Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q2 2019 Earnings Presentation
28 slides from Two Harbors Investment's earnings presentation, Aug 6, 2019
Slide 1: Second Quarter 2019 Earnings Call
Second Quarter 2019 Earnings Call AUGUST 7, 2019
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 Generated Strong 14.7% Return on Book Value for the First Half of 2019(1) • Grew book value to $14.17 per common share, representing a 5.4% total quarterly return on book value.(1) • Generated Comprehensive Income of $201.0 million, or $0.74 per weighted average basic common share.
Slide 4: Long-Term Stockholder Value Focus
Long-Term Stockholder Value Focus DELIVERED TOTAL STOCKHOLDER RETURN OF 191% SINCE INCEPTION(1) 250 200 191% 45% outperformance 150 146% since inception 100 50 0 1 0 0 1 0 0 0 1 0 0 1 0 0 0 0 7 4 2 9 5 2 0 7 4 2 9 5 2 06/19 / / / / / / / / / / / / / / 0 1 1 1 1 1 1 1 1 1 1 1 1 1 9 0 1 1 2 3 4 4 5 6
Slide 5: Book Value
Book Value Q2-2019 YTD-2019 Q2-2019 Book Value YTD-2019 Book Value (Dollars in millions, except per share data) Book Value per share Book Value per share Beginning common stockholders’ equity $ 3,773.0 $ 13.83 $ 3,253.2 $ 13.11 GAAP Net Income: Core Earnings, including dollar roll income, net of tax
Slide 6: Core Earnings Summary
Core Earnings Summary(1) (Dollars in millions, except per share data) Q1-2019 Q2-2019 Variance ($) • Core Earnings, including dollar roll Interest income $ 245.5 $ 269.1 $ 23.6 income, was $0.39 per weighted average Interest expense 163.5 192.4 (28.9) basic common share, representing a Net interest
Slide 7: Performance Summary
Performance Summary • Lower Agency yield consistent with lower rate environment • Added non-Agency securities at lower base yields Three Months Ended March 31, 2019 June 30, 2019 Annualized portfolio yield during the quarter 4.25% 3.93% Rates Agency RMBS, Agency Derivatives and MSR 3.89% 3.67% Credi
Slide 8: Financing Profile and Capital Structure
Financing Profile and Capital Structure DEBT-TO-EQUITY • Economic debt-to-equity, which includes the implied debt on net to-be-announced (TBA) positions(1) – 7.8x at June 30, 2019, compared to 6.5x at March 31, 2019 – Average of 7.2x in the second quarter 2019 compared to 7.0x in the first quarter 2
Slide 9: Market Landscape and Outlook
Market Landscape and Outlook ECONOMIC UNCERTAINTY AND GLOBAL TRADE CONCERNS FUELED RALLY IN INTEREST RATES IN THE SECOND QUARTER RATES MARKET • Second quarter environment consisted of lower rates, a flatter yield curve and 3-month LIBOR above most long-term rates • Agency basis widened in the quarte
Slide 10: Portfolio Composition and Quarterly Activity
Portfolio Composition and Quarterly Activity PORTFOLIO COMPOSITION(1) PORTFOLIO ACTIVITY $32.1 BILLION PORTFOLIO AS OF JUNE 30, 2019 • Added Agency mortgages, in both pool and Non-Agency TBA form, to manage duration and mortgage $3.9b 30-year coupon spread risk during the interest rate rally breakdo
Slide 11: Risk Profile
Risk Profile HEDGING ACROSS THE CURVE Common book value exposure to changes in rates(1) Net interest income exposure to changes in rates(2) +50 basis points (4.6%) +50 basis points 1.6% +25 basis points (1.4%) +25 basis points 0.8% -25 basis points 0.5% -25 basis points (0.8%) -50 basis points 1.8%
Slide 12: Strategic Opportunities
Strategic Opportunities MANAGE PORTFOLIO TO GENERATE STRONG RISK-ADJUSTED RETURNS RATES STRATEGY - Combination of Agency RMBS and MSR • Current expected returns in low double digits for Agency RMBS paired with MSR • Believe the combination of these two assets results in an attractive return with a l
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Slide 14: Return on Book Value
Return on Book Value(1) Return on common book value Q2-2019 (Per common share amounts, except for percentage) Book value at March 31, 2019 $ 13.83 Book value at June 30, 2019 14.17 Increase in book value 0.34 Dividend declared in Q4-2018 0.40 Return on book value Q2-2019 $ 0.74 Percent return on boo
Slide 15: Financial Performance
Financial Performance COMPREHENSIVE INCOME (LOSS) BOOK VALUE AND DIVIDEND PER COMMON SHARE(1) 36.2% $400 40% $18.00 $300 30% $311.3 21.0% $16.00 $200 13.1% 20% $0.47 $201.0 $0.47 $100 10% $0.40 $90.8 $14.00 $0.47 $0 0% $0.47 $15.69 $(102.8) $14.81 -$100 -10% $12.00 $13.83 $14.17 $13.11 -$200 (11.9)%
Slide 16: Q2-2019 Operating Performance
Q2-2019 Operating Performance Q2-2019 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $ 269.1 $— ($8.1) $ 261.0 Interest expense 192.4 — — 192.4 Net interest income 76.7 — (8.1) 68.6 Total oth
Slide 17: Q1-2019 Operating Performance
Q1-2019 Operating Performance Q1-2019 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $ 245.5 $— $— $ 245.5 Interest expense 163.5 — — 163.5 Net interest income 82.0 — — 82.0 Total other-than-
Slide 18: 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) March 31, 2019 June 30, 2019 Reconciliation of Comprehensive income to Core Earnings: Comprehensive income attributable to com
Slide 19: Modified MSR Amortization for Core Earnings
Modified MSR Amortization for Core Earnings Effective April 1, 2019, the company refined the MSR amortization(1) method utilized for Core Earnings, including dollar roll income(2) Previous method Core MSR Amortization = amortized cost(3) at end of period less amortized cost at beginning of period Ne
Slide 20: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics AGENCY PORTFOLIO YIELDS AND METRICS AGENCY PORTFOLIO COMPOSITION Hybrid ARMs and IO & Inverse IO Other Realized At March 31, Realized At June 30, 30-Year Fixed 0.6% Portfolio Yield Q1-2019 2019 Q2-2019 2019 5% & above 0.9% Agency yield 3.6% 3.4% 3.4% 3.3% 6.9% Repo and FHL
Slide 21: Rates: Agency RMBS
Rates: Agency RMBS Weighted % Prepay Amortized Cost Weighted Average Average Age As of June 30, 2019 Par Value ($M) Market Value ($M) Protected(1) Basis ($M) Coupon (Months) 30-Year fixed 3.0-3.5% $2,943 $3,033 94.7% $3,001 3.5% 3 4.0% 12,374 13,012 90.2% 12,865 4.0% 19 4.5% 7,620 8,128 100.0% 7,971
Slide 22: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) As of March 31, 2019 As of June 30, 2019 Fair value ($M) $2,014.4 $1,800.8 Unpaid principal balance ($M) $174,147.3 $169,643.7 Weighted average coupon 4.1% 4.1% Average original FICO score(2) 751 751 Average original LTV 75% 75% 60+ day delinquencies 0.3% 0.3% Net
Slide 23: Credit: Non-Agency Securities Metrics
Credit: Non-Agency Securities Metrics NON-AGENCY PORTFOLIO YIELDS AND METRICS NON-AGENCY PORTFOLIO COMPOSITION Realized At March Realized At June 30, Portfolio Yield Q1-2019 31, 2019 Q2-2019 2019 Non-Agency: Loan Type March 31, 2019 June 30, 2019 Non-Agency yield 6.7% 6.6% 6.0% 6.0% Sub-prime 75% 77
Slide 24: Credit: Non-Agency Securities
Credit: Non-Agency Securities As of June 30, 2019 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $3,211.1 $575.2 3,786.3 % of non-Agency portfolio 84.8% 15.2% 100.0% Average purchase price(1) $61.12 $64.95 $61.70 Average coupon 3.2% 3.1% 3.2% Weighted average m
Slide 25: Financing
Financing $ in millions Repurchase Revolving Credit Term Notes Convertible Total Outstanding Outstanding Borrowings and Maturities(1) Agreements FHLB Advances Facilities Payable Notes Borrowings Percent (%) Within 30 days $ 5,902.9 $ — $ — $ — $ — $ 5,902.9 20.4% 30 to 59 days 4,412.7 — — — — 4,412.
Slide 26: Interest Rate Swaps
Interest Rate Swaps INTEREST RATE SWAPS Average Maturity Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Years Payers 2019 $4.2 1.781% 2.569% 0.3 2020 3.6 1.806% 2.502% 1.3 2021 10.5 2.104% 2.484% 1.9 2022 2.5 2.002% 2.430% 3.2 2023 and after 8.5 2.532% 2.536% 6.5 $29.3
Slide 27: Interest Rate Swaptions
Interest Rate Swaptions Option Underlying Swap Average Notional Average Average Cost Fair Value Months to Amount Average Pay Receive Term Swaption Expiration ($M) ($M) Expiration ($M) Rate Rate (Years) Purchase Contracts: Payer <6 Months $1.9 $0.9 4.9 $1,250 2.28% 3M LIBOR 5.2 Total Payer $1.9 $0.9
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