Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q3 2022 Earnings Presentation
32 slides from Two Harbors Investment's earnings presentation, Nov 9, 2022
Slide 1: An Agency + MSR Mortgage REIT Third Quarter 2022 Earnings Call
An Agency + MSR Mortgage REIT Third Quarter 2022 Earnings Call NOVEMBER 9, 2022
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 Book Value Impacted as Spreads Continued to Widen Beyond Historical Levels Quarterly Summary • Reported book value of $16.42 per common share, representing a (16.2)% quarterly economic return on book value(1) • Generated Comprehensive Loss of $287.8 million, or $(3.35) per weighte
Slide 4: Key Market Highlights
Key Market Highlights INFLATION, A HAWKISH FED, AND RISING RECESSION RISK MADE FOR A DIFFICULT ENVIRONMENT I. INFLATION CONTINUED TO EXCEED EXPECTATIONS(1) • Uncertainty around the path of forward rates and geopolitical turmoil contributed to extraordinarily high rate volatility • Despite the accele
Slide 5: Key Market Highlights
Key Market Highlights SPREADS ARE AT HISTORICALLY ATTRACTIVE LEVELS IN BOTH STATIC AND OAS TERMS I. RMBS SPREADS AT HISTORICAL WIDES(1) • MBS spreads widened sharply to levels which have historically only been seen in acute phases of crisis periods • Convexity of the RMBS index is near zero reflecti
Slide 6: Book Value Summary
Book Value Summary Q3-2022 YTD-2022 • Book value of $16.42 per Q3-2022 Book Value YTD-2022 Book Value common share, resulting in a ($ millions, except per share data) Book Value per share Book Value per share (16.2)% quarterly economic return on book value(2) Beginning common stockholders’ equity $
Slide 7: Earnings Available for Distribution
Earnings Available for Distribution • Third quarter EAD reflects: ($ millions, except per share data) Q3-2022 Q2-2022 Variance ◦ Higher interest income due to a larger RMBS Interest income $ 94.4 $ 57.0 $ 37.4 portfolio, a greater proportion of up-in-coupon RMBS, and lower amortization as prepayment
Slide 8: Portfolio Yields and Financing Costs
Portfolio Yields and Financing Costs • Portfolio yield increased 22 bps to 4.61% primarily due to a greater amount of higher coupon available-for-sale securities • Net spread narrowed by (93) bps as a combination of higher rates and borrowing balances offset a higher portfolio yield ($ thousands) Q3
Slide 9: Strong Balance Sheet and Liquidity Position
Strong Balance Sheet and Liquidity Position BALANCE SHEET AS OF SEPTEMBER 30, 2022 AGENCY RMBS • $9.6 billion of outstanding repurchase agreements with 21 counterparties • Weighted average days to maturity of 96 days 2019 2020 2021 2022 50.00 Average Repo Rate - SOFR (bps) (1) Agency RMBS $9.4 billi
Slide 10: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) LEVERAGE • MBS spread widening resulted in higher portfolio leverage taking At September 30, 2022, $16.6 billion portfolio us from a “neutral” to “overweight” position Includes $12.5 billion settled positions ◦ Economic debt-to-eq
Slide 11: Specified Pools
Specified Pools QUARTERLY HIGHLIGHTS I. SPECIFIED POOL PORTFOLIO(1) • Specified pools significantly underperformed rate hedges across Other, 4.1% the stack Investor, 13.6% ◦ 3.5% to 4.0% coupons performed in line to TBAs, wider by 45 % to 50 ticks 3.5, 6.0 9% 4. ◦ Higher coupons like 4.5% and 5.0% u
Slide 12: Mortgage Servicing Rights
Mortgage Servicing Rights QUARTERLY HIGHLIGHTS I. MSR PORTFOLIO CHARACTERISTICS(1) • Market activity, which was robust in the first half of the year, 9/30/2022 6/30/2022 has moderated Fair value ($ millions) $ 3,022 $ 3,226 ◦ Almost $100 billion UPB of conventional MSR offered in the Price multiple
Slide 13: Special Topic: Low Coupon MSR + Higher Coupon RMBS
Special Topic: Low Coupon MSR + Higher Coupon RMBS SPEEDS FAVOR HIGH COUPON RMBS AND LOW COUPON MSR I. THE ADVANTAGE OF HIGHER COUPONS(1) • Prepayment rates continue to decline as mortgage rates increase to new cycle highs pushing more than 99% of the mortgage universe out-of-the money • Very low co
Slide 14: Return Potential and Outlook
Return Potential and Outlook HISTORICALLY WIDE MORTGAGE SPREADS OFFER ATTRACTIVE OPPORTUNITIES BUT RISKS REMAIN INVESTED PORTFOLIO STATIC MARKET PROSPECTIVE MARKET RETURNS PROSPECTIVE MARKET RETURNS CAPITAL MARKET VALUE RETURN ESTIMATE(2) • Market return estimates reflect static As of Sep-30-2022 AL
Slide 15: Appendix
Appendix 15
Slide 16: Effective Coupon Positioning
Effective Coupon Positioning GREATER EXPOSURE TO MORTGAGE SPREADS TO CAPTURE HISTORICALLY WIDE LEVELS • Overall exposure to a 25 bps widening of mortgages increased from (7.6)% in the second quarter to (13.7)% driven by two factors ◦ MSR has less sensitivity to mortgage rates with note rates being f
