Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q1 2019 Earnings Presentation
27 slides from Two Harbors Investment's earnings presentation, May 7, 2019
Slide 1: First Quarter 2019 Earnings Call
First Quarter 2019 Earnings Call MAY 8, 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 DELIVERED 9.1% QUARTERLY RETURN ON BOOK VALUE(1) • Grew book value to $13.83 per common share, representing a 9.1% total quarterly return on book value.(1) • Generated Comprehensive Income of $311.3 million, or $1.23 per weighted average basic common share. • Reported Core Earnings
Slide 4: Long-Term Stockholder Value Focus
Long-Term Stockholder Value Focus DELIVERED TOTAL STOCKHOLDER RETURN OF 201% SINCE INCEPTION(1) 300 250 223% 200 201% 53% outperformance 150 148% since inception 100 50 0 -50 1 6 1 8 3 1 5 1 8 3 1 5 1 7 3 1 0 / / / / 0 / / / / 0 / 2 / / 0 3/31/2019 / 7 7 1 1 / 3 2 7 1 / 2 / 3 6 / 2 / / 2 9 1 0 / / 3
Slide 5: Book Value
Book Value Q1-2019 Q1-2019 Book Value per (Dollars in millions, except per share data) Book Value share Beginning common stockholders’ equity $3,253.2 $13.11 GAAP Net Income: Core Earnings, including dollar roll income, net of tax(1) 141.6 Comprehensive Dividend declaration - preferred (18.9) Income
Slide 6: Core Earnings Summary
Core Earnings Summary(1) (Dollars in millions, except per share data) Q4-2018 Q1-2019 Variance ($) • Core Earnings, including dollar roll Interest income $252.0 $245.5 ($6.5) income, was $0.49 per weighted average Interest expense 162.3 163.5 (1.2) basic common share, representing a Net interest inc
Slide 7: Performance Summary
Performance Summary • Net interest margin benefitted from purchases of Agency pools at attractive yields Three Months Ended December 31, 2018 March 31, 2019 Annualized portfolio yield during the quarter 4.14% 4.25% Rates Agency RMBS, Agency Derivatives and MSR 3.61% 3.89% Credit Non-Agency securitie
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) – 6.5x at March 31, 2019, compared to 7.2x at December 31, 2018 – Average of 7.0x in both first quarter 2019 and fourth quarter 2018 RATES – AGE
Slide 9: Market Landscape and Outlook
Market Landscape and Outlook EXPECT STABILITY IN RATES AND FLATTER CURVE TO PERSIST RATES MARKET • More balanced Fed outlook; market shift from expecting rate increases to projecting stable-to-lower rates • Agency spreads tightened modestly; higher coupon Agencies and specified pools outperformed •
Slide 10: Portfolio Composition and Quarterly Activity
Portfolio Composition and Quarterly Activity PORTFOLIO COMPOSITION(1) PORTFOLIO ACTIVITY $27.2 BILLION PORTFOLIO AS OF MARCH 31, 2019 • Deployed capital raised in the quarter to MSR Non-Agency and Agencies, both in pool and TBA form $3.6b 30-year coupon • Expect TBA position to decrease in favor of
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) +25 basis points (1.9%) +25 basis points 2.3% +50 basis points (5.1%) +50 basis points 4.7% -50 basis points —% -50 basis points (4.7%) -25 basis points (0.7%)
Slide 12: Strategic Overview
Strategic Overview ATTRACTIVE SCALABLE INVESTMENT OPPORTUNITY IN PAIRING AGENCY RMBS WITH MSR RATES STRATEGY - Combination of Agency RMBS and MSR • Expect returns in mid-double digits for Agency RMBS paired with MSR • Believe the combination of these two assets results in a higher return with a lowe
Slide 13: Appendix
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Slide 14: Return on Book Value
Return on Book Value Return on common book value Q1-2019 (Per common share amounts, except for percentage) Book value at December 31, 2018 $13.11 Book value at March 31, 2019 13.83 Increase in book value 0.72 Dividend declared in Q1-2019 0.47 Return on book value Q1-2019 $1.19 Percent return on book
