Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2018 Earnings Presentation
29 slides from Two Harbors Investment's earnings presentation, Feb 6, 2019
Slide 1: Fourth Quarter 2018 Earnings Call
Fourth Quarter 2018 Earnings Call FEBRUARY 7, 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 and Annual Summary
Quarterly and Annual Summary 2018 Transformative Year for the Company Quarterly Summary • Redeployed capital from CYS Investments, Inc. (CYS) acquisition in accordance with previously announced plan. • Added $36.1 billion unpaid principal balance (UPB) of MSR through bulk acquisitions and monthly fl
Slide 4: Driving Stockholder Value
Driving Stockholder Value Improved stockholder value over the past three years by growing our company and reducing operating complexity: • 2016: Discontinued our mortgage loan conduit, reducing operating complexity and costs • 2017: Formed and spun out Granite Point Mortgage Trust Inc. (NYSE: GPMT)
Slide 5: Book Value
Book Value Q4-2018 FY-2018 Q4-2018 Book Value FY-2018 Book Value (Dollars in millions, except per share data) Book Value per share Book Value per share Beginning common stockholders’ equity $3,674.7 $14.81 $2,845.2 $16.31 GAAP Net Income: Core Earnings, net of tax(1) 105.7 384.0 Dividend declaration
Slide 6: Core Earnings Summary
Core Earnings Summary(1) Q3-2018 Q4-2018 Variance ($) (Dollars in millions, except per share data) • Core Earnings, including dollar roll Interest income $236.7 $252.0 $15.3 income, was $0.49 per weighted average Interest expense 152.4 162.3 (9.9) basic common share, representing a Net interest inco
Slide 7: Tax Characterization of Dividends in 2018
Tax Characterization of Dividends in 2018 FULL YEAR 2018 DIVIDEND SUMMARY • Generated REIT taxable income of $490.3 million in 2018(1) • 2018 dividend declarations totaled $444.0 million – $444.0 million consists of dividends to common shares of $384 million ($1.88 per common share), dividends to pr
Slide 8: Optimizing Financing Profile and Capital Structure
Optimizing Financing Profile and Capital Structure DEBT-TO-EQUITY • 5.8x debt-to-equity at December 31, 2018(1) • Economic debt-to-equity, which includes the implied debt on net to-be-announced (TBA) positions, of 7.2x at December 31, 2018, compared to 7.3x at September 30, 2018(2) PREFERRED STOCK •
Slide 9: Portfolio Composition
Portfolio Composition PORTFOLIO COMPOSITION(1) CAPITAL ALLOCATION $27.6 BILLION PORTFOLIO AS OF DECEMBER 31, 2018 July 31, 2018 - March 31, Acquisition of December 31, 2018 CYS 2018 Non-Agency $3.9b Rates 69% 77% 74% MSR $2.0b Agency 50% 59% 50% MSR 19% 18% 24% Agency $21.7b Credit 31% 23% 26% Coupo
Slide 10: Market Performance
Market Performance • Current coupon Agencies underperformed hedges in the quarter • Higher coupons performed worse (1) 2018 Mortgage Coupon Price Performance Q4-2018 Mortgage Coupon Price Performance (1) 20 10 0 0 -20 -10 ) ) s s k k c c i i t t ( ( e e v v o -40 o -20 m M s s i i s s a a B B -60 -3
Slide 11: Estimated Book Value Attribution
Estimated Book Value Attribution(1) • Rate volatility did not contribute to any meaningful change in book value • MSR performed in line with current coupon Agency spread widening • Book value primarily impacted by underperformance of higher coupon Agencies • Legacy non-Agency securities also widened
Slide 12: Performance Summary
Performance Summary • Net interest margin benefitted from purchases of Agency pools at attractive yields • MSR benefitted from slower prepayment speeds and higher interest rate environment • Non-Agency yields stable Three Months Ended September 30, 2018 December 31, 2018 Annualized portfolio yield d
Slide 13: Portfolio Highlights & Opportunities for 2019
Portfolio Highlights & Opportunities for 2019 ATTRACTIVE INVESTMENT OPPORTUNITIES IN 2019 AS A RESULT OF SPREAD WIDENING RATES STRATEGY • Wider spreads creates attractive opportunities to invest capital in Agency RMBS • Acquired $36.1 billion UPB of MSR in the fourth quarter 2018; grew portfolio by
Slide 14: Risk Metrics
