Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q1 2018 Earnings Presentation
29 slides from Two Harbors Investment's earnings presentation, May 8, 2018
Slide 1: First Quarter 2018 Earnings Call
First Quarter 2018 Earnings Call MAY 9, 2018
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 STRONG QUARTER FOR CORE EARNINGS • Reported book value of $15.63 per common share, representing a (1.3%) total quarterly return on book value(1) • Incurred a Comprehensive Loss of ($23.7) million, or ($0.14) per weighted average basic common share • Reported Core Earnings including
Slide 4: Proposed Acquisition of CYS Investments, Inc.
Proposed Acquisition of CYS Investments, Inc. UNIQUE OPPORTUNITY TO DRIVE STOCKHOLDER VALUE • CYS stockholders will receive Two Harbors shares as well as an aggregate cash consideration of $15 million • Expect to redeploy capital from the acquisition in substantially the same allocation as Two Harbo
Slide 5: Two Harbors Strategic Overview
Two Harbors Strategic Overview KEY DIFFERENTIATING FACTORS ü Utilize variety of instruments to hedge interest rate exposure ü Strategy of pairing MSR with Agency RMBS ü Unique portfolio of legacy non-Agency securities AREAS OF FOCUS IN 2018 Acute focus on Rates(1) and Credit(2) strategies – Leverage
Slide 6: Book Value
Book Value Q1-2018 Q1-2018 Book Value per (Dollars in millions, except per share data) Book Value share Beginning common stockholders’ equity $2,845.1 $16.31 Comprehensive GAAP Net Income: Loss (GAAP) Core Earnings, net of tax(1) 94.1 Incurred Q1-2018 Comprehensive Dividend declaration - preferred (
Slide 7: Core Earnings Summary
Core Earnings Summary(1) (Dollars in millions, except per share data) Q4-2017 Q1-2018 Variance ($) • Core Earnings, including dollar roll Interest income $195.1 $194.0 ($1.1) income of $0.02, was $0.48 per Interest expense 94.8 96.6 (1.8) weighted average basic common share, Net interest income 100.
Slide 8: Optimizing Financing Profile and Capital Structure
Optimizing Financing Profile and Capital Structure DEBT-TO-EQUITY • 5.9x at March 31, 2018, unchanged from December 31, 2017 • Maintain substantial liquidity to opportunistically take advantage of market opportunities PREFERRED STOCK ISSUANCES • $726 million issued with weighted average dividend rat
Slide 9: Portfolio Composition
Portfolio Composition PORTFOLIO COMPOSITION(1) HISTORICAL CAPITAL ALLOCATION $22.4 BILLION PORTFOLIO AS OF MARCH 31, 2018 March 31, December 31, March 31, Non-Agency 2017 2017 2018 $3.0b Rates(2) 58% 68% 69% MSR $1.3b Credit(3) 27% 32% 31% Rates(3) $10,766 Agency Commercial(4) 15% —% —% $18.1b Rates
Slide 10: Expected Portfolio Strategy into 2019
Expected Portfolio Strategy into 2019 REALLOCATE CAPITAL FROM CYS ACQUISITION INTO TARGET ASSETS • Anticipate reallocating capital from CYS acquisition into Agency RMBS (primarily 30-year fixed and specified pools), MSR and residential credit • Expect approximately 50% of Two Harbors’ total capital
Slide 11: Portfolio Performance
Portfolio Performance DRIVING SUPERIOR PORTFOLIO PERFORMANCE Q1-2018 PERFORMANCE SUMMARY PORTFOLIO METRICS RATES December 31, March 31, Three Months Ended 2017 2018 • Positive performance from hedges and MSR in rising rate environment Annualized portfolio yield from continuing operations during the
Slide 12: Rates Update
Rates Update STRATEGY OF PAIRING MSR WITH AGENCY RMBS IS DISTINGUISHING FACTOR • Added $13.6 billion UPB of MSR through a bulk purchase and through flow-sale arrangements • Pairing MSR with Agency RMBS results in a portfolio that has higher return potential with lower mortgage spread risk – Mitigate
Slide 13: Protecting Book Value and Income
Protecting Book Value and Income • Utilize a variety of hedging tools including MSR, swaps and swaptions/mortgage options to reduce book value sensitivity to changes in interest rates and mortgage spreads HEDGING ACROSS THE CURVE Book value exposure to changes in rates(1) Net income exposure to chan
Slide 14: Credit Update
Credit Update UNIQUE NON-AGENCY PORTFOLIO DRIVES ATTRACTIVE TOTAL RETURNS • Non-Agency securities holdings of $3.0 billion; primarily positioned in deeply discounted legacy subprime non-Agency RMBS • Continue to add deeply discounted legacy non-Agencies • Average legacy market price of ~$76 creates
Slide 15: Appendix
— = —- —_ — Appendix TWO HARBORS Investment Corp.
