Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2020 Earnings Presentation
28 slides from Two Harbors Investment's earnings presentation, Feb 10, 2021
Slide 1: Fourth Quarter 2020 Earnings Call
Fourth Quarter 2020 Earnings Call FEBRUARY 10, 2021
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 in a Repositioned Portfolio Quarterly Summary • Reported book value of $7.63 per common share, representing a 5.8% quarterly return on book value(1) • Generated Comprehensive Income of $113.5 million, representing an annualized return on average common equity of
Slide 4: Book Value Summary
Book Value Summary • Book value of $7.63 per common Q4-2020 YTD-2020 share, represented a 5.8% total Q4-2020 Book YTD-2020 Book Book Value per Book Value per economic return on book value(2) (Dollars in millions, except per share data) Value share Value share • Generated Comprehensive Income of $113
Slide 5: Core Earnings Review
Core Earnings Review(1) • Fourth quarter Core Earnings results ($ in millions, except per share data) Q3-2020 Q4-2020 Variance ($) impacted by: Interest income 89.7 72.5 $ (17.2) ◦ Interest income decreased from $89.7 million to $72.5 million due to lower Interest expense 29.2 22.6 6.6 average balan
Slide 6: Portfolio Yield
Portfolio Yield LOWER PORTFOLIO YIELD OFFSET BY LOWER COST OF FUNDS • Lower portfolio yield due to higher Agency RMBS prepayments • Lower cost of funds due to favorable repo rolls Realized Realized As of Dec. 31, Q3-2020 Q4-2020 2020(1) Annualized portfolio yield(2) 2.42 % 2.26 % 2.23 % Annualized c
Slide 7: Financing Profile
Financing Profile BALANCE SHEET AS OF 12/31/2020 CONSERVATIVE LEVERAGE FOR AGENCY + MSR STRATEGY • Strong capital and liquidity position • $1.4 billion of unrestricted cash • Economic debt-to-equty of 6.8x at December 31, 2020, compared to 7.7x at September 30, 2020(1) Agency RMBS • Average economic
Slide 8: Special Topic: Capital Optimization
Special Topic: Capital Optimization ACTIONS TO OPTIMIZE LIABILITY STRUCTURE AND CAPITAL STRUCTURE POST-QUARTER END • Issued $287.5 million of 5-year convertible notes BALANCE SHEET COMPARISON ◦ 6.25% coupon, 20.0% conversion premium Pro Forma ◦ Initial strike price of $7.38, minimal potential $ in m
Slide 9: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) PERFORMANCE COMMENTARY • Return on book value of 5.8%(3) $21.8 billion portfolio • Spreads tightened in MBS as the Federal Reserve Includes $16.3 billion settled positions continued its purchases • Current coupon mortgages continu
Slide 10: Specified Pools
Specified Pools SPECIFIED POOL PERFORMANCE SPECIFIED POOL PORTFOLIO • Specified pools outperformed TBA on a relative basis in 3.0 through 4.0 coupons • Specified pool prepayment speeds continue to be slower and more stable than TBA speeds Loan Balance(1) Other 63.5% • Expect that while prepayments m
Slide 11: Mortgage Servicing Rights
Mortgage Servicing Rights 4Q-2020 MSR PORTFOLIO ACTIVITY MSR PORTFOLIO(1) • Settled $23.0 billion UPB of MSR through flow-sale 12/31/2019 12/31/2020 arrangements and an additional $20.4 billion UPB through Fair value ($ millions) $1,909 $1,596 bulk purchases Pricing Multiple 3.9x 3.2x • Experienced
Slide 12: Agency + MSR Advantage
Agency + MSR Advantage EFFECTIVE COUPON POSITIONING(1) Agency P&I RMBS/TBA MSR/Agency IO RMBS(2) Combined September 30, 2020 BOOK VALUE EXPOSURE TO CHANGES IN SPREAD(3) PRESENCE OF MSR REDUCES MORTGAGE SPREAD RISK • MSR and Agency IO RMBS have similar risks to a short pools/TBA position in 1.5% and
Slide 13: Risk Positioning
Risk Positioning AGENCY + MSR DELIVERS BOOK VALUE STABILITY • Interest rate and curve exposure remains low and in line with historical positioning • MSR/IO position duration offsets RMBS/TBA duration • In a 25 basis point parallel shift up in rates, potential book value increase of 0.6% • In a 25 ba
Slide 14: Special Topic: Stability of Agency + MSR Returns
Special Topic: Stability of Agency + MSR Returns AGENCY + MSR IS ESPECIALLY ATTRACTIVE VERSUS AGENCY-ONLY DURING TIGHT SPREAD ENVIRONMENTS HISTORICAL CHANGE IN SPREAD FOR A GIVEN STARTING SPREAD(1) • Historical returns of Agency MBS show a correlation between the initial spread level and ending spre
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 low teens • Estimate returns for Agency RMBS / flow MSR in low teens MARK
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: Q4-2020 Operating Performance
Q4-2020 Operating Performance Q4-2020 Realized Gains (In millions, except for per common share data) Core Earnings(1) (Losses) Unrealized MTM Total Interest income $ 72.5 $ — $ — $ 72.5 Interest expense 22.6 — — 22.6 Net interest income 49.9 — — 49.9 Gain (loss) on investment securities — 47.6 (10.2
Slide 19: 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 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, 2020 December 31, 2020 Reconciliation of Comprehensive income to Core Earnings: Comprehensive income attributabl
Slide 21: Portfolio Metrics
Portfolio Metrics AGENCY RMBS CPR(1) AGENCY PORTFOLIO COMPOSITION IO & Inverse IO Other P&I(2) 2.5% 0.8% 30-Year Fixed 5% & above 4.0% 30-Year Fixed < 2.5% 30-Year Fixed 4.0% 13.6% 19.8% 30-Year Fixed 4.5% 17.3% MSR CPR 30-Year Fixed 3.5% 30-Year Fixed 24.7% 3.0% 17.3% (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 $ 1,878 $ 2,005 7.7 % 100.0 % $ 1,977 3.4 % 7 3.0% 2,360 2,542 19
Slide 23: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Gross Weighted Unpaid Principal Weighted Weighted Average Weighted Number of Balance % Fannie Average Average Loan Original Average 60+ Day Net Servicing Loans ($ in millions) Mae Coupon Rate Age (months) FICO(2) Original LTV Delinquencies 3-Month CPR Fee (bps)
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 $ 5,370.5 $ — $ — $ — $ 5,370.5 33.3 % 30 to 59 days 4,292.9 — — — 4,292.9 26.6 % 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 2021 $ — —% —% 0.0 2022 7.4 0.042 % 0.090 % 1.7 2023 2.3 0.023 % 0.090 % 2.5 2024 — —% —% — 2025 and after 1.5 0.257 % 0.090 % 6.5 $ 11.2 0.067 % 0.090 %
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 $ 7.2 $ 2.4 4.2 $ 2,800 1.32 % SOFR 10.0 Receiver <6 Months 3.
Slide 27: Tax Characterization of Dividends in 2020
Tax Characterization of Dividends in 2020 FULL YEAR 2020 DIVIDEND SUMMARY • Generated estimated REIT taxable loss of $640.5 million in 2020 largely resulting from the realized losses on the termination of swap positions designated as debt hedges for tax purposes. • 2020 distribution declarations for
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