Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2020 Earnings Presentation
27 slides from Two Harbors Investment's earnings presentation, Feb 24, 2021
Slide 1: Two Harbors Investment Corp. Fourth Quarter 2020 Investor Presentation
1 T WO H A R B O R S I N V E ST M E NT C O R P. An Agency+MSR Mortgage REIT Fourth Quarter 2020 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: Table of Contents
Table of Contents 3 Company Overview and History…………………………………………………………………………………………………………………………..……..….…….……. 4 TWO is Among the Largest Mortgage REITs…………………………………………………………………………….……………….……………………………...... 5 Company Update: Fourth Quarter and Full Year 2020……………………………………………………………………………………………………….……..
Slide 4: Company Overview and History
APRIL Acquires Matrix Financial Services Corp. 20202009 201720132011 2018 Company Overview and History • Unique strategy of pairing Agency RMBS with Agency mortgage servicing rights (MSR) • Robust and sophisticated risk management practices • Dedicated to stockholder engagement and transparency • Co
Slide 5: Two Harbors is Among the Largest Mortgage REITs
Two Harbors is Among the Largest Mortgage REITs 5Source: Company filings; Financial data as of latest available (1) Represents total shareholders’ equity before non-controlling interest. Top 20 mREITs by Total Assets Top 20 mREITs by Total Equity Name Assets ($B) Focus Annaly $88.5 Agency AGNC Inves
Slide 6: Strong Performance in a Repositioned Portfolio
Strong Performance in a Repositioned Portfolio Fourth Quarter 2020 • 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 22.1% • Reported
Slide 7: Strong Capital and Liquidity Profile
7 (1) Defined as total borrowings to fund RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA positions, divided by total equity. (2) Excludes deferred debt issuance costs. • $1.4 billion of unrestricted cash • Economic debt-to-equity of 6.8x at December 31, 2020, compared to 7.7x at
Slide 8: Capital Optimization
• Issued $287.5 million of 5-year convertible notes ◦ 6.25% coupon, 20.0% conversion premium ◦ Initial strike price of $7.38, minimal potential dilution of $0.03 to current book value if converted ◦ Repurchased $143.7 million of convertible notes due 2022 • Planned optimization of MSR financing • An
Slide 9: Fourth Quarter 2020: Activity and Portfolio Composition
9 $21.8 billion portfolio Includes $16.3 billion settled positions (1) Represents bond equivalent value of TBA position. Bond equivalent value is defined as notional amount multiplied by market price. Accounted for as derivative instruments in accordance with GAAP. (2) Return on book value is define
Slide 10: Fourth Quarter 2020: Specified Pools
(1) Securities collateralized by loans less than or equal to $200 thousand of initial principal balance. (2) Securities collateralized by loans from certain geographic concentrations. (3) Securities collateralized by loans with greater than or equal to 80% LTV. (4) J.P. Morgan Beta MBS Pricing and A
Slide 11: Fourth Quarter 2020: Mortgage Servicing Rights
12/31/2019 12/31/2020 Fair value ($ millions) $1,909 $1,596 Pricing Multiple 3.9x 3.2x UPB ($ millions) $179,333 $185,687 Gross weighted average coupon rate 4.1% 3.7% Weighted average original FICO(2) 754 756 Weighted average original loan-to- value (LTV) 75% 74% 60+ day delinquencies 0.2% 3.2% Net
Slide 12: The Agency + MSR Advantage
The Agency + MSR Advantage • Portfolio constructed by pairing Agency RMBS with Agency MSR ― MSR portfolio is sourced through strategic partnerships with a set of highly curated flow sellers and opportunistic bulk purchases ― Engage a small number of high-quality subservicers to maximize the effectiv
Slide 13: Agency + MSR Delivers Book Value Stability
• Our MSR portfolio is also expected to be an effective hedge to unexpected interest rate shifts ― In a scenario where an instantaneous 25bps parallel shift in rates occurs in either direction, the expected change in value of our MSR portfolio largely offsets the impact of Agency assets, maintaining
Slide 14: Stability of Agency + MSR Returns
14 AGENCY + MSR IS ESPECIALLY ATTRACTIVE VERSUS AGENCY-ONLY DURING TIGHT SPREAD ENVIRONMENTS • Historical returns of Agency MBS show a correlation between the initial spread level and ending spread level over a 1- year horizon ◦ When spreads are very low, they tend to widen ◦ When spreads are very h
Slide 15: Agency + MSR Strategy Drives Attractive Returns
Agency + MSR Strategy Drives Attractive Returns(1) 15 OPPORTUNITY SET IN OUR TARGET ASSETS REMAINS ATTRACTIVE • 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
Slide 16: Key Investment Highlights
Key Investment Highlights 16 • Top 5 residential mortgage REIT by total assets and total investable equity • $1.9 billion common equity market capitalization(1) and ~$20 billion investment portfolio • Internalized management structure creates sustainable long-term scale advantages Industry-leading M
Slide 17: Appendix
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Slide 18: Management Team
Management Team 18 • Over 25 years of experience managing portfolios of structured finance assets • 8 year tenure with Two Harbors • Appointed CEO in June 2020 • Served as Co-CIO of Two Harbors since January 2020, and prior to that, served as Co-Deputy CIO from June 2018 • Prior to joining Two Harbo
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Slide 20: MSR Risk Management and Operations Expertise
MSR Risk Management and Operations Expertise • Focus on ongoing flow relationships with ~20 strategic MSR sellers ― Demonstrated track record in producing/servicing high quality assets • Develop and grow quality subservicing relationships • Opportunistic bulk MSR acquisitions are considered on a cas
Slide 21: MSR Oversight Model
Oversight Model 21 Relationship Management • Ongoing subservicer engagement • Regular & frequent touch-points with Fannie Mae & Freddie Mac • Robust task tracking & resolution (proprietary system) • GSE guideline tracking & implementation • Site visits Process Management • Daily data feeds • Excepti
Slide 22: Fourth Quarter 2020 Earnings
Fourth Quarter 2020 Earnings 22
Slide 23: Fourth Quarter 2020 Book Value Rollforward
• Book value of $7.63 per common share, represented a 5.8% total economic return on book value(2) • Generated Comprehensive Income of $113.5 million, representing an annualized return on average common equity of 22.1% • Book value growth was driven by outperformance of lower coupon TBAs, improvement
Slide 24: Fourth Quarter Core Earnings Results
24(1) Core Earnings is a non-GAAP measure. Please see Appendix slide 26 for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information. • Fourth quarter Core Earnings results impacted by: ◦ Interest income decreased from $89.7 million to $72.5 million due to lower a
Slide 25: Lower Portfolio Yield Offset by Lower Cost of Funds
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 25 (1) Represents yields on the portfolio held as of December 31, 2020 and projected over the remaining life of the investments. Assumes
Slide 26: Reconciliation of GAAP to non-GAAP Information
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 attributable to common stockholders $ 219,180 $ 113
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