Slide 17: Risk Positioning
Risk Positioning INTEREST RATE AND CURVE EXPOSURE REMAINS LOW • During this period of heightened movement in the front end of the yield curve, portfolio exposure across the yield curve is well-hedged • Inert nature of MSR results in RMBS being primarily hedged with interest rate products ◦ Net inter
Slide 18: Financial Performance
Financial Performance COMPREHENSIVE INCOME (LOSS) QUARTERLY ECONOMIC RETURN ON BOOK VALUE(1) DIVIDEND YIELD(2) BOOK VALUE AND DIVIDEND PER COMMON SHARE(2) 18
Slide 19: Q3-2022 Operating Performance
Q3-2022 Operating Performance Q3-2022 Earnings Available Realized Gains $ millions, except for per common share data) for Distribution(1) (Losses) Unrealized MTM Total Interest income $ 94.4 $ — $ — $ 94.4 Interest expense 83.4 — — 83.4 Net interest income 11.0 — — 11.0 Gain (loss) on investment sec
Slide 20: Q2-2022 Operating Performance
Q2-2022 Operating Performance Q2-2022 Earnings Available Realized Gains ($ millions, except for per common share data) for Distribution(1) (Losses) Unrealized MTM Total Interest income $ 57.0 $ — $ — $ 57.0 Interest expense 37.1 — — 37.1 Net interest income 19.9 — — 19.9 Loss on investment securitie
Slide 21: 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, 2022 June 30, 2022 Comprehensive loss attributable to common stockholders $ (287,808) $ (90,379) Adjustment for other comprehe
Slide 22: Agency RMBS Portfolio
Agency RMBS Portfolio Amortized Weighted Par Value Market Value Weighted % Prepay Cost Basis Gross Weighted Average Age ($ millions) ($ millions) Average CPR(1) Protected(2) ($ millions) Average Coupon (Months) 30-Year fixed 2.5% & below $ — $ — —% —% $ — —% — 3.0% — — —% —% — —% — 3.5% 1,165 1,054
Slide 23: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Unpaid Principal Current Loan Number of Balance Gross Coupon Size Loan Age 60+ Day Net Servicing Loans ($ millions) Rate ($ thousands) (months) Original FICO(2) Original LTV Delinquencies 3-Month CPR Fee (bps) 30-Year Fixed < 3.25% 301,688 $ 98,335 2.8% $ 384 2
Slide 24: Mortgage Servicing Rights UPB Roll-Forward
Mortgage Servicing Rights UPB Roll-Forward $ millions Q3-2022 Q2-2022 Q1-2022 Q4-2021 Q3-2021 UPB at beginning of period $ 227,074 $ 229,416 $ 193,771 $ 194,394 $ 185,210 Bulk purchases of mortgage servicing rights — — 37,197 3,214 15,328 Flow purchases of mortgage servicing rights 4,449 5,720 7,940
Slide 25: Financing
Financing $ millions Repurchase Revolving Credit Total Outstanding Outstanding Borrowings and Maturities(1) Agreements Facilities Term Notes Payable Convertible Notes Borrowings Percent (%) Within 30 days $ 2,098.5 $ — $ — $ — $ 2,098.5 17.7 % 30 to 59 days 1,121.3 — — — 1,121.3 9.5 % 60 to 89 days
Slide 26: Futures
Futures Weighted Notional Amount Carrying Value Average Days to Type & Maturity ($M) ($M)(1) Expiration U.S. Treasury futures - 2 year $ (643) $ — 97 U.S. Treasury futures - 5 year (4,706) — 97 U.S. Treasury futures - 10 year (3,219) — 91 U.S. Treasury futures - 20 year (554) — 91 Federal Funds futu
Slide 27: End Notes
End Notes PAGE 3 - Executive Overview 1. Economic 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. Earnings A
Slide 28: End Notes (continued)
End Notes (continued) PAGE 8 - Portfolio Yields and Financing Costs 1. Includes interest income, net of premium amortization/discount accretion, on available-for-sale securities and Agency Derivatives, servicing income, net of estimated amortization and servicing expenses, on MSR, and the implied as
Slide 29: End Notes (continued)
End Notes (continued) PAGE 11 - 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
Slide 30: End Notes (continued)
End Notes (continued) PAGE 16 - Effective Coupon Positioning 1. RMBS + MSR represents an internally calculated exposure of a synthetic TBA position and the current coupon equivalents of our MSR and Agency IO RMBS. 2. RMBS + RATES represents our investment portfolio after excluding the internally cal
Slide 31: End Notes (continued)
End Notes (continued) PAGE 21 - GAAP to EAD Reconciliation 1. MSR amortization refers to the portion of change in fair value of MSR primarily attributed to the realization of expected cash flows (runoff) of the portfolio, which is deemed a non-GAAP measure due to the company’s decision to account fo
Slide 32: Investment Corp.
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Two Harbors Investment — Q3 2022 Earnings Presentation on 6ix