Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2019 Earnings Presentation
30 slides from Two Harbors Investment's earnings presentation, Feb 5, 2020
Slide 1: Fourth Quarter 2019 Earnings Call
Fourth Quarter 2019 Earnings Call FEBRUARY 6, 2020
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 and Annual Summary
Quarterly and Annual Summary Generated 23.6% Total Annual Return on Book Value(1) Quarterly Summary • Reported book value of $14.54 per common share, representing a 1.5% total quarterly return on book value.(1) • Generated Comprehensive Income of $56.8 million, or $0.21 per weighted average basic co
Slide 4: Focused on Generating Long-Term Stockholder Value
Focused on Generating Long-Term Stockholder Value DELIVERED TOTAL STOCKHOLDER RETURN OF 256% SINCE INCEPTION(1) 280 256% 240 77% outperformance 200 179% since inception 160 120 80 40 0 1 0 0 0 0 1 0 0 0 1 1 0 0 0 8 6 3 1 0 8 5 3 2 0 7 5 / / / / / / / / / / / / / 12/31/19 2 1 0 1 0 2 0 2 1 2 1 2 1 9
Slide 5: Book Value
Book Value Q4-2019 FY-2019 Q4-2019 Book Value FY-2019 Book Value (Dollars in millions, except per share data) Book Value per share Book Value per share Beginning common stockholders’ equity $ 4,018.3 $ 14.72 $ 3,253.2 $ 13.11 GAAP Net Income: Core Earnings, including dollar roll income, net of tax(1
Slide 6: Core Earnings Summary
Core Earnings Summary(1) (Dollars in millions, except per share data) Q3-2019 Q4-2019 Variance ($) • Fourth quarter Core Earnings, including Interest income $ 251.1 $ 237.3 $ (13.8) dollar roll income, favorably driven by: Interest expense 191.1 167.3 23.8 Lower LIBOR Net interest income 60.0 70.0 1
Slide 7: Tax Characterization of Dividends in 2019
Tax Characterization of Dividends in 2019 FULL YEAR 2019 DIVIDEND SUMMARY • Generated REIT taxable income of $510.6 million in 2019 after utilizing $11.7 million of carryover net operating losses(1) • 2019 dividend declarations for tax purposes totaled $483.6 million(2) – $483.6 million consists of
Slide 8: Performance Summary
Performance Summary • Lower portfolio yield driven by Agency portfolio rotation and increased premium amortization Realized Q3-2019 Realized Q4-2019 As of December 31, 2019 Annualized portfolio yield(1) 3.67% 3.54% 3.74% Rates Agency RMBS, Agency Derivatives and MSR 3.47% 3.20% 3.39% Credit Non-Agen
Slide 9: Financing Profile and Capital Structure
Financing Profile and Capital Structure DIVERSE FINANCING PROFILE ECONOMIC DEBT-TO-EQUITY(1) RATES – AGENCY RMBS • 7.5x at December 31, 2019, compared to 7.2x at • Outstanding repurchase agreements of $27.4 billion September 30, 2019 with 23 counterparties • Average of 7.2x consistent quarter-over-q
Slide 10: Markets and Performance Overview - Rates
Markets and Performance Overview - Rates MARKET OVERVIEW • Fourth quarter was reversal of 2019 performance trends; long interest rates rose, higher coupon MBS widened and lower coupon MBS tightened • Steepening yield curve reduced prepayment fears • Repo markets continue to show signs of improvement
Slide 11: Markets and Performance Overview - Credit
Markets and Performance Overview - Credit MARKET OVERVIEW • HPA remains solid and expectations are for slowly increasing home prices • Supply of single family homes lowest it has been in 15 years HOME PRICE APPRECIATION BY YEAR(1) MONTH'S SUPPLY OF SINGLE-FAMILY HOMES(2) 7% 14 6% 12 5% y l p 10 4% p
Slide 12: Portfolio Composition and Quarterly Activity
Portfolio Composition and Quarterly Activity PORTFOLIO COMPOSITION(1) PORTFOLIO ACTIVITY $41.0b PORTFOLIO AS OF DECEMBER 31, 2019 • Capital allocation(5) was 78% Rates(3), 22% Credit(4) at Includes $33.4b settled positions in portfolio December 31, 2019 • Continued to rotate exposure out of higher c
Slide 13: Specified Pool and Coupon Positioning
Specified Pool and Coupon Positioning SPECIFIED POOL CHARACTERISTICS(1) 3-MONTH TBA SPEEDS VS. TWO CPR(2) 60 50 ) 40 % Loan Balance ( 30 R 58% P FICO, Generic, C 20 Seasoned, 10 New, Other 0 3% Geography FN FN FN FN FN C C C C C 16% L L L L L LTV 3 3 4 4 5 . . . . . 23% 0 5 0 5 0 TBA CPR Two Harbors
Slide 14: Risk Profile
Risk Profile LOW RISK EXPOSURES COMMON BOOK VALUE EXPOSURE TO CHANGES IN SPREADS(1) • Exposure to mortgage spreads and interest 12% rates remains small e 8% u l 4.4% a v 2.4% k 4% 1.9% • Potential impact of (2.7%) of book value in 25 o o b n 0% basis point spread widening i e g n -4% a (2.5%) (2.7%)
