Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q1 2017 Earnings Presentation
28 slides from Two Harbors Investment's earnings presentation, May 3, 2017
Slide 1: First Quarter 2017 Earnings Call
MAY 4, 2017 First Quarter 2017 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 3.9%(2) – Book value of $9.91 per common share and cash dividend of $0.25 per common share • Comprehensive Income of $145.7 million, or $0.42 per common share • GAAP net income of $72.0 million, or $0.21 per common share • Core Earnings (revised)(
Slide 4: Strategic Overview
Strategic Overview 4 • Attractive investment opportunities in target assets • More efficient business model • Sophisticated approach to risk management • Opportunistic expansion of capital structure INCREASING EARNINGS POTENTIAL WHILE MAINTAINING RISK MANAGEMENT APPROACH
Slide 5: Book Value and Comprehensive Income
(Dollars in millions, except per share data) Q4-2016 Book Value Q4-2016 Book Value per share Q1-2017 Book Value Q1-2017 Book Value per share Beginning common stockholders’ equity $3,478.2 $10.01 $3,401.1 $9.78 GAAP Net Income: Core Earnings (revised), net of tax(1) 86.6 95.0 Realized gains and losse
Slide 6: Core Earnings Summary
(Dollars in millions) Q4-2016 Q1-2017 Variance ($) Interest income $179.1 $191.6 $12.5 Interest expense 66.2 75.4 (9.2) Net interest income 112.9 116.2 3.3 Loss on swaps and swaptions (2.9) (7.9) (5.0) Gain on other derivatives 4.1 3.8 (0.3) Servicing income, net of amortization on MSR (0.4) 13.2 13
Slide 7: Diversified Financing Profile
Diversified Financing Profile 7 REPURCHASE AGREEMENTS • Outstanding borrowings of $13.6 billion with 24 active counterparties; 31 total counterparties • Repo markets functioning efficiently for RMBS FEDERAL HOME LOAN BANK OF DES MOINES • Outstanding secured advances of $3.6 billion • Weighted averag
Slide 8: Portfolio Composition
HISTORICAL CAPITAL ALLOCATIONPORTFOLIO COMPOSITION(1) Portfolio Composition 8 $20.0 BILLION PORTFOLIO AS OF MARCH 31, 2017 (1) For additional detail on the portfolio, see Appendix slides 19-24. (2) Commercial consists of senior, mezzanine and B-note commercial real estate debt and related instrument
Slide 9: Portfolio Performance Q1-2017
Portfolio Performance 9 Q1-2017 PERFORMANCE SUMMARY (1) “Legacy” non-Agency RMBS includes non-Agency bonds issued up to and including 2009. “New issue” non-Agency MBS includes bonds issued after 2009. (2) Cost of funds includes interest spread expense associated with the portfolio’s interest rate sw
Slide 10: Rates Update
Rates Update 10 PORTFOLIO SUMMARY MSR INTEGRAL COMPONENT OF RATES STRATEGY SENSIBLE APPROACH TO RISK MANAGEMENT • Low interest rate exposure • Utilize a combination of hedging tools • MSR is a key component of hedging strategy • Agency RMBS holdings of $15.2 billion – Increase in Agency RMBS from in
Slide 11: Credit Update
Credit Update 11 • Legacy RMBS prices increased in the first quarter but significant opportunity remains • Home prices continue to improve; CoreLogic Home Price Index up 7.0% on a rolling 12-month basis(1) • Prepayments higher year-over-year – TWO’s 1Q-17 three month CPR of 6.7%, compared to 1Q-16 t
Slide 12: Commercial Real Estate Update
Commercial Real Estate Update 12 PORTFOLIO BY PROPERTY TYPE PORTFOLIO BY GEOGRAPHY (1) Stabilized LTV considers the prospective market value “as stabilized” which reflects the property’s market value as of the time the property is projected to achieve stabilized occupancy. Stabilized occupancy is th
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 March 31, 2017 is defined as the increase in book value per common share from December 31, 2016 to March 31, 2017 of $0.13 per common share, plus dividends declared of $0.25 per common share, divided by December 31, 2016 b
