Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q1 2021 Earnings Presentation
25 slides from Two Harbors Investment's earnings presentation, May 6, 2021
Slide 1: First Quarter 2021 Earnings Call
First Quarter 2021 Earnings Call MAY 6, 2021
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: Executive Overview
Executive Overview Hedge Benefits of MSR Result in Stable Performance During Volatile Quarter Quarterly Summary • Reported book value of $7.29 per common share, representing a (2.2)% quarterly return on book value(1) • Generated Comprehensive Loss of $(48.5) million, representing an annualized retur
Slide 4: Special Topic: First Quarter Key Market Highlights
Special Topic: First Quarter Key Market Highlights EXPECTATIONS FOR A FAST AND ROBUST RECOVERY LED TO SHARPLY HIGHER RATES AND VOLATILITY • Combination of a rapid vaccine rollout, the steep drop FEWER REFINANCEABLE MORTGAGES (1) in COVID cases, fiscal stimulus and supportive monetary policy helped d
Slide 5: Book Value Summary
Book Value Summary • Book value of $7.29 per common share, Q1-2021 resulting in a (2.2)% total economic return on Q1-2021 Book Value per book value(2) (Dollars in millions, except per share data) Book Value share • Book value decline reflects: Beginning common stockholders’ equity $ 2,087.7 $ 7.63 ◦
Slide 6: Core Earnings Review
Core Earnings Review(1) ($ in millions, except per share Variance • First quarter Core Earnings results impacted by: data) Q4-2020 Q1-2021 ($) ◦ Lower interest income due to the reduction in average Interest income $ 72.5 $ 56.1 $ (16.4) RMBS asset balances as a result of prepayments and Interest ex
Slide 7: Financing Profile
Financing Profile BALANCE SHEET AS OF MARCH 31, 2021 CONSERVATIVE LEVERAGE FOR AGENCY + MSR STRATEGY • Strong capital and liquidity position • $1.2 billion of unrestricted cash • Economic debt-to-equity of 6.4x at March 31, 2021, compared to 6.8x at December 31, 2020(1) Agency RMBS • Average economi
Slide 8: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) PERFORMANCE COMMENTARY • Return on book value of (2.2)%(3) At March 31, 2021, $18.6 billion portfolio • Continued to reduce leverage Includes $13.6 billion settled positions ◦ Spreads at the tightest levels in a decade driven by 3
Slide 9: Special Topic: Current Coupon Volatility-Adjusted Returns
Special Topic: Current Coupon Volatility-Adjusted Returns(1) COMBINATION OF LOWER CARRY AND HEIGHTENED VOLATILITY RESULTS IN UNATTRACTIVE VALUE PROPOSITION FOR TBA 2.0s AND 2.5s • DURATION-HEDGED CARRY: This chart shows how carry DURATION-HEDGED CARRY has evolved for TBA 2.0 and 2.5. 2.0’s in partic
Slide 10: Specified Pools
Specified Pools SPECIFIED POOL PERFORMANCE SPECIFIED POOL PORTFOLIO • Current coupon TBA 2.0’s and 2.5’s were flat and higher coupon TBAs outperformed slightly • Specified pools underperformed TBA on a relative basis Loan Balance(1) in the 2.5 coupon and outperformed in 4.0 and 4.5 62.7% Other coupo
Slide 11: Mortgage Servicing Rights
Mortgage Servicing Rights 1Q-2021 MSR PORTFOLIO ACTIVITY MSR PORTFOLIO(1) • MSR fair value increased by over 30%, benefiting from higher Dec. 31, 2020 Mar. 31, 2021 rates and steeper curve Fair value ($ millions) $1,596 $2,092 • Maintained portfolio UPB balance despite fast prepayment Pricing Multip
Slide 12: Agency + MSR Advantage
Agency + MSR Advantage EFFECTIVE COUPON POSITIONING(1) Agency P&I RMBS/TBA MSR/Agency IO RMBS(2) Combined December 31, 2020 BOOK VALUE EXPOSURE TO CHANGES IN SPREAD(3) PRESENCE OF MSR REDUCES MORTGAGE SPREAD RISK • MSR and Agency IO RMBS have similar risks to a short pools/TBA position in 2.0 and 2.