Slide 15: Outlook
Outlook GENERATING STRONG ECONOMIC RETURNS WITH LOWER VOLATILITY OVER TIME RATES STRATEGY - Combination of Agency RMBS and MSR • Expect capital allocation to this strategy to continue to increase • Current expected returns in low to mid double digits for Agency RMBS paired with MSR • Believe the com
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Slide 17: Return on Book Value
Return on Book Value(1) Return on common book value Q4-2019 (Per common share amounts, except for percentage) Book value at September 30, 2019 $ 14.72 Book value at December 31, 2019 14.54 Decrease in book value (0.18) Dividend declared in Q4-2019 0.40 Return on book value Q4-2019 $ 0.22 Percent ret
Slide 18: Financial Performance
Financial Performance COMPREHENSIVE (LOSS) INCOME QUARTERLY RETURN ON BOOK VALUE(1) 9.1% $500 50% 10% 36.2% 6.7% 25.7% 5.4% $300 21.0% 30% $311.3 5% $257.6 $201.0 5.7% $100 10% 1.5% $56.8 0% -$100 -10% (35.2)% -5% -$300 -30% $(307.9) (8.3)% -$500 -50% -10% Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Q4-
Slide 19: Q4-2019 Operating Performance
Q4-2019 Operating Performance Q4-2019 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $ 237.3 $ — $ 1.1 $ 238.4 Interest expense 167.3 — — 167.3 Net interest income 70.0 — 1.1 71.1 Total other
Slide 20: Q3-2019 Operating Performance
Q3-2019 Operating Performance Q3-2019 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $ 251.1 $ — $ (1.3) $ 249.8 Interest expense 191.1 — — 191.1 Net interest income 60.0 — (1.3) 58.7 Total o
Slide 21: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation(1)(2) Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended (In thousands, except for per common share data) September 30, 2019 December 31, 2019 Reconciliation of Comprehensive income to Core Earnings: Comprehensive income attribut
Slide 22: Rates Metrics
Rates Metrics AGENCY RMBS CPR(1) AGENCY PORTFOLIO COMPOSITION IO & Inverse IO Hybrid ARMs and Other 14.3% 0.5% 15.0% 13.4% 0.7% 10.1% 10.0% 30-Year Fixed 5% & above 6.8% 6.5% 2.9% 5.0% 0.0% 30-Year Fixed 4.5% 30-Year Fixed 4.0% Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 18.3% 32.3% MSR CPR 30-Year Fixe
Slide 23: Rates: Agency RMBS
Rates: Agency RMBS Weighted As of December 31, Market Value Weighted Average % Prepay Amortized Cost Gross Weighted Average Age 2019 Par Value ($M) ($M) CPR Protected(1) Basis ($M) Average Coupon (Months) 30-Year fixed 3.0% $ 6,034 $ 6,168 3.3% 98.3% $ 6,169 3.8% 3 3.5% 6,175 6,452 7.0% 100.0% 6,386
Slide 24: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) Gross Weighted Weighted Weighted Weighted Unpaid Average Average Average Average (dollars in Number of Principal % Fannie Coupon Loan Age Original Original 60+ Day 3-Month Net Servicing millions) Loans Balance Fair Value Mae Rate (months) FICO(2) LTV Delinquencies
Slide 25: Credit Metrics
Credit Metrics NON-AGENCY 60+ DAY DELINQUENCIES NON-AGENCY PORTFOLIO COMPOSITION 25.0% Other: 0.1% Prime: 0.9% 19.2% 20.0% 18.7% 18.1% 18.3% 17.9% Option-ARM: 15.0% 11.3% 10.0% Q4-2018 Q1-2019 Q2-2019 Q3-2019 Q4-2019 Alt-A: 12.9% NON-AGENCY CPR Sub-prime: 10.0% 74.8% 6.4% 5.9% 5.3% 5.2% 4.9% 5.0% 0.
Slide 26: Credit: Non-Agency Securities
Credit: Non-Agency Securities As of December 31, 2019 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $ 3,073.1 $ 480.8 $ 3,553.9 % of non-Agency portfolio 86.5% 13.5% 100.0% Weighted average purchase price(1) $ 63.63 $ 65.36 $ 63.86 Weighted average coupon 2.9%
Slide 27: Financing
Financing $ in millions Repurchase Revolving Credit Term Notes Convertible Total Outstanding Outstanding Borrowings and Maturities(1) Agreements FHLB Advances Facilities Payable Notes Borrowings Percent (%) Within 30 days $ 5,305.9 $ 160.0 $ — $ — $ — $ 5,465.9 18.0% 30 to 59 days 6,300.4 — — — — 6,
Slide 28: Interest Rate Swaps
Interest Rate Swaps INTEREST RATE SWAPS Average Maturity Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Years Payers 2020 $ 3.6 1.806% 1.937% 0.8 2021 15.8 1.681% 1.910% 1.5 2022 2.6 1.911% 1.901% 2.7 2023 0.2 3.057% 1.910% 3.9 2024 and after 8.7 2.224% 1.935% 7.2 $ 30.
Slide 29: 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 $ 24.7 $ 16.1 3.2 $ 7,525 2.27% 3M LIBOR 10.0 Total Payer $ 24
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