Slide 15: Financial Performance
Book Value ($) Dividend Declared ($) $12.00 $10.00 $8.00 $6.00 Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 $9.70 $9.83 $10.01 $9.78 $9.91 $0.23 $0.23 $0.23 $0.24 $0.25 Comp. Income ($M) Comp. Income ROACE (%) $150 $100 $50 $0 -$50 -$100 20% 10% 0% -10% -20% Q1-2016 Q2-2016 Q3-2016 Q4-2016 Q1-2017 $(67.6
Slide 16: Operating Performance
Operating Performance Q4-2016 Q1-2017 (In millions, except for per common share data) Core Earnings (revised)(1) Realized Gains (Losses) Unrealized MTM Total Core Earnings (revised)(1) Realized Gains (Losses) Unrealized MTM Total Interest income $179.1 $— $— $179.1 $191.6 $— $— $191.6 Interest expen
Slide 17: Updated Disclosure of Non-GAAP Financial Measures
Updated Disclosure of Non-GAAP Financial Measures One of the company’s principal business objectives is to generate net income by earning a net interest spread on its investment portfolio, which is a function of interest income from its investment portfolio less financing, hedging and operating cost
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) December 31, 2016 March 31, 2017 Reconciliation of Comprehensive income to Core Earnings (revised): Comprehensive income $2,18
Slide 19: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics 19 AGENCY PORTFOLIO YIELDS AND METRICS AGENCY RMBS CPR(1) (1) Agency weighted average 3-month Constant Prepayment Rate (CPR) includes IIOs (or Agency Derivatives). (2) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price
Slide 20: Rates: Agency RMBS
Rates: Agency RMBS 20 As of March 31, 2017 Par Value ($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% $7,005 $7,150 53.2% $7,244 3.4% 6 4.0-4.5% 6,542 6,995 96.2% 7,008 4.2% 23 ≥ 5.0% 434 487 100.0% 46
Slide 21: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) 21 As of December 31, 2016 As of March 31, 2017 Fair value ($M) $693.8 $747.6 Unpaid principal balance ($M) $62,828.0 $68,128.0 Weighted average coupon 3.8% 3.9% Original FICO score(2) 756 755 Original LTV 73% 73% 60+ day delinquencies 0.3% 0.2% Net servicing spre
Slide 22: Credit: Non-Agency MBS Metrics
Credit: Non-Agency MBS Metrics 22 NON-AGENCY PORTFOLIO COMPOSITIONNON-AGENCY PORTFOLIO YIELDS AND METRICS (1) Weighted average cost basis includes MBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weig
Slide 23: Credit: Non-Agency MBS
Credit: Non-Agency MBS 23 As of March 31, 2017 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $1,410.6 $784.3 $2,194.9 % of non-Agency portfolio 64.3% 35.7% 100.0% Average purchase price(1) $55.95 $65.84 $59.48 Average coupon 2.8% 2.1% 2.5% Weighted average mar
Slide 24: Commercial Real Estate Portfolio
Commercial Real Estate Portfolio (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 prosp
Slide 25: Financing
Financing 25 (1) Weighted average of 3.0 years to maturity. (2) Includes FHLB advances of $2.5 billion with original maturities of 20 years. (3) Excludes FHLB membership and activity stock totaling $148.1 million. (4) Revolving credit facilities over-collateralized due to operational considerations.
Slide 26: Interest Rate Swaps
Maturities Notional Amounts ($B)(1) Average Fixed Pay Rate(2) Average Receive Rate(2) Average Maturity Years(2) Payers 2017 $1.9 0.776% 1.077% 0.4 2018 5.3 1.232% 1.102% 1.3 2019 0.3 1.283% 1.039% 2.2 2020 1.5 1.481% 1.076% 3.5 2021 and after 5.1 1.907% 1.091% 6.6 $14.1 1.413% 1.090% 3.1 Maturities
Slide 27: Interest Rate Swaptions
Interest Rate Swaptions 27 Option Underlying Swap Swaption Expiration Cost ($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 $70.9 $30.3 4.6 $6,700 2.43% 3M LIBOR 4.8 Payer >6 Months —
Slide 28: Two Harbors Investment Corp.
TWO HARBORS Investment Corp. AP vr Capa Managed Gonoany
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