Slide 13: Risk Positioning
Risk Positioning AGENCY + MSR DELIVERS BOOK VALUE STABILITY • Interest rate and curve exposure remains low and in line with historical positioning • MSR/IO position duration offsets RMBS/TBA duration • In a 25 basis point parallel shift up in rates, estimated book value decrease of (0.7)% • In a 25
Slide 14: Two Harbors Outlook
Two Harbors Outlook OPPORTUNITY SET IN OUR TARGET ASSETS REMAINS ATTRACTIVE TODAY • Estimate returns for Agency RMBS / swaps in mid-to-high single digits • Higher returns available, in the low teens, in the near term in current coupon TBA • Estimate returns for Agency RMBS / flow MSR in low teens MA
Slide 15: Appendix
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Slide 16: Financial Performance
Financial Performance COMPREHENSIVE INCOME (LOSS) QUARTERLY RETURN ON BOOK VALUE(1) DIVIDEND YIELD(2) BOOK VALUE AND DIVIDEND PER COMMON SHARE(2) (1) Return on book value is defined as the increase (decrease) in book value per common share from the beginning to the end of the given period, plus divi
Slide 17: Q1-2021 Operating Performance
Q1-2021 Operating Performance Q1-2021 Realized Gains (In millions, except for per common share data) Core Earnings(1) (Losses) Unrealized MTM Total Interest income $ 56.1 $ — $ — $ 56.1 Interest expense 22.7 — — 22.7 Net interest income 33.4 — — 33.4 Gain (loss) on investment securities — 70.3 62.5
Slide 18: Q4-2020 Operating Performance
Q4-2020 Operating Performance Q4-2020 Realized Gains (In millions, except for per common share data) Core Earnings(1) (Losses) Unrealized MTM Total Interest income $ 72.5 $ — $ — $ 72.5 Interest expense 22.6 — — 22.6 Net interest income 49.9 — — 49.9 Gain (loss) on investment securities — 47.6 (10.2
Slide 19: 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) December 31, 2020 March 31, 2021 Reconciliation of Comprehensive income to Core Earnings: Comprehensive income (loss) attribut
Slide 20: Portfolio Metrics
Portfolio Metrics AGENCY RMBS CPR(1) AGENCY PORTFOLIO COMPOSITION IO & Inverse IO Other P&I(2) 4.6% 0.9% 30-Year Fixed 5% & above 4.6% 30-Year Fixed < 2.5% 12.1% 30-Year Fixed 4.5% 30-Year Fixed 3.0% 19.7% 19.1% MSR CPR 30-Year Fixed 3.5% 30-Year Fixed 4.0% 16.9% 22.1% (1) Agency weighted average 3-
Slide 21: Agency RMBS Portfolio
Agency RMBS Portfolio Par Value ($ Market Value ($ Weighted % Prepay Amortized Cost Gross Weighted Weighted Average millions) millions) Average CPR Protected(1) Basis ($ millions) Average Coupon Age (Months) 30-Year fixed 2.5% & below $ 1,353 $ 1,393 9.8 % 100.0 % $ 1,425 3.4 % 9 3.0% 2,088 2,204 25
Slide 22: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Gross Weighted Unpaid Principal Weighted Weighted Average Weighted Number of Balance % Fannie Average Average Loan Original Average 60+ Day Net Servicing Loans ($ in millions) Mae Coupon Rate Age (months) FICO(2) Original LTV Delinquencies 3-Month CPR Fee (bps)
Slide 23: Financing
Financing $ in millions Repurchase Revolving Credit Total Outstanding Outstanding Borrowings and Maturities(1)(3) Agreements Facilities Term Notes Payable Convertible Notes Borrowings Percent (%) Within 30 days $ 2,588.8 $ — $ — $ — $ 2,588.8 20.0 % 30 to 59 days 1,935.5 — — — 1,935.5 15.0 % 60 to 8
Slide 24: Interest Rate Swaps
Interest Rate Swaps INTEREST RATE SWAPS Average Maturity Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Years Payers 2021 $ — —% —% — 2022 7.4 0.042 % 0.060 % 1.4 2023 2.3 0.023 % 0.060 % 2.2 2024 — —% —% — 2025 and after 1.7 0.358 % 0.079 % 6.7 $ 11.4 0.085 % 0.063 % 2
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