Risk Metrics • Active management of risk positioning with goal of maintaining low exposures to rates and spreads HEDGING ACROSS THE CURVE Book value exposure to changes in rates(1) Net interest income exposure to changes in rates(2) +25 basis points 0.1% +25 basis points (1.8%) +50 basis points (2.6
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Slide 16: Return on Book Value
Return on Book Value Return on common book value Q4-2018 (Per common share amounts, except for percentage) Book value at September 30, 2018 $14.81 Book value at December 31, 2018 13.11 Decrease in book value (1.70) Dividend declared in Q4-2018 0.47 Return on book value Q4-2018 ($1.23) Percent return
Slide 17: Financial Performance
Financial Performance COMPREHENSIVE INCOME (LOSS) BOOK VALUE AND DIVIDEND PER COMMON SHARE(1) $150 13.1% 20% $25.00 8.5% 10% $50 $65.7 $90.8 $(23.7) 0% $20.00 -$50 $4.14(2) (3.3)% $(102.8) -10% 0.47 0.47 -$150 $(307.9) $15.00 0.47 (11.9)% -20% $16.31 $0.47 $15.63 $15.69 $14.81 -$250 (35.2)% -30% $13
Slide 18: 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 19: Q3-2018 Operating Performance
Q3-2018 Operating Performance Q3-2018 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $236.7 $— $— $236.7 Interest expense 152.4 — — 152.4 Net interest income 84.3 — — 84.3 Total other-than-te
Slide 20: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation(1) Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended (In thousands, except for per common share data) September 30, 2018 December 31, 2018 Reconciliation of Comprehensive income (loss) to Core Earnings: Comprehensive loss attrib
Slide 21: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics AGENCY PORTFOLIO YIELDS AND METRICS AGENCY PORTFOLIO COMPOSITION Hybrid ARMs and IO & Inverse IO Other Realized At September Realized At December Portfolio Yield Q3-2018 30, 2018 Q4-2018 31, 2018 30-Year Fixed 1.1% 1.3% 5% & above Agency yield 3.1% 3.4% 3.3% 3.5% 6.7% Repo
Slide 22: Rates: Agency RMBS
Rates: Agency RMBS Weighted As of December 31, % Prepay Amortized Cost Weighted Average Average Age 2018 Par Value ($M) Market Value ($M) Protected(1) Basis ($M) Coupon (Months) 30-Year fixed 3.0-3.5% $234 $235 100.0% $236 3.5% 19 4.0-4.5% 18,878 19,533 91.8% 19,812 4.3% 19 ≥ 5.0% 1,368 1,452 74.4%
Slide 23: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) As of September 30, 2018 As of December 31, 2018 Fair value ($M) $1,664.0 $1,993.4 Unpaid principal balance ($M) $131,114.5 $163,102.3 Weighted average coupon 4.1% 4.1% Original FICO score(2) 751 752 Original LTV 74% 75% 60+ day delinquencies 0.4% 0.3% Net servici
Slide 24: Credit: Non-Agency Securities Metrics
Credit: Non-Agency Securities Metrics NON-AGENCY PORTFOLIO YIELDS AND METRICS LEGACY NON-AGENCY PORTFOLIO COMPOSITION At Realized September Realized At December Portfolio Yield Q3-2018 30, 2018 Q4-2018 31, 2018 Non-Agency: Loan Type September 30, 2018 December 31, 2018 Non-Agency yield 7.4% 7.2% 7.7
Slide 25: Credit: Legacy Non-Agency Securities
Credit: Legacy Non-Agency Securities As of December 31, 2018 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $2,842.7 $799.9 3,642.6 % of non-Agency portfolio 78.0% 22.0% 100.0% Average purchase price(1) $60.72 $65.96 $61.87 Average coupon 3.4% 3.2% 3.3% Weighte
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 $ 7,488.9 $ — $ — $ — $ 7,488.9 30.5% 30 to 59 days 5,077.6 — — — 5,077.6 20.6% 60 to 89 days 5,6
Slide 27: Interest Rate Swaps and Caps
Interest Rate Swaps and Caps INTEREST RATE SWAPS Average Maturity Maturities Notional Amounts ($B)(1) Average Fixed Pay Rate(2) Average Receive Rate(2) Years(2) Payers 2019 $4.3 1.769% 2.565% 0.8 2020 3.6 1.806% 2.689% 1.8 2021 4.1 1.550% 2.687% 2.7 2022 2.5 2.002% 2.728% 3.7 2023 and after 6.8 2.49
Slide 28: Interest Rate Swaptions
Interest Rate Swaptions Option Underlying Swap Average Notional Average Average Cost Fair Value Months to Amount Average Pay Receive Term Swaption Expiration ($M) ($M) Expiration ($M) Rate Rate (Years) Purchase Contracts: Payer <6 Months $4.9 $2.4 5.1 $900 3.16% 3M LIBOR 10.0 Payer >6 Months 8.4 6.0
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