Slide 16: Return on Book Value
Return on Book Value Return on common book value Q1-2018 (Per common share amounts, except for percentage) Book value at December 31, 2017 $16.31 Book value at March 31, 2018 15.63 Decrease in book value (0.68) Dividend declared in Q1-2018 0.47 Return on book value Q1-2018 ($0.21) Percent return on
Slide 17: Financial Performance
Financial Performance COMPREHENSIVE INCOME BOOK VALUE AND DIVIDEND PER COMMON SHARE(1) 18.5% $150 16.9% 20% $25.00 9.9% $100 8.5% 10% $145.7 $161.6 $20.00 $0.50 $0.52 $0.52 $50 $85.9 $65.7 $4.14(2) (3.3)% 0% $0 $0.47 $(23.7) $15.00 $19.82 $19.74 $20.12 -10% $16.31 -$50 $15.63 $10.00 -$100 -20% Q1-20
Slide 18: Q1-2018 Operating Performance
Q1-2018 Operating Performance Q1-2018 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $194.0 $— $— $194.0 Interest expense 96.6 — — 96.6 Net interest income 97.4 — — 97.4 Total other-than-temp
Slide 19: Q4-2017 Operating Performance
Q4-2017 Operating Performance Q4-2017 Realized Gains (In millions, except for per common share data) Core Earnings(1) (Losses) Unrealized MTM Total Interest income $195.1 $— $— $195.1 Interest expense 94.8 — — 94.8 Net interest income 100.3 — — 100.3 Total other-than-temporary impairment losses — —
Slide 20: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation(1) Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended (In thousands, except for per common share data) December 31, 2017 March 31, 2018 Reconciliation of Comprehensive income to Core Earnings: Comprehensive income (loss) attribut
Slide 21: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics AGENCY PORTFOLIO YIELDS AND METRICS AGENCY PORTFOLIO COMPOSITION Hybrid ARMs and Realized At December Realized At March IO & Inverse IO Other Portfolio Yield Q4-2017 31, 2017 Q1-2018 31, 2018 30-Year Fixed 1.5% 1.4% 5% & above Agency yield 3.1% 3.1% 3.1% 3.2% 2.3% Repo and
Slide 22: Rates: Agency RMBS
Rates: Agency RMBS Weighted As of March 31, % Prepay Amortized Cost Weighted Average Average Age 2018 Par Value ($M) Market Value ($M) Protected(1) Basis ($M) Coupon (Months) 30-Year fixed 3.0-3.5% $3,983 $4,004 96.7% $4,168 3.5% 15 4.0-4.5% 12,645 13,173 100.0% 13,469 4.2% 18 ≥ 5.0% 378 415 100.0%
Slide 23: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) As of December 31, 2017 As of March 31, 2018 Fair value ($M) $1,086.7 $1,301.0 Unpaid principal balance ($M) $101,344.1 $111,703.2 Weighted average coupon 3.9% 4.0% Original FICO score(2) 753 752 Original LTV 74% 74% 60+ day delinquencies 0.5% 0.5% Net servicing s
Slide 24: Credit: Non-Agency Securities Metrics
Credit: Non-Agency Securities Metrics NON-AGENCY PORTFOLIO YIELDS AND METRICS LEGACY NON-AGENCY PORTFOLIO COMPOSITION At Realized December Realized At March Portfolio Yield Q4-2017 31, 2017 Q1-2018 31, 2018 Non-Agency: Loan Type December 31, 2017 March 31, 2018 Non-Agency yield 7.6% 7.5% 8.0% 7.6% S
Slide 25: Credit: Legacy Non-Agency Securities
Credit: Legacy Non-Agency Securities As of March 31, 2018 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $1,860.0 $777.9 $2,637.9 % of non-Agency portfolio 70.5% 29.5% 100.0% Average purchase price(1) $56.99 $65.53 $59.51 Average coupon 2.9% 2.5% 2.8% Weighted
Slide 26: 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 $ 4,027.3 $ — $ — $ — $ 4,027.3 19.8% 30 to 59 days 3,901.3 — — — 3,901.3 19.2% 60 to 89 days 3,1
Slide 27: Interest Rate Swaps
Interest Rate Swaps Average Maturity Maturities Notional Amounts ($B)(1) Average Fixed Pay Rate(2) Average Receive Rate(2) Years(2) Payers 2018 $2.0 1.289% 1.885% 0.6 2019 4.3 1.769% 1.802% 1.5 2020 2.9 1.785% 1.952% 2.6 2021 2.4 1.788% 2.198% 3.7 2022 and after 5.8 2.200% 1.936% 7.9 $17.4 1.831% 1.
Slide 28: Interest Rate Swaptions
Interest Rate Swaptions Option Underlying Swap Average Notional Average Average Cost Fair Value Months to Amount Average Pay Receive Term Swaption Expiration ($M) ($M) Expiration ($M) Rate Rate (Years) Purchase Contracts: Payer <6 Months $8.5 $10.8 3.7 $4,095 2.98% 3M LIBOR 5.0 Sale Contracts: Payer
Slide 29: TWO HARBORS Investment Corp.
TWO HARBORS Investment Corp, [AP na Fiver Cantal Managed Company
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