Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q2 2018 Earnings Presentation
25 slides from Two Harbors Investment's earnings presentation, Aug 27, 2018
Slide 1: Second Quarter 2018 Investor Presentation
Second Quarter 2018 Investor Presentation 1
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: Two Harbors Investment Corp. Overview
Two Harbors Investment Corp. Overview(1) A LEADING HYBRID MORTGAGE REIT Residentially-focused mortgage REIT formed in 2009 Substantial total stockholder return outperformance since our inception relative to peers Proven stability in book value, especially during volatile periods Sophisticate
Slide 4: Two Harbors Snapshot
Two Harbors Snapshot $3.8 billion $4.8 billion $30.7 billion hybrid portfolio comprised of Rates market capitalization(1) total stockholders’ equity(1) and Credit strategies(2) 218% 16.8% -2.4% difference in book value volatility total stockholder return since substantial book value growth since com
Slide 5: Substantial Total Stockholder Return Outperformance
Substantial Total Stockholder Return Outperformance • Outperformed peer group by 85% since our inception • Delivered total stockholder return of 218% during that time(1) ― Bloomberg REIT Mortgage Index total stockholder return of 133% over the same period of time(2) 220.0% 218% 190.0% 160.0% 133% 13
Slide 6: Proven Book Value Stability…
Proven Book Value Stability… BOOK VALUE STABILITY AND GROWTH • Book value has grown by 16.8% since our inception through June 30, 2018, when adjusted to include the value of the Granite Point and Silver Bay stock distributions to Two Harbors stockholders(1)(2) • Peer average over same time period wa
Slide 7: …Particularly Through Volatile Times
…Particularly Through Volatile Times REFLECTS SOPHISTICATED APPROACH TO RISK MANAGEMENT AND HEDGING • Proven stability of book value through times of • Importantly, these results were achieved with less volatility: in the 2013 “taper tantrum” Two Harbors book value volatility than comparable mortgag
Slide 8: Acquisition of CYS Investments, Inc.
Acquisition of CYS Investments, Inc. TRANSACTION SUMMARY • For each share of CYS common stock owned, CYS common stockholders received (i) 0.4680 newly issued shares of Two Harbors common stock and (ii) cash consideration of $0.0965 – As an illustrative example, a CYS stockholder holding 1,000 shares
Slide 9: Portfolio Composition
Portfolio Composition PORTFOLIO COMPOSITION(1) HISTORICAL CAPITAL ALLOCATION $20.8 BILLION PORTFOLIO AS OF JUNE 30, 2018 June 30, March 31, June 30, 2017 2018 2018 Non-Agency $3.5b Rates(2) 54 % 69 % 68 % MSR (3) $1.5b Credit 28 % 31 % 32 % Rates(3) Commercial(4) 18 % — % — % Agency $10,766 $15.8b R
Slide 10: Portfolio Performance
Portfolio Performance DRIVING SUPERIOR PORTFOLIO PERFORMANCE Q2-2018 PERFORMANCE SUMMARY PORTFOLIO METRICS • Overall portfolio performance benefitted from floating- March 31, June 30, rate coupons on non-Agency securities, the LIBOR Three Months Ended 2018 2018 side of swaps and MSR float income Ann
Slide 11: Rates Update
Rates Update STRATEGY OF PAIRING MSR WITH AGENCY RMBS IS DISTINGUISHING FACTOR AGENCY RMBS ACTIVITY • Allocated capital from Agency pools into to-be-announced (“TBA”) positions • Continued to add exposure to Fannie Mae TBA 4.5’s due to attractiveness of coupon – Roll for this coupon traded special m
Slide 12: Protecting Book Value and Income
Protecting Book Value and Income • Active management of risk positioning leads to stability in returns through periods of market volatility HEDGING ACROSS THE CURVE Book value exposure to changes in rates(1) Net income exposure to changes in rates(2) % % +25 basis points (0.7 ) +25 basis points (0.1
Slide 13: Credit Update
Credit Update UNIQUE NON-AGENCY PORTFOLIO DRIVES ATTRACTIVE TOTAL RETURNS • Non-Agency securities holdings of $3.5 billion; primarily positioned in deeply discounted legacy subprime non- Agency RMBS with LIBOR floating rate coupons • Increased holdings of low dollar priced legacy non-Agencies by app
Slide 14: Portfolio Considerations for Acquisition of CYS Investments, Inc.
Portfolio Considerations for Acquisition of CYS Investments, Inc. REDEPLOYING CAPITAL AND MAINTAINING LOW LEVEL OF RISK • Redeploying capital from 100% Agency assets acquired in merger into our targeted asset mix • Prior to acquisition, portfolio allocation of about 70% to Rates and 30% to Credit •
Slide 15: Optimizing Financing Profile and Capital Structure
Optimizing Financing Profile and Capital Structure DEBT-TO-EQUITY • 5.3x debt-to-equity at June 30, 2018(1) • Economic debt-to-equity, which includes the implied debt on net TBA positions, of 6.2x at June 30, 2018, compared to 6.0x at March 31, 2018(2) • Maintain substantial liquidity to opportunist
Slide 16: Appendix
Investment: Corp. WR no Fiver Cactal Marans Copan — 4 Yj ee
Slide 17: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics AGENCY PORTFOLIO YIELDS AND METRICS AGENCY PORTFOLIO COMPOSITION Hybrid ARMs and Realized At March 31, Realized At June 30, IO & Inverse IO Other Portfolio Yield Q1-2018 2018 Q2-2018 2018 30-Year Fixed 1.7% 1.5% Agency yield 3.1% 3.2% 3.0% 3.1% 5% & above Repo and FHLB cos
Slide 18: Rates: Agency RMBS
Rates: Agency RMBS Weighted As of June 30, % Prepay Amortized Cost Weighted Average Age 2018 Par Value ($M) Market Value ($M) Protected(1) Basis ($M) Average Coupon (Months) 30-Year fixed 3.0-3.5% $3,111 $3,106 100.0% $3,265 3.5% 20 4.0-4.5% 11,548 11,949 100.0% 12,314 4.2% 22 ≥ 5.0% 272 296 100.0%
Slide 19: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) As of March 31, 2018 As of June 30, 2018 Fair value ($M) $1,301.0 $1,450.3 Unpaid principal balance ($M) $111,703.2 $119,531.6 Weighted average coupon 4.0 % 4.0 % Original FICO score(2) 752 752 Original LTV 74 % 74 % 60+ day delinquencies 0.5 % 0.4 % Net servicing
Slide 20: Credit: Non-Agency Securities Metrics
Credit: Non-Agency Securities Metrics NON-AGENCY PORTFOLIO YIELDS AND METRICS LEGACY NON-AGENCY PORTFOLIO COMPOSITION Realized At March Realized At June 30, Portfolio Yield Q1-2018 31, 2018 Q2-2018 2018 Non-Agency: Loan Type March 31, 2018 June 30, 2018 Non-Agency yield 8.0% 7.6% 8.1% 7.5% Sub-prime
Slide 21: Credit: Legacy Non-Agency Securities
Credit: Legacy Non-Agency Securities As of June 30, 2018 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $2,282.5 $842.9 $3,125.4 % of non-Agency portfolio 73.0 % 27.0 % 100.0 % Average purchase price(1) $59.62 $65.28 $61.15 Average coupon 3.1 % 2.8 % 3.0 % Weig
Slide 22: 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 $ 2,852.2 $ — $ — $ — $ 2,852.2 15.4 % 30 to 59 days 3,614.2 — — — 3,614.2 19.5 % 60 to 89 days 3
Slide 23: Interest Rate Swaps
Interest Rate Swaps Average Maturity Maturities Notional Amounts ($B)(1) Average Fixed Pay Rate(2) Average Receive Rate(2) Years(2) Payers 2018 $2.0 1.289 % 2.318% 0.4 2019 4.4 1.769 % 2.358% 1.3 2020 2.9 1.785 % 2.327% 2.3 2021 2.4 1.788 % 2.339% 3.4 2022 and after 6.5 2.407 % 2.345% 8.0 $18.2 1.92
Slide 24: Interest Rate Swaptions
Interest Rate Swaptions Option Underlying Swap Average Average Average Expiratio Cost Fair Value Months to Notional Average Receive Term Swaption n ($M) ($M) Expiration Amount ($M) Pay Rate Rate (Years) Purchase Contracts: Payer <6 Months $9.7 $10.7 0.8 $2,545 2.91% 3M LIBOR 5.9 Sale Contracts: Paye
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