Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q1 2022 Earnings Presentation
31 slides from Two Harbors Investment's earnings presentation, May 5, 2022
Slide 1: An Agency + MSR Mortgage REIT First Quarter 2022 Earnings Call
An Agency + MSR Mortgage REIT First Quarter 2022 Earnings Call MAY 5, 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 Hedge Benefits of MSR Offset Historic Spread Widening in RMBS During a Volatile Quarter Quarterly Summary • Reported book value of $5.53 per common share, representing a (2.9)% quarterly return on book value(1) • Generated Comprehensive Loss of $60.3 million, representing an annua
Slide 4: Key Market Highlights
Key Market Highlights HISTORIC MARKET REPRICING AS FEDERAL RESERVE AMPLIFIES EFFORTS TO TAME INFLATION I. INCREASING EXPECTATIONS OF RATE HIKES(1) • Market expectations have shifted significantly and rapidly ◦ The number of hikes priced in for 2022 rose from 3 to 9, and are expected to rise above ne
Slide 5: Key Market Highlights
Key Market Highlights RMBS ARE ATTRACTIVE ON A FUNDAMENTAL BASIS BUT TECHNICALS STILL WARRANT CAUTION I. CURRENT COUPON SPREADS CONTINUE TO WIDEN(1) • Current coupon OAS widened over 33 bps to 27 bps. In April, spreads widened another 11 bps and are now past historical averages and near the 90th per
Slide 6: Book Value Summary
Book Value Summary Q1-2022 • Book value of $5.53 per common share, resulting in Q1-2022 Book Value a (2.9)% quarterly return on book value(2) ($ millions, except per share data) Book Value per share ◦ Book value decline reflects impact of spread Beginning common stockholders’ equity $ 2,017.7 $ 5.87
Slide 7: Earnings Available for Distribution
Earnings Available for Distribution • First quarter EAD reflects: ($ millions, except per share data) Q4-2021 Q1-2022 Variance ◦ Higher interest income due to lower amortization as Interest income $ 33.0 $ 44.8 $ 11.8 prepayment speeds slowed and, to a lesser degree, Interest expense 20.2 22.3 (2.1)
Slide 8: Portfolio Yields and Financing Costs
Portfolio Yields and Financing Costs • Portfolio yield increased 18 bps to 3.90% primarily due to lower premium amortization on available-for-sale securities and higher yields on mortgage servicing rights • Net spread narrowed by (10) bps due to increased cost of financing mainly from added payer sw
Slide 9: Financing Profile
Financing Profile BALANCE SHEET AS OF MARCH 31, 2022 AGENCY RMBS STRONG LIQUIDITY POSITION • $7.5 billion of outstanding repurchase agreements with 19 counterparties • Although repo term rates increased during the quarter in anticipation of rate hikes, spread to SOFR remains low 2019 2020 2021 2022
Slide 10: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) LEVERAGE At March 31, 2022, $14.8 billion portfolio • Began to increase portfolio leverage in March at attractive spreads Includes $10.1 billion settled positions ◦ Portfolio leverage increased modestly to 5.1x 30 8.0x ◦ Average e
Slide 11: Specified Pools
Specified Pools QUARTERLY HIGHLIGHTS I. SPECIFIED POOL PORTFOLIO(1) • Specified pools widened materially across the coupon stack ◦ Higher coupon 4.5 and 5.0 collateral performed the best given their shorter cash flows and lower spread duration • Weighted average specified pool portfolio speeds decli
Slide 12: Mortgage Servicing Rights
Mortgage Servicing Rights QUARTERLY HIGHLIGHTS I. MSR PORTFOLIO(1) • Portfolio grew by $35.1 billion UPB 12/31/2021 3/31/2022 ◦ Buying opportunistically as bulk market activity remains Fair value ($ millions) $ 2,192 $ 3,090 robust Price multiple 4.2x 5.1x UPB ($ millions) $ 197,782 $ 232,864 ◦ Sett
Slide 13: Agency + MSR Advantage
Agency + MSR Advantage LOW EXPOSURE TO CURRENT COUPON SPREAD • The charts below illustrate a point-in-time view of risk exposure through the lens of: Agency RMBS paired with MSR (RMBS + MSR(1)) and Agency RMBS hedged with Rates (RMBS + RATES(2)) ◦ RMBS + MSR: The rates sell-off moved the effective s
Slide 14: Risk Positioning
Risk Positioning AGENCY + MSR DELIVERS BOOK VALUE STABILITY • Interest rate and curve exposure remains low and in line with historical positioning ◦ For an instantaneous parallel shift in rates, the estimated change in book value would be -1.3% for a 25 bps decline and -0.1% for a 25 bps increase ◦
