Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2021 Earnings Presentation
37 slides from Two Harbors Investment's earnings presentation, Mar 7, 2022
Slide 1: An Agency + MSR Mortgage REIT Fourth Quarter 2021 Investor Presentation
An Agency + MSR Mortgage REIT Fourth Quarter 2021 Investor Presentation
Slide 2: Safe Harbor Statement
Safe Harbor Statement 2 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 an
Slide 3: Key Company Highlights
Key Company Highlights 3 • Leading residential mortgage REIT by total assets and total investable equity • $2.0 billion common equity market capitalization and ~$13.6 billion investment portfolio • Internalized management structure creates sustainable long-term scale advantages Industry-leading Mort
Slide 4: Fourth Quarter 2021 Financial Results
Fourth Quarter 2021 Financial Results 4
Slide 5: Overall Performance Driven by Spread Widening Executive Overview
Overall Performance Driven by Spread Widening Executive Overview 5Note: Financial data throughout this presentation is as of or for the quarter ended December 31, 2021, unless otherwise noted. Note: The End Notes are an integral part of this presentation. See slide 32 through 35 at the back of this
Slide 6: Key Market Highlights
Key Market Highlights ACCELERATED TAPER ON THE PATH TO HIGHER INTEREST RATES 6 II. FEDERAL RESERVE ACCELERATES TAPER(2) I. HIGHER RATES AND FLATTER YIELD CURVE(1) III. TIGHT SPREADS WIDEN IN 2022(3) • In response to inflationary pressures and tight labor market, the Federal Reserve communicated an a
Slide 7: Looking Ahead: Slower Prepayment Speeds on the Horizon
SLOWER PREPAYMENT SPEEDS ON THE HORIZON • Realized prepayment speeds in 2021 were much faster than expected due to home price appreciation, increased use of property inspection waivers, remote notarization, and program changes by the FHFA • Looking forward, prepayment speeds are expected to slow sig
Slide 8: Book Value Summary
Book Value Summary ($ millions, except per share data) Q4-2021 Book Value Q4-2021 Book Value per share YTD-2021 Book Value YTD-2021 Book Value per share Beginning common stockholders’ equity $ 2,008.6 $ 6.40 $ 2,087.7 $ 7.63 Earnings Available for Distribution, net of tax(1) 87.0 302.7 Dividend decl
Slide 9: Earnings Available for Distribution Summary
($ millions, except per share data) Q3-2021 Q4-2021 Variance Interest income $ 36.0 $ 33.0 $ (3.0) Interest expense 21.9 20.2 1.7 Net interest income 14.1 12.8 (1.3) Servicing income 123.0 125.5 2.5 MSR amortization(1) (66.3) (64.6) 1.7 Interest spread income on interest rate swaps 4.5 5.8 1.3 TBA d
Slide 10: Portfolio Yields
Portfolio Yields 10 • Annualized portfolio yield increased to 3.72% and net spreads widened by 44 bps, due primarily to higher MSR yields and a greater proportion of MSR in the portfolio • Net spread at December 31, 2021, which reflects our estimate for the near term, increased further to 3.10%(1) (
Slide 11: Financing Profile
• $527 million of outstanding borrowings under bilateral MSR asset financing facilities • $400 million of outstanding 5-year MSR term notes(2) • $313 million of unused, committed MSR asset financing capacity • $19 million outstanding borrowings and $181 million of unused, committed capacity for serv
Slide 12: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition 12 At December 31, 2021, $13.6 billion portfolio Includes $9.4 billion settled positions PORTFOLIO COMPOSITION(1) PORTFOLIO ACTIVITY • In anticipation of wider spreads caused by a more active Fed, sold RMBS in early December, reducing leverage to 4.7x fro
Slide 13: Specified Pools
C PR Specified Pools I. SPECIFIED POOL PORTFOLIO(1) 13 II. QUARTERLY PERFORMANCE SPECIFIED POOL PERFORMANCE III. SPECIFIED POOL PREPAYMENT SPEEDS TWO Specified Pools • High coupon specified pools underperformed, reversing the spread tightening that occurred during the third quarter ◦ Loan balance 3.
