Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q3 2018 Earnings Presentation
29 slides from Two Harbors Investment's earnings presentation, Nov 6, 2018
Slide 1: Third Quarter 2018 Earnings Call
Third Quarter 2018 Earnings Call NOVEMBER 7, 2018
Slide 2: Safe Harbor Statement
Safe Harbor Statement FORWARD-LOOKING STATEMENTS This presentation includes “forward-looking statements” within the meaning of the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ from expectations, estimates and projections and,
Slide 3: Quarterly Summary
Quarterly Summary COMPETED CYS ACQUISITION AND GENERATED STRONG QUARTERLY CORE EARNINGS • Completed the acquisition of CYS Investments, Inc. (CYS) on July 31, 2018, increasing the company’s total capital to approximately $4.7 billion. • Reported book value of $14.81 per common share, representing a
Slide 4: Strategic Overview
Strategic Overview A SUPERIOR BUSINESS MODEL Diversified Rates(1) and Credit(2) strategies – Leverages competitive advantages in MSR and legacy non-Agency RMBS Sophisticated and differentiated approach to risk management Balance sheet composition optimizes earnings and stockholder returns P Deliver
Slide 5: Driving Stockholder Value
Driving Stockholder Value GENERATING INCOME FOR STOCKHOLDERS(1) 13% Dividend to Book Value Two Harbors Cohort Average Dividend to Dividend to 12% Book Value Book Value Quarter Ended Ratio Ratio Difference 11% 6/30/2018 12.0% 10.8% 1.2 % 10% 3/31/2018 12.0% 10.7% 1.3 % 12/31/2017 11.5% 10.5% 1.0 % 9%
Slide 6: Book Value
Book Value Q3-2018 YTD-2018 Q3-2018 Book Value YTD-2018 Book Value (Dollars in millions, except per share data) Book Value per share Book Value per share Beginning common stockholders’ equity $2,753.9 $15.69 $2,845.1 $16.31 GAAP Net Income: Comprehensive Core Earnings, net of tax(1) 93.1 278.2 (Loss
Slide 7: Core Earnings Summary
Core Earnings Summary(1) Q2-2018 Q3-2018 Variance ($) (Dollars in millions, except per share data) • Core Earnings, including dollar roll Interest income $187.3 $236.7 $49.4 income of $0.15, was $0.48 per Interest expense 108.4 152.4 (44.0) weighted average basic common share, Net interest income 78
Slide 8: Optimizing Financing Profile and Capital Structure
Optimizing Financing Profile and Capital Structure DEBT-TO-EQUITY • 5.4x debt-to-equity at September 30, 2018(1) • Economic debt-to-equity, which includes the implied debt on net to-be-announced (“TBA”) positions, of 7.3x at September 30, 2018, compared to 6.2x at June 30, 2018(2) • Maintain suffici
Slide 9: Portfolio Composition
Portfolio Composition PORTFOLIO COMPOSITION(1) HISTORICAL CAPITAL ALLOCATION $27.7 BILLION PORTFOLIO AS OF SEPTEMBER 30, 2018 September 30, June 30, September 30, 2017 2018 2018 Non-Agency $3.8b Rates(2) 55% 68% 76% MSR $1.7b Credit(3) 29% 32% 24% Rates(3) Commercial(4) 16% —% —% $10,766 Agency $22.
Slide 10: Portfolio Performance
Portfolio Performance DRIVING SUPERIOR PORTFOLIO PERFORMANCE Q3-2018 PERFORMANCE SUMMARY PORTFOLIO METRICS RATES June 30, September 30, • Higher rates and variability in spreads during the Three Months Ended 2018 2018 quarter impacted book value performance • Positive performance from hedges and MSR
Slide 11: Rates Update
Rates Update STRATEGY OF PAIRING MSR WITH AGENCY RMBS IS DISTINGUISHING FACTOR AGENCY RMBS ACTIVITY • Added $10.0 billion Agency securities to portfolio in connection with the CYS acquisition; primarily reallocated into higher-coupon 30-year Agencies • Increased exposure to Fannie Mae 4.5’s and 5.0’
Slide 12: Protecting Book Value and Income
Protecting Book Value and Income • Active management of risk positioning drives stability through periods of market volatility HEDGING ACROSS THE CURVE Book value exposure to changes in rates(1) Net interest income exposure to changes in rates(2) +25 basis points (1.0%) +25 basis points 3.2% +50 bas
Slide 13: Credit Update
Credit Update UNIQUE NON-AGENCY PORTFOLIO DRIVES ATTRACTIVE TOTAL RETURNS • Non-Agency securities holdings of $3.8 billion; primarily positioned in deeply discounted legacy subprime non-Agency RMBS with LIBOR floating rate coupons • Continue to see opportunity to add low dollar priced legacy non-Age
Slide 14: CYS Portfolio Reallocation Momentum
CYS Portfolio Reallocation Momentum TREMENDOUS PROGRESS ON DEPLOYING CAPITAL FROM CYS ACQUISITION • Expect to reallocate capital from Agencies to MSR and non-Agency securities • Maintaining low level of risk exposures to rates, curve and spread changes – Addition of MSR reduces Agency mortgage sprea
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Slide 16: Return on Book Value
Return on Book Value Return on common book value Q3-2018 (Per common share amounts, except for percentage) Book value at June 30, 2018 $15.69 Book value at September 30, 2018 14.81 Decrease in book value (0.88) Dividend declared in Q3-2018 0.47 Return on book value Q3-2018 ($0.41) Percent return on
Slide 17: Financial Performance
Financial Performance COMPREHENSIVE INCOME (LOSS) BOOK VALUE AND DIVIDEND PER COMMON SHARE(1) 18.5% $150 20% $25.00 13.1% $100 8.5% 10% $161.6 $90.8 $20.00 $0.52 $50 $4.14(2) $65.7 (3.3)% 0% $0.47 $0 $0.47 $(23.7) $15.00 $20.12 $0.47 (11.9)% -10% $16.31 $15.63 $15.69 -$50 $(102.8) $14.81 $10.00 -$10
Slide 18: Q3-2018 Operating Performance
Q3-2018 Operating Performance Q3-2018 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $236.7 $— $— $236.7 Interest expense 152.4 — — 152.4 Net interest income 84.3 — — 84.3 Total other-than-te
Slide 19: Q2-2018 Operating Performance
Q2-2018 Operating Performance Q2-2018 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $187.3 $— $— $187.3 Interest expense 108.4 — — 108.4 Net interest income 78.9 — — 78.9 Total other-than-te
Slide 20: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation(1) Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended (In thousands, except for per common share data) June 30, 2018 September 30, 2018 Reconciliation of Comprehensive income (loss) to Core Earnings: Comprehensive income (loss) a
Slide 21: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics AGENCY PORTFOLIO YIELDS AND METRICS AGENCY PORTFOLIO COMPOSITION At Hybrid ARMs and Realized At June 30, Realized September IO & Inverse IO Other Portfolio Yield Q2-2018 2018 Q3-2018 30, 2018 30-Year Fixed 1.1% 1.4% 5% & above Agency yield 3.0% 3.1% 3.1% 3.4% 2.6% Repo and
Slide 22: Rates: Agency RMBS
Rates: Agency RMBS Weighted As of September 30, % Prepay Amortized Cost Weighted Average Average Age 2018 Par Value ($M) Market Value ($M) Protected(1) Basis ($M) Coupon (Months) 30-Year fixed 3.0-3.5% $4,164 $4,108 72.1% $4,270 3.5% 21 4.0-4.5% 16,559 16,954 84.4% 17,445 4.2% 21 ≥ 5.0% 531 570 100.
Slide 23: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) As of June 30, 2018 As of September 30, 2018 Fair value ($M) $1,450.3 $1,664.0 Unpaid principal balance ($M) $119,531.6 $131,114.5 Weighted average coupon 4.0% 4.1% Original FICO score(2) 752 751 Original LTV 74% 74% 60+ day delinquencies 0.4% 0.4% Net servicing s
Slide 24: Credit: Non-Agency Securities Metrics
Credit: Non-Agency Securities Metrics NON-AGENCY PORTFOLIO YIELDS AND METRICS LEGACY NON-AGENCY PORTFOLIO COMPOSITION At Realized At June 30, Realized September Portfolio Yield Q2-2018 2018 Q3-2018 30, 2018 Non-Agency: Loan Type June 30, 2018 September 30, 2018 Non-Agency yield 8.1% 7.5% 7.4% 7.2% S
Slide 25: Credit: Legacy Non-Agency Securities
Credit: Legacy Non-Agency Securities As of September 30, 2018 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $2,719.6 $844.9 $3,564.5 % of non-Agency portfolio 76.3% 23.7% 100.0% Average purchase price(1) $60.53 $65.35 $61.68 Average coupon 3.1% 2.9% 3.1% Weigh
Slide 26: Financing
Financing $ in millions Repurchase Revolving Credit Total Outstanding Outstanding Borrowings and Maturities(1) Agreements FHLB Advances Facilities Convertible Notes Borrowings Percent (%) Within 30 days $ 6,910.6 $ — $ — $ — $ 6,910.6 27.3% 30 to 59 days 2,465.3 — — — 2,465.3 9.8% 60 to 89 days 5.0
Slide 27: Interest Rate Swaps and Caps
Interest Rate Swaps and Caps INTEREST RATE SWAPS Average Maturity Maturities Notional Amounts ($B)(1) Average Fixed Pay Rate(2) Average Receive Rate(2) Years(2) Payers 2018 $1.0 1.008% 2.336% 0.0 2019 4.3 1.769% 2.336% 1.0 2020 5.2 1.705% 2.334% 2.1 2021 4.1 1.550% 2.362% 2.9 2022 and after 8.8 2.30
Slide 28: Interest Rate Swaptions
Interest Rate Swaptions Option Underlying Swap Average Notional Average Average Cost Fair Value Months to Amount Average Pay Receive Term Swaption Expiration ($M) ($M) Expiration ($M) Rate Rate (Years) Purchase Contracts: Payer <6 Months $9.4 $30.6 3.6 $5,225 3.20% 3M LIBOR 7.6 Sale Contracts: Recei
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