Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q3 2020 Earnings Presentation
27 slides from Two Harbors Investment's earnings presentation, Nov 5, 2020
Slide 1: Third Quarter 2020 Earnings Call
Third Quarter 2020 Earnings Call NOVEMBER 5, 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: Executive Overview
Executive Overview Strong Performance From Agency Plus MSR Strategy Quarterly Summary • Reported book value of $7.37 per common share, representing a 12.1% quarterly return on book value; excluding the $0.51 reversal of the previously accrued management agreement termination fee, quarterly return on
Slide 4: Agency + MSR Advantage
Agency + MSR Advantage DIFFERENTIATED STRATEGY • Portfolio constructed by pairing Agency MSR with Agency RMBS • Continue to believe that this Agency plus MSR strategy has a higher return potential with lower mortgage spread risk • Expect to continue to grow MSR holdings through strategic partnership
Slide 5: Book Value Summary
Book Value Summary Q3-2020 YTD-2020 Q3-2020 Book Value YTD-2020 Book Value (Dollars in millions, except per share data) Book Value per share Book Value per share Beginning common stockholders’ equity $ 1,834.6 $ 6.70 $ 3,969.2 $ 14.54 • Book value of $7.37 GAAP Net Income (Loss): per common share, C
Slide 6: Core Earnings Review
Core Earnings Review(1) ($ in millions, except per share data) Q2-2020 Q3-2020 Variance ($) • Third quarter Core Earnings results Interest income $ 107.3 $ 89.7 $ (17.6) impacted by: Interest expense 62.1 29.2 32.9 ◦ Net interest income increased from Net interest income 45.2 60.5 15.3 $45.2 million
Slide 7: Portfolio Yield
Portfolio Yield LOWER PORTFOLIO YIELD OFFSET BY LOWER COST OF FUNDS • Lower portfolio yield due to higher Agency RMBS prepayments, rotation to lower coupon pools, and higher servicing expense and lower servicing income due to MSR portfolio runoff and forbearances • Lower cost of funds due to favorab
Slide 8: Financing Profile
Financing Profile ECONOMIC DEBT-TO-EQUITY(1) • 7.7x at September 30, 2020, compared to 7.4x at June 30, 2020 • Average economic debt-to-equity of 7.6x in the third quarter, compared to 6.8x in the second quarter DIVERSE FINANCING PROFILE AGENCY RMBS • Outstanding repurchase agreements of $16.4 billi
Slide 9: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) PERFORMANCE COMMENTARY • Return on book value of 4.5%(3) excluding the reversal $24.4 billion portfolio of previously accrued management agreement Includes $17.9 billion settled positions termination fee • MSR performed as expecte
Slide 10: Special Topic: TBA Roll Specialness
Special Topic: TBA Roll Specialness DYNAMICS OF ROLL SPECIALNESS • Economics of holding TBA is roughly equal to that of a cash RMBS pool • Large non-economic buyers such as the Fed can distort these supply/demand dynamics by taking delivery and driving up prices in the front month • Simultaneously,
Slide 11: Specified Pools
Specified Pools SPECIFIED POOL PERFORMANCE SPECIFIED POOL PORTFOLIO • Specified pools outperformed TBA on a relative basis in nearly every coupon • Specified pool prepayment speeds continue to be Loan Balance(1) slower and more stable than TBA speeds Other 68.6% 0.4% • Expect that while prepayments
Slide 12: Mortgage Servicing Rights
Mortgage Servicing Rights MSR PORTFOLIO ACTIVITY MSR PORTFOLIO(1) • Expanded MSR flow-sale program Fair value ($ millions) $ 1,257.5 ◦ Experienced three of the four highest months of lock UPB ($ millions) $ 163,993.9 volume by UPB since program inception Gross weighted average coupon rate 3.9% ◦ Oct
Slide 13: Effective Coupon Positioning