Slide 14: Mortgage Servicing Rights
• Portfolio growth was flat with new volume replacing run-off ◦ Maintained strong market share position notwithstanding flow volume decline as refinancing activity slowed ◦ Buying opportunistically as bulk volume has been high ◦ Expect to settle $39 billion UPB from bulk transactions in the first qu
Slide 15: Special Topic: Sourcing Mortgage Servicing Rights
Special Topic: Sourcing Mortgage Servicing Rights DIVERSIFIED ACQUISITION THROUGH FLOW AND BULK CHANNELS Took advantage of robust market activity in 2021 to grow the portfolio by $15.9 billion, offsetting the impact of fast prepayments FLOW CHANNEL • A leading purchaser of MSR with average market sh
Slide 16: Agency + MSR Advantage
Agency + MSR Advantage 16 COMBINED Agency P&I RMBS/TBA MSR/Agency IO RMBS(4) Combined September 30, 2021 Note: Sensitivity data as of December 31, 2021. The above spread scenario is provided for illustration purposes only and is not necessarily indicative of Two Harbors’ financial condition and oper
Slide 17: Risk Positioning
Note: Sensitivity data as of December 31, 2021. The above scenarios are provided for illustration purposes only and is not necessarily indicative of Two Harbors’ financial condition and operating results, nor are they necessarily indicative of the financial condition or results of operations that ma
Slide 18: Two Harbors Outlook
18 Two Harbors Outlook STATIC RETURN OUTLOOK FOR TARGET ASSETS(1) • The paired MSR construction remains the most attractive opportunity to deploy capital with returns in the low double digits • Lower coupon mortgages widened sharply after quarter end and returns are now in the high single digits OPP
Slide 19: Appendix
Appendix 19
Slide 20: Financial Performance
DIVIDEND YIELD(2) Financial Performance 20 COMPREHENSIVE INCOME (LOSS) QUARTERLY RETURN ON BOOK VALUE(1) BOOK VALUE AND DIVIDEND PER COMMON SHARE(2)
Slide 21: Q4-2021 Operating Performance
Q4-2021 Operating Performance Q4-2021 $ millions, except for per common share data) Earnings Available for Distribution(1) Realized Gains (Losses) Unrealized MTM Total Interest income $ 33.0 $ — $ — $ 33.0 Interest expense 20.2 — — 20.2 Net interest income 12.8 — — 12.8 Gain (loss) on investment sec
Slide 22: Q3-2021 Operating Performance
Q3-2021 Operating Performance 22 Q3-2021 ($ millions, except for per common share data) Earnings Available for Distribution(1) Realized Gains (Losses) Unrealized MTM Total Interest income $ 36.0 $ — $ — $ 36.0 Interest expense 21.9 — — 21.9 Net interest income 14.1 — — 14.1 Gain on investment securi
Slide 23: GAAP to EAD Reconciliation
GAAP to EAD Reconciliation Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended ($ thousands, except for per common share data) September 30, 2021 December 31, 2021 Comprehensive income (loss) attributable to common stockholders $ 45,226 $ (128,594) Adjustment for oth
Slide 24: Portfolio Metrics
Portfolio Metrics 24 AGENCY RMBS CPR(1) MSR CPR AGENCY PORTFOLIO COMPOSITION (2)
Slide 25: Agency RMBS Portfolio
Agency RMBS Portfolio 25 Par Value ($ millions) Market Value ($ millions) Weighted Average CPR(1) % Prepay Protected(2) Amortized Cost Basis ($ millions) Gross Weighted Average Coupon Weighted Average Age (Months) 30-Year fixed 2.5% & below $ 1,244 $ 1,271 5.9 % — % $ 1,272 3.3 % 3 3.0% 1,317 1,384
Slide 26: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) 26 Number of Loans Unpaid Principal Balance ($ millions) Gross Weighted Average Coupon Rate Weighted Average Loan Size(2) ($ thousands) Weighted Average Loan Age (months) Weighted Average Original FICO(3) Weighted Average Original LTV 60+ Day Delinquencies 3-Mo
Slide 27: Mortgage Servicing Rights Portfolio UPB Roll-Forward
Mortgage Servicing Rights Portfolio UPB Roll-Forward 27 MSR ROLL-FORWARD: Q4-2021 MSR ROLL-FORWARD: FULL YEAR 2021 *Includes recapture
Slide 28: Financing
Financing 28 $ millions Outstanding Borrowings and Maturities(1) Repurchase Agreements Revolving Credit Facilities Term Notes Payable Convertible Notes Total Outstanding Borrowings Percent (%) Within 30 days $ 1,627.3 $ — $ — $ 143.7 $ 1,771.0 19.9 % 30 to 59 days 1,807.5 — — — 1,807.5 20.3 % 60 to
Slide 29: Interest Rate Swaps and Swaptions
Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) Payers 2022 $ 7.4 0.420 % 0.070 % 0.7 2023 2.6 0.113 % 0.068 % 1.5 2024 — — % — % — 2025 0.4 1.030 % 0.050 % 4.0 2026 and Thereafter 2.8 0.652 % 0.063 % 6.6 $ 13.2 0.213 % 0.067 % 2.2 Maturities Not
Slide 30: Futures
Type & Maturity Notional Amount ($ thousands) Carrying Value ($ thousands) Weighted Average Days to Expiration U.S. Treasury futures - 10 year $ 687,900 $ 1,809 90 Eurodollar futures - 3 month < 1 year (3,582,000) 15,121 213 > 1 and < 2 years (2,269,500) 14,952 560 > 2 and < 3 years (666,000) 3,480
Slide 31: Tax Characterization of Dividends in 2021
Tax Characterization of Dividends in 2021 31 • Generated estimated REIT taxable income of $63.9 million in 2021 • 2021 distribution declarations for tax purposes totaled $256.2 million – $256.2 million consists of distributions to common shares of $192.5 million ($0.68 per common share) and distribu
Slide 32: End Notes
End Notes 32 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 dividends declared in the period, divided by book value as of the beginning of the period. 2. Beginning in the third quarter, the company
Slide 33: End Notes (continued)
PAGE 13 - Specified Pools 1. Specified pools include securities with implicit or explicit protection including lower loan balances (securities collateralized by loans less than or equal to $200K of initial principal balance), higher LTVs (securities collateralized by loans with greater than or equal
Slide 34: End Notes (continued)
End Notes (continued) 34 PAGE 18 - Two Harbors Outlook 1. Source: Company’s indicative estimates based on portfolio assumptions and market conditions, for illustrative purposes only. PAGE 16 - Agency + MSR Advantage 1. RMBS + MSR represents an internally calculated exposure of a synthetic TBA positi
Slide 35: End Notes (continued)
End Notes (continued) 35 PAGE 24 - Portfolio Metrics 1. Agency weighted average 3-month Constant Prepayment Rate (CPR) includes Agency Derivatives. 2. Other P&I includes 15-year fixed, Hybrid ARMs, CMO and DUS pools. PAGE 25 - Agency RMBS Portfolio 1. Weighted average actual 1 month annualized CPR r
Slide 36: End Notes (continued)
End Notes (continued) 36 PAGE 31 - Tax Characterization of Dividends in 2021 1. Pursuant to IRC Section 857(b)(9), cash distributions made on January 29, 2021 with a record date of December 30, 2020 are treated as received by stockholders on December 31, 2020 to the extent of 2020 earnings and profi
Slide 37: Two Harbors Investment Corp.
TWO HARBORS Investment Corp.
Two Harbors Investment — Q4 2021 Earnings Presentation on 6ix