Slide 15: Two Harbors Outlook
Two Harbors Outlook OPPORTUNITY SET IN TARGET ASSETS REMAINS ATTRACTIVE TODAY • Spread widening significantly improved the return profile of pools, and the paired MBS / MSR strategies • TBA static returns are showing outsized returns from high dollar rolls which are likely to subside later this year
Slide 16: Appendix
Appendix 16
Slide 17: Financial Performance
Financial Performance COMPREHENSIVE (LOSS) INCOME QUARTERLY RETURN ON BOOK VALUE(1) DIVIDEND YIELD(2) BOOK VALUE AND DIVIDEND PER COMMON SHARE(2) $0.17 $0.17 $0.17 $0.17 $0.17 17
Slide 18: Q1-2022 Operating Performance
Q1-2022 Operating Performance Q1-2022 Earnings Available Realized Gains $ millions, except for per common share data) for Distribution(1) (Losses) Unrealized MTM Total Interest income $ 44.8 $ — $ — $ 44.8 Interest expense 22.3 — — 22.3 Net interest income 22.5 — — 22.5 (Loss) gain on investment sec
Slide 19: Q4-2021 Operating Performance
Q4-2021 Operating Performance Q4-2021 Earnings Available Realized Gains ($ millions, except for per common share data) for Distribution(1) (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 se
Slide 20: 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) December 31, 2021 March 31, 2022 Comprehensive loss attributable to common stockholders $ (128,594) $ (60,322) Adjustment for other comprehe
Slide 21: 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% 1,907 1,874 8.8 % 100.0 % 1,999 3.
Slide 22: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Unpaid Principal Number of Balance Gross Current Loan Size Loan Age Original 60+ Day Net Servicing Loans ($ millions) Coupon Rate ($ thousands) (months) FICO(2) Original LTV Delinquencies 3-Month CPR Fee (bps) 30-Year Fixed < 3.25% 321,221 $ 105,218 2.8% $ 386
Slide 23: Mortgage Servicing Rights UPB Roll-Forward
Mortgage Servicing Rights UPB Roll-Forward $ millions Q1-2021 Q2-2021 Q3-2021 Q4-2021 Q1-2022 UPB at beginning of period $ 177,861 $ 179,014 $ 185,210 $ 194,394 $ 193,771 Bulk purchases of mortgage servicing rights 1,088 6,548 15,328 3,214 37,197 Flow purchases of mortgage servicing rights 21,302 16
Slide 24: 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 $ 2,183.2 $ — $ — $ — $ 2,183.2 23.9 % 30 to 59 days 1,083.8 — — — 1,083.8 11.9 % 60 to 89 days
Slide 25: Interest Rate Swaps and Swaptions
Interest Rate Swaps and Swaptions INTEREST RATE SWAPS Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Average Maturity (Years) Payers 2022 $ 7.4 0.042 % 0.330 % 0.4 2023 2.6 0.113 % 0.325 % 1.3 2024 0.5 0.948 % 0.290 % 1.8 2025 0.4 1.030 % 0.290 % 3.7 2026 and Thereafter
Slide 26: Futures and Options on Futures
Futures and Options on Futures FUTURES Weighted Notional Amount Carrying Value Average Days to Type & Maturity ($ thousands) ($ thousands) Expiration U.S. Treasury futures - 10 year $ (238,400) $ — 91 Eurodollar futures - 3 month < 1 year (4,707,000) — 232 > 1 and < 2 years (2,238,250) — 550 > 2 and
Slide 27: End Notes
End Notes PAGE 3 - Executive Overview 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. Earnings Available
Slide 28: End Notes (continued)
End Notes (continued) PAGE 8 - Portfolio Yields and Financing Costs 1. Portfolio yields on the portfolio held as of March 31, 2022 and projected over the remaining life of the investments. Assumes a static portfolio and, as a result, does not represent a projection of future yields due to excluding
Slide 29: End Notes (continued)
End Notes (continued) PAGE 12 - Mortgage Servicing Rights 1. MSR portfolio based on the loans underlying the MSR reported by subservicers on a month lag, adjusted for current month purchases. Portfolio metrics, other than fair value and UPB, represent averages weighted by UPB. 2. FICO represents a m
Slide 30: End Notes (continued)
End Notes (continued) PAGE 19 - Q4-2021 Operating Performance 1. Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see Appendix slide 20 for a definition of Earnings Available for Distribution and a reconciliation of GAAP to non-GAAP financial information. PAGE 20 - GAAP to
Slide 31: Two Harbors Investment Corp.
w TWO HARBORS Investment Corp.
Two Harbors Investment — Q1 2022 Earnings Presentation on 6ix