thank you our next question comes from Rick Shane from J.P. Morgan. Your line is open. Please go ahead..

Based on your comments or your responses to Jill's question, I’m not sure how far I am going to get with what I'm about to ask you. I hear what you're saying about buyback and I understand that you don't want to telegraph specifically at what levels you're going to be buying back stock.

But at the same time I think framing this conversation is relevant to investors and is helpful to them. And I guess the two things that I would love to think about are without being specific in terms of this is the price at which you become aggressive, what are the considerations? Your stock is trading right now near its trough multiple buy book.

That obviously should be a consideration I think the other thing that probably has to weigh into this is your implicit assumptions about whether or not the underlying assets are fairly or cheaply or overvalued, can you talk a little bit about that and then at least put into some context, the magnitude of what you would consider buying back? The buyback in the most recent quarter was about 30 basis points.

So it's a signal to the market but I would describe that it doesn't really move the dial in a big way and I want to get a sense of how aggressive that could do?.

Sure. So we have, how big it could be we have 21.2 million shares remaining that are available for a repurchase on our existing program.

So today that's the maximum amount that could be but in respect of your first question, yes I'm not going to get into more granularity about strategy what I will say is that is how we look at say, what are the investment opportunities in the space in which we operate and then we look at the math and respect of the exact price relative to book value.

So in a big picture stands if investment opportunities are amazing and our shares are trading, year or through book value that's not a good time to repurchase shares, conversely when market conditions are otherwise one certain investment opportunities aren't that attractive and our shares had a discount to book value that's want to make sounds to repurchase shares and as I said we have an ongoing commitment to the stay faithful to that methodology and honestly I think that's appropriate for us to say today because we want to remain flexible in respect of our strategies around repurchasing shares.

That's what's best for our shareholders, not to give particular guidance around that..

Thank you. Our next question comes from Brock Vandervliet from Nomura Securities. Your line is open. Please go ahead..

Thanks very much, I appreciate you guys all trying to explain the swap spread issue. I think the challenge that we all have is that all every management in the space seems to be tends to explain the drivers and when that may change.

I guess a follow on would be, can you give with the swap spreads kind of marching tighter almost every day, could you give any sort of an update on book value here to date in the quarter?.

Sure. It's our policy in less book value in mezzanine for not to discuss intra quarter. Obviously we're just about one month into the quarter and so if there was any meaningful change we would set actually and we would not set it. So that's what we're prepared to say. There have been a dramatic move in the market that it should be noted at this time.

Again we're one month into the quarter so that's m there is two-thirds have to point out. So as of today, there has not been a notable change in book value..

OK fair enough and as a follow up, different topic on to securitizations you executed. Could you talk just about the execution that you got on those deals, I think I heard you retained half or so of the AAA? Thanks..

We've been very happy with the execution on our deals generally. There have been some deals where we sold all the AAA and there has been some deals where we sold some of the AAA. Frankly that just comes down to clearing levels.

If you pay any attention to where AAA spreads have been, they've been anywhere from in mid to high tees to mid to high three, in terms of points factor of past and so obviously probably fair to assume that there weren’t anyone on the wider end that look pretty good to us and we weren't going to sell bonds at those levels.

I don't want to get into specifics because it kind of depends on any given day how cheap is the mortgage basis and what's the book look like et cetera.

There has obviously been as you probably have heard on other call as there are certain times where these AAA get really very cheap and a lot of people want them and that’s a time where we want them to. So we're happy to retain them when we think they're double digit ROEs for us..

Thank you. Our next question comes from Michael Widner from KBW. Your line is open. Please go ahead..

Good morning guys.

I'm not going to ask anything about swap spreads but I do want to ask you about if you stock conceptually about your core earnings, your expectations, with respect to the dividend, I guess specifically what I had prefix that is since the taper tantrum about two years now, you're core earnings have been averaging very close to what this quarter was and then you mention in the opening comments that $0.22 core was very much in line with your expectations.

So is 22 has been the run rate it's kind of where you guys expected this quarter to be, could you just talk about that relative to the $0.26 dividend and how we should think about that going forward?.

Thanks for the question. We have often said that core earnings are not a perfect metric in respect of many sense, in respect of our ability to pay the dividend.

So the dividends determined by several things typically but this year it's really been more of a story of taxable income and obviously in respect of that we need to be compliant with rules and so in no way should you take this is as guidance but in that respect, we're in good shape coming into the yearend but we're a month into the quarter, the determination the dividend has not been determined yet obviously we have projections but we've been reluctant to historically for all the right reasons to be love to give dividend guidance.

And so you should anticipate going to be hard philosophy going forward as well..

So I appreciate that certainly makes sense I guess because you guys, if you talk a little bit more about taxable last quarter and a little less this quarter, I don't think too many people care much about, the Q4 dividend, I think it's more thinking about 2016 and ahead, I guess really maybe my question is do you expect a sort of systemic spread between taxable and core and again if it's for $0.04, any reason to think that that would change that core might better reflect or be closer to taxable going forward if that question makes sense..

Well I say with all good humor if I'm reluctant to give guidance and to the fourth quarter, I am really reluctant to give guidance in 2016.

The mortgage market conditions are upright, so if you look at what's going to drive, dividend over the long term it's going to be earning power of the portfolio which is a function of earnings and capital gains and so forth and if you look at agency spreads historically they're pretty unattractive, mediocre I would characterize the math.

But conditions can change a lot so what 2016 brand is going to be difficult for us to say and the drivers of the dividend can change over time. As I said in my prior remarks 2015 has largely been historically taxable income but 2016 there would be other drivers that determine the dividend as well..

Yes, I certainly get that.

Specifically is there some reason that we would expect based on the current mix of assets and businesses in the operating businesses, we should expect a systemic sort of spread between core and taxable, as an analyst it's very difficult to predict taxable because we're not tax accountants and like you said there can be very difficult things to predict that, well again it’s a different, predicting GAAP versus core versus taxable is three different things I don't really feel like I personally have this greater visibility into taxable as you know perhaps the other two and that's why just a question whether there's something systemic that leads to spread the taxable for years and above core?.

Sure. So I am going to let Brad handle the timing aspect of that question.

But I would just say that our transition into these new businesses, they have better ROEs and so that's why we're making the transition and frankly in many respects we think the higher quality ROEs but that's not to say that it's difficult to say what the future holds but that is why we're making the transition, the ROEs are better in that business which is obviously better to support the dividend but again we're not going to give any guidance.

With that I'm going to hand it over to Brad for the tax aspect of your question..

Yes I'll probably a little repeated I think two points.

One, you are kind of referring the dealt between taxable income and core and the largest driver of that is as us existing or selling agency securities, not only the securities that we hold and to project what that will be, is this is just not feasible but bigger picture we sold nearly a billion dollars of agency securities this quarter.

Shifted that capital to other forms of assets commercial, prime jumbo loans. That will generate incremental core earnings. And at the same time that does generate realized gain. So, taking a step back? Yes, in so far we harvest and shift capital.

There will be realized gains which will drive the higher taxable income and credit delta between core earnings. Meanwhile we're working very-very diligently to shift our capital to asset classes that are generating incremental ROE which will then drive our core earnings.

So I think those are the two big trends that we're working very hard and try to be transparent about what we're trying to achieve..

Okay, I appreciate that and I think really when your points there sort of hits the real question which again I'm not looking for core guidance it's more about the delta between the two and it sounds like the majority of that is really just the realized gain component, understanding that support your model, I understand it's going to be inherently unpredictable but I do appreciate all the comments thanks..

Yes, I mean especially if I can just add one final comment on the non-agency space.

We've had some capital gain, capital gains in 2015 because prices have advanced over the last couple of years but really our philosophy around that is not to capital gains per se, really what we're doing selling bonds when we think they no longer make economic sense the whole and in 2015, there were capital gains to arrive from that but the philosophy is not to generate capital gains per se but rather to make smart investment decisions for our shoulders..

Understood, appreciate the comments as always guys. Thank you..

Thank you. Our next question comes from [indiscernible] your line is open please go ahead. [Operator instructions]..

Rob, are you there?.

I am no longer showing him in queue. I would like to hand the conference over to Thomas Siering for closing remarks..

Thanks Sayeed. Thank you all for joining our earnings call today. We are quite pleased with the advancements we have made in our business lines and are excited for the future of the company. As a reminder, last night we launched the eighth webinar in our ongoing series titled Mortgage Loan Conduit and Securitization.

It can be found at www.twoharbors.com under the investor and webinar links. We hope you find it as instructed and we thank you for your interest in Two Harbors. Have a wonderful day..

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day..