Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Investor Presentation (December 2016)
28 slides from Two Harbors Investment's investor presentation, Dec 6, 2016
Slide 1: Mortgage Servicing Rights (MSR) Primer
Mortgage Servicing Rights (MSR) Primer December 6 , 2016
Slide 2: Safe Harbor Statement
Safe Harbor Statement F O R W A R D - L O O K I N G S T A T E M EN T S 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, estimate
Slide 3: Two Harbors Overview
Two Harbors Overview
Slide 4: Two Harbors Investment Corp. Overview
Two Harbors Investment Corp. Overview (1) LEADING HYBRID MORTGAGE REIT FOCUSED ON DRIVING STRONG LONG -TERM RETURNS WHILE TAKING LESS RISK 4 1) Data as of September 30, 2016. 2) Two Harbors’ total stockholder return is calculated for the period October 29, 2009 through September 30, 2016. Total stoc
Slide 5: Attractive Returns With Lower Risk
11.2% 10.3% 11.3% 11.0% 13.6% 11.9% 13.0% 12.0% 0.0% 6.0% 12.0% 18.0% 2013 2014 2015 2016-YTD 2013 2014 2015 2016-YTD …LESS INTEREST RATE R ISK (3 ) . . . Attractive Returns With Lower Risk 5 AT T R AC T I VE & C O M PA R A BLE D I V I D E ND Y I E L D (1 ) …WITH LOWER LEVERAGE (2 ) . . . SUPERIOR A
Slide 6: MSR Portfolio at a Glance
MSR PORTFOLIO AT A GLANCE (5) TOTAL PORTFOLIO COMPOSITION Two Harbors’ Portfolio Composition 6 $17.0 BILLION PORTFOLIO AS OF SEPTEMBER 30, 2016 1) Commercial consists of senior and mezzanine commercial real estate debt and related instruments. 2) MSR includes Ginnie Mae buyout residential mortgage l
Slide 7: Webinar Executive Summary
7 Webinar Executive Summary 1) Illustrative returns reflective of a duration neutral position. See slide 20 for further detail on these two illustrative portfolios. Note: The above scenarios are intended to illustrate the potential benefits of hedging Agency RMBS with MSR. The numbers used in the sc
Slide 8: MSR Overview
MSR Overview
Slide 9: What are Mortgage Servicing Rights?
9 What are Mortgage Servicing Rights? MSR ARE THE CONTRACTUAL RIGHTