Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q3 2016 Earnings Presentation
28 slides from Two Harbors Investment's earnings presentation, Nov 2, 2016
Slide 1: Third Quarter 2016 Earnings Call
NOVEMBER 3, 2016 Third Quarter 2016 Earnings Call
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: Financial Summary
Financial Summary(1) • Total return on book value of 4.2%(2) – Book value of $10.01 per share and cash dividend of $0.23 per share • Comprehensive Income of $136.5 million, or $0.39 per share • GAAP net income of $117.8 million, or $0.34 per share • Core Earnings(3) of $82.5 million, or $0.24 per sh
Slide 4: Strategic Overview
Strategic Overview 4 KEY AREAS OF FOCUS THROUGH 2017 INCREASE EARNINGS POWER AND SIMPLIFY BUSINESS MODEL • Continue to thoughtfully manage Agency portfolio and build out MSR position • Capitalize on tailwinds supporting non-Agency • Increase capital allocated to commercial strategy • Deploy capital
Slide 5: Book Value and Comprehensive Income
(Dollars in millions, except per share data) Q3-2016 Book Value Q3-2016 Book Value per share YTD-2016 Book Value YTD-2016 Book Value per share Beginning stockholders’ equity $3,418.1 $9.83 $3,576.6 $10.11 GAAP Net Income (Loss): Core Earnings, net of tax 82.5 230.5 Realized gains and losses, net of
Slide 6: Core Earnings Summary
(Dollars in millions) Q2-2016 Q3-2016 Variance ($) Variance (%) Interest income $154.8 $168.9 $14.1 9.1 % Interest expense 54.0 60.4 (6.4) (11.8%) Net interest income 100.8 108.5 7.7 7.6 % Loss on swaps and swaptions (7.7) (4.3) 3.4 43.9% Gain on other derivatives 5.0 3.7 (1.3) (25.8%) Servicing inc
Slide 7: Diversified Financing Profile
Diversified Financing Profile 7 REPURCHASE AGREEMENTS • Repo markets functioning without interruption • Outstanding borrowings of $10.6 billion with 22 active counterparties; 31 total counterparties • $441.8 million outstanding with direct lending counterparty FINANCING FOR MSR • Added $30 million r
Slide 8: Portfolio Composition
HISTORICAL CAPITAL ALLOCATIONPORTFOLIO COMPOSITION(1) Portfolio Composition 8 $17.0 BILLION PORTFOLIO AS OF SEPTEMBER 30, 2016 (1) For additional detail on the portfolio, see Appendix slides 18-24. (2) Commercial consists of senior and mezzanine commercial real estate debt and related instruments. (
Slide 9: Portfolio Performance
Portfolio Performance 9 Q3-2016 PERFORMANCE HIGHLIGHTS (1) Defined as average total borrowings to fund RMBS, residential mortgage loans held-for-sale, commercial real estate assets, MSR and Agency Derivatives, divided by total equity. (2) “Legacy” non-Agency RMBS includes non-Agency bonds issued up
Slide 10: Rates Update
CONSERVATIVE RISK PROFILE • Maintain low interest rate exposure • Focus on preserving book value and income generation • Agency pools combined with MSR provides attractive returns with less risk – Additional benefits from increased MSR yield and float income in slowing prepayment environment THIRD Q
Slide 11: Credit Update
• Strong tailwinds for residential credit driving greater long-term opportunity for portfolio – Employment improving – Housing prices increasing – Affordability high • Continue to reduce credit reserve; released over $400 million in the past 3 years – Expect future yields to be consistent with this
Slide 12: Commercial Real Estate Update
• Aggregate portfolio carrying value of $1.1 billion at September 30, 2016 – Twenty-two senior and six mezzanine assets • Weighted average stabilized loan-to-value (LTV) of 65.1%(1); weighted average spread of LIBOR plus 482 basis points • Tremendous opportunity for lending; strong pipeline of loans
Slide 13: Appendix
E oo ——— = Appendix TWO HARBORS: nt Corp.
Slide 14: Return on Book Value
Return on Book Value 14 (1) Return on book value for three-month period ended September 30, 2016 is defined as the increase in book value from June 30, 2016 to September 30, 2016 of $0.18 per share, plus dividends declared of $0.23 per share, divided by June 30, 2016 book value of $9.83 per share. (
Slide 15: Financial Performance
Book Value ($) Dividend Declared ($) $12.00 $10.00 $8.00 $6.00 Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 $10.30 $10.11 $9.70 $9.83 $10.01 $0.26 $0.26 $0.23 $0.23 $0.23 Comp. Income ($M) Comp. Income ROAE (%) $150 $100 $50 $0 -$50 -$100 20% 10% 0% -10% -20% Q3-2015 Q4-2015 Q1-2016 Q2-2016 Q3-2016 $(92.
Slide 16: Operating Performance
Operating Performance Q2-2016 Q3-2016 (In millions, except for per share data) Core Earnings(1) Realized Gains (Losses) Unrealized MTM Total Core Earnings(1) Realized Gains (Losses) Unrealized MTM Total Interest income $154.8 $— $— $154.8 $168.9 $— $— $168.9 Interest expense 54.0 — — 54.0 60.4 — — 6
Slide 17: 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 share data) June 30, 2016 September 30, 2016 Reconciliation of Comprehensive income to Core Earnings: Comprehensive income $122,310 $136,532 Adju
Slide 18: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics 18 AGENCY PORTFOLIO YIELDS AND METRICS AGENCY RMBS CPR(1) (1) Agency weighted average 3-month Constant Prepayment Rate (CPR) includes IIOs (or Agency Derivatives). (2) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price
Slide 19: Rates: Agency RMBS
Rates: Agency RMBS 19 As of September 30, 2016 Par Value ($M) Market Value ($M) % Prepay Protected(1) Amortized Cost Basis ($M) Weighted Average Coupon Weighted Average Age (Months) 30-Year fixed 3.0-3.5% $7,251 $7,597 49.9% $7,563 3.1% 5 4.0-4.5% 3,381 3,731 100.0% 3,636 4.2% 39 ≥ 5.0% 484 555 100.
Slide 20: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) 20 As of June 30, 2016 As of September 30, 2016 Fair value ($M) $427.8 $455.6 Unpaid principal balance ($M) $55,622.0 $55,080.9 Weighted average coupon 3.9% 3.9% Original FICO score(2) 750 757 Original LTV 75% 72% 60+ day delinquencies 0.9% 0.3% Net servicing spre
Slide 21: Credit: Non-Agency MBS Metrics
Credit: Non-Agency MBS Metrics 21 NON-AGENCY PORTFOLIO COMPOSITIONNON-AGENCY PORTFOLIO YIELDS AND METRICS (1) Weighted average cost basis includes MBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weig
Slide 22: Credit: Non-Agency MBS
Credit: Non-Agency MBS 22 As of September 30, 2016 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $1,193.0 $650.0 $1,843.0 % of non-Agency portfolio 64.7% 35.3% 100.0% Average purchase price(1) $53.96 $68.40 $59.05 Average coupon 2.9% 2.3% 2.7% Weighted average
Slide 23: Commercial Real Estate Assets
Commercial Real Estate Assets (1) Cash coupon does not include origination or exit fees. (2) Yield includes net origination fees and exit fees, but does not include future fundings. (3) Initial LTV considers the original appraisal at the time of origination. (4) Stabilized LTV considers the prospect
Slide 24: Commercial Real Estate Assets
Commercial Real Estate Assets (1) Cash coupon does not include origination or exit fees. (2) Yield includes net origination fees and exit fees, but does not include future fundings. (3) Initial LTV considers the original appraisal at the time of origination. (4) Stabilized LTV considers the prospect
Slide 25: Repo and FHLB Financing
Repo and FHLB Financing 25 (1) Excludes FHLB membership and activity stock totaling $167.9 million. (2) Weighted average of 69 days to maturity. (3) Includes advances of $2.5 billion with original maturities of 20 years. Repo and FHLB Collateral(1) Repo FHLB Total ($M) Available-for-sale securities,
Slide 26: Interest Rate Swaps
Maturities Notional Amounts ($B)(1) Average Fixed Pay Rate(2) Average Receive Rate(2) Average Maturity Years(2) Payers Hedging Repo and FHLB Advances 2016 $1.0 0.435% 0.857% 0.2 2017 2.4 0.765% 0.787% 0.8 2018 1.3 1.002% 0.674% 1.9 2019 0.3 1.283% 0.731% 2.7 2020 and after 2.1 1.733% 0.731% 6.7 $7.1
Slide 27: Interest Rate Swaptions
Interest Rate Swaptions 27 Option Underlying Swap Swaption Expiration Cost ($M) Fair Value ($M) Average Months to Expiration Notional Amount ($M) Average Pay Rate Average Receive Rate Average Term (Years) Purchase Contracts: Payer >6 Months $43.0 $0.1 8.8 $1,800 3.27% 3M LIBOR 5.6 Total Payer $43.0
Slide 28: Two Harbors Investment Corp.
TWO HARBORS Investment Corp. AP vr Capa Managed Gonoany
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