Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q2 2021 Earnings Presentation
25 slides from Two Harbors Investment's earnings presentation, Aug 5, 2021
Slide 1: An Agency + MSR Mortgage REIT Second Quarter 2021 Earnings Call
An Agency + MSR Mortgage REIT Second Quarter 2021 Earnings Call AUGUST 5, 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 Overall Performance Driven by Spread Widening in High Coupon RMBS Quarterly Summary • Reported book value of $6.42 per common share, representing a (9.6)% quarterly return on book value(1) • Generated Comprehensive Loss of $194.6 million, representing an annualized return on avera
Slide 4: Second Quarter Key Market Highlights
Second Quarter Key Market Highlights CURRENT COUPON SPREADS REMAIN UNATTRACTIVE AS RATES DECLINE AND YIELD CURVE FLATTENS • Inflationary pressures are evident in many parts of the I. RISING INFLATIONARY PRESSURE(1) US economy • The Fed believes inflation pressures are transitory, citing supply chain
Slide 5: Special Topic: Key Policy-Related Announcements
Special Topic: Key Policy-Related Announcements POLICY AND REGULATORY LANDSCAPE CONTINUES TO EVOLVE • Implementation of policies which are supportive of borrowers, broaden the credit box, and increase oversight FEDERAL HOUSING FINANCE AGENCY CONSUMER FINANCIAL PROTECTIONS BUREAU • Sandra L. Thompson
Slide 6: Book Value Summary
Book Value Summary Q2-2021 YTD-2021 Q2-2021 Book Value YTD-2021 Book Value • Book value of $6.42 per (Dollars in millions, except per share data) Book Value per share Book Value per share common share, resulting in a (9.6)% total economic Beginning common stockholders’ equity $ 1,994.4 $ 7.29 $ 2,08
Slide 7: Core Earnings and Portfolio Yield
Core Earnings(1) and Portfolio Yield Variance • Second quarter Core Earnings results impacted by: ($ in millions, except per share data) Q1-2021 Q2-2021 ($) ◦ Decline in interest income as average RMBS Interest income $ 56.1 $ 43.4 $ (12.7) balances decreased due to sales and non- reinvestment of pa
Slide 8: Financing Profile
Financing Profile BALANCE SHEET AS OF JUNE 30, 2021 CONSERVATIVE LEVERAGE FOR AGENCY + MSR STRATEGY • Strong capital and liquidity position • $1.3 billion of unrestricted cash • Economic debt-to-equity of 6.5x at June 30, 2021, compared to 6.4x at March 31, 2021(1) • Average economic debt-to-equity
Slide 9: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) PORTFOLIO ACTIVITY At June 30, 2021, $17.1 billion portfolio • Executed on MSR strategy and maintained cautious Includes $9.9 billion settled positions positioning in RMBS 7.7x • Reduced specified pool portfolio to $7.3 billion th
Slide 10: Specified Pools
Specified Pools SPECIFIED POOL PERFORMANCE I. SPECIFIED POOL PORTFOLIO • High coupon specified pools underperformed during the quarter by 1 point to more than 2 points, depending on coupon • Some market participants pointed to the new FHFA refi program announcements and stubbornly fast speeds as cau
Slide 11: Mortgage Servicing Rights
Mortgage Servicing Rights MSR PORTFOLIO PERFORMANCE I. MSR PORTFOLIO(1) • Grew portfolio UPB despite fast prepayment speeds Mar. 31, 2021 Jun. 30, 2021 ◦ Settled $16.4 billion UPB through flow-sale Fair value ($ millions) $2,092 $2,020 arrangements and $6.5 billion UPB through bulk Price Multiple 4.
Slide 12: Agency + MSR Advantage
Agency + MSR Advantage I. EFFECTIVE COUPON POSITIONING(1) I(a): AGENCY P&I RMBS / TBA I(b): MSR/AGENCY IO RMBS(2) I(c): COMBINED March 31, 2021 II. BOOK VALUE EXPOSURE TO CURRENT COUPON SPREAD(3) MSR REDUCES CURRENT COUPON MORTGAGE SPREAD RISK • Rally in rates shifted the implied short position from
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 • Duration exposure of MSR/IO is greater than the exposure of RMBS and TBA positions • Duration of the portfolio is actively managed; slight bias to high
Slide 14: Two Harbors Outlook
Two Harbors Outlook OPPORTUNITY SET IN OUR TARGET ASSETS REMAINS ATTRACTIVE TODAY • Estimate returns for: ◦ Current Coupon Pools / Swaps in the mid-single digits, unchanged from last quarter ◦ High Coupon Pools / Swaps in the high-single to low-double digits after this quarter’s spread widening ◦ TB
Slide 15: Appendix
Appendix 15
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: Q2-2021 Operating Performance
Q2-2021 Operating Performance Q2-2021 Realized Gains (In millions, except for per common share data) Core Earnings(1) (Losses) Unrealized MTM Total Interest income $ 43.4 $ — $ — $ 43.4 Interest expense 24.4 — — 24.4 Net interest income 19.0 — — 19.0 Gain (loss) on investment securities — 8.1 (49.6)
Slide 18: 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 on investment securities — 70.3 62.5 132.8 S
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) March 31, 2021 June 30, 2021 Reconciliation of Comprehensive loss to Core Earnings: Comprehensive loss attributable to common
Slide 20: Portfolio Metrics
Portfolio Metrics AGENCY RMBS CPR(1) AGENCY PORTFOLIO COMPOSITION IO & Inverse IO Other P&I(2) 6.0% 30-Year Fixed 1.3% 5% & above 5.8% 30-Year Fixed 3.0% 17.2% 30-Year Fixed 4.5% 30-Year Fixed 3.5% 25.1% 16.4% MSR CPR 30-Year Fixed 4.0% 28.2% (1) Agency weighted average 3-month Constant Prepayment R
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 $ — $ — —% —% $ — —% — 3.0% 1,278 1,357 19.4 % 100.0 % 1,316 3.7
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 $ 2,098.6 $ — $ — $ — $ 2,098.6 21.6 % 30 to 59 days 1,318.3 — — — 1,318.3 13.6 % 60 to 8
Slide 24: Interest Rate Swaps and Swaptions
Interest Rate Swaps and Swaptions INTEREST RATE SWAPS Average Maturity Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Years Payers 2021 $ — —% —% — 2022 7.4 0.042 % 0.080 % 1.2 2023 2.3 0.023 % 0.080 % 2.0 2024 — —% —% — 2025 and after 1.5 0.257 % 0.080 % 6.0 $ 11.2 0.0
Slide 25: Two Harbors Investment Corp.
w TWO HARBORS Investment Corp.
Two Harbors Investment — Q2 2021 Earnings Presentation on 6ix