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% $16.00 $0.47 $200 13.1% 20% $0.47 $311.3 $0.47 $100 10% (3.3)% $90.8 $14.00 $0.47 $0 0% $0.47 $15.63 $15.69 $(23.7) $(102.8) $14.81 -$100 -10% $12.00 $13.83 $13.11 -$200 (11.9
Slide 16: 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-te
Slide 17: Q4-2018 Operating Performance
Q4-2018 Operating Performance Q4-2018 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $252.0 $— $— $252.0 Interest expense 162.3 — — 162.3 Net interest income 89.7 — — 89.7 Total other-than-te
Slide 18: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation(1) Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended (In thousands, except for per common share data) December 31, 2018 March 31, 2019 Reconciliation of Comprehensive (loss) income to Core Earnings: Comprehensive (loss) income a
Slide 19: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics AGENCY PORTFOLIO YIELDS AND METRICS AGENCY PORTFOLIO COMPOSITION Hybrid ARMs and IO & Inverse IO Other Realized At December Realized At March 31, 0.8% Portfolio Yield Q4-2018 31, 2018 Q1-2019 2019 30-Year Fixed 1.1% 5% & above Agency yield 3.3% 3.5% 3.6% 3.4% 8.8% Repo and
Slide 20: Rates: Agency RMBS
Rates: Agency RMBS Weighted As of March 31, % Prepay Amortized Cost Weighted Average Average Age 2019 Par Value ($M) Market Value ($M) Protected(1) Basis ($M) Coupon (Months) 30-Year fixed 3.0-3.5% $3 $3 100.0% $3 3.0% 50 4.0% 9,911 10,305 87.3% 10,317 4.0% 21 4.5% 8,499 8,998 100.0% 8,907 4.5% 16 ≥
Slide 21: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) As of December 31, 2018 As of March 31, 2019 Fair value ($M) $1,993.4 $2,014.4 Unpaid principal balance ($M) $163,102.3 $174,147.3 Weighted average coupon 4.1% 4.1% Average original FICO score(2) 752 751 Average original LTV 75% 75% 60+ day delinquencies 0.3% 0.3%
Slide 22: Credit: Non-Agency Securities Metrics
Credit: Non-Agency Securities Metrics NON-AGENCY PORTFOLIO YIELDS AND METRICS NON-AGENCY PORTFOLIO COMPOSITION At Realized December Realized At March 31, Portfolio Yield Q4-2018 31, 2018 Q1-2019 2019 Non-Agency: Loan Type December 31, 2018 March 31, 2019 Non-Agency yield 7.7% 7.0% 6.7% 6.6% Sub-prim
Slide 23: Credit: Non-Agency Securities
Credit: Non-Agency Securities As of March 31, 2019 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $2,885.5 $576.1 3,461.6 % of non-Agency portfolio 83.4% 16.6% 100.0% Average purchase price(1) $61.46 $64.97 $62.04 Average coupon 3.3% 3.2% 3.3% Weighted average
Slide 24: Financing
Financing $ in millions Repurchase Revolving Credit Total Outstanding Outstanding Borrowings and Maturities(1) Agreements FHLB Advances Facilities Convertible Notes Borrowings Percent (%) Within 30 days $ 4,852.5 $ — $ — $ — $ 4,852.5 22.8% 30 to 59 days 3,996.9 312.5 — — 4,309.4 20.3% 60 to 89 days
Slide 25: Interest Rate Swaps and Caps
Interest Rate Swaps and Caps INTEREST RATE SWAPS Average Maturity Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Years Payers 2019 $4.2 1.781% 2.716% 0.6 2020 3.6 1.806% 2.674% 1.6 2021 9.2 2.138% 2.683% 2.1 2022 2.5 2.002% 2.654% 3.5 2023 and after 8.4 2.533% 2.716% 6.
Slide 26: Interest Rate Swaptions
Interest Rate Swaptions Option Underlying Swap Average Notional Average Average Cost Fair Value Months to Amount Average Pay Receive Term Swaption Expiration ($M) ($M) Expiration ($M) Rate Rate (Years) Purchase Contracts: Payer <6 Months $2.1 $0.6 5.3 $700 3.09% 3M LIBOR 10.0 Total Payer $2.1 $0.6 5
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