Effective Coupon Positioning EFFECTIVE COUPON POSITIONING(1) Cash pools/TBA MSR(2) Combined June 30, 2020 Position BOOK VALUE EXPOSURE TO CHANGES IN SPREAD(3) COMMENTARY • MSR has similar risks to a short pools/TBA position in 1.5% and 2.0% coupons • Portfolio long 2.0% through 5.0% coupons • In a 2
Slide 14: Risk Positioning
Risk Positioning BOOK VALUE EXPOSURE TO CHANGES IN RATES(1) BOOK VALUE EXPOSURE TO CHANGES IN YIELD CURVE(2) Agency RMBS / TBA MSR(3) Other(4) Combined COMMENTARY • Exposure to rates remains low, in line with historical positioning • MSR position has more negative duration than RMBS position • In a
Slide 15: Two Harbors Outlook
Two Harbors Outlook OPPORTUNITY SET IN OUR TARGET ASSETS REMAINS ATTRACTIVE TODAY • Estimate returns for Agency RMBS / swaps in mid-to-high single digits • Higher returns available in the near term in current coupon TBA in the mid teens • Estimate returns for Agency RMBS / flow MSR in low-to-mid tee
Slide 16: Appendix
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Slide 17: 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 18: Q3-2020 Operating Performance
Q3-2020 Operating Performance Q3-2020 Realized Gains (In millions, except for per common share data) Core Earnings(1) (Losses) Unrealized MTM Total Interest income $ 89.7 $ — $ — $ 89.7 Interest expense 29.2 — — 29.2 Net interest income 60.5 — — 60.5 Loss on investment securities — (8.9) (0.2) (9.1)
Slide 19: Q2-2020 Operating Performance
Q2-2020 Operating Performance Q2-2020 Realized Gains (In millions, except for per common share data) Core Earnings(1) (Losses) Unrealized MTM Total Interest income $ 107.3 $ — $ — $ 107.3 Interest expense 62.1 — — 62.1 Net interest income 45.2 — — 45.2 Gain (loss) on investment securities — 53.6 (0.
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) June 30, 2020 September 30, 2020 Reconciliation of Comprehensive income to Core Earnings: Comprehensive income attributable to
Slide 21: Portfolio Metrics
Portfolio Metrics AGENCY RMBS CPR(1) AGENCY PORTFOLIO COMPOSITION IO & Inverse IO Other P&I(2) 1.0% 0.7% 30-Year Fixed 5% & above 3.9% 30-Year Fixed < 2.5% 30-Year Fixed 4.0% 12.5% 25.0% 30-Year Fixed 4.5% 17.0% MSR CPR 30-Year Fixed 3.5% 30-Year Fixed 23.7% 3.0% 16.2% (1) Agency weighted average 3-
Slide 22: 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 $ 1,956 $ 2,080 3.0 % 100.0 % $ 2,052 3.4 % 5 3.0% 2,496 2,690 14
Slide 23: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Gross Weighted Weighted Weighted Average Weighted Number of Unpaid Principal % Fannie Average Average Loan Original Average 60+ Day Net Servicing Loans Balance Mae Coupon Rate Age (months) FICO(2) Original LTV Delinquencies 3-Month CPR Fee (bps) 30-Year Fixed <
Slide 24: Financing
Financing $ in millions Repurchase Revolving Credit Total Outstanding Outstanding Borrowings and Maturities(1) Agreements Facilities Term Notes Payable Convertible Notes Borrowings Percent (%) Within 30 days $ 3,791.0 $ — $ — $ — $ 3,791.0 21.9 % 30 to 59 days 3,920.4 — — — 3,920.4 22.6 % 60 to 89 d
Slide 25: Interest Rate Swaps
Interest Rate Swaps INTEREST RATE SWAPS Average Maturity Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Years Payers 2022 $ 7.4 0.042 % 0.090 % 1.9 2023 2.3 0.023 % 0.090 % 2.7 2024 and after 1.5 0.257 % 0.090 % 6.7 $ 11.2 0.067 % 0.090 % 2.7 Average Fixed Receive Avera
Slide 26: Interest Rate Swaptions
Interest Rate Swaptions Option Underlying Swap Average Average Average Cost Fair Value Months to Notional Average Pay Receive Term Swaption Expiration ($M) ($M) Expiration Amount ($M) Rate Rate (Years) Purchase Contracts: Payer <6 Months $ 5.8 $ 6.9 3.4 $ 3,000 1.23 % SOFR 10.0 Receiver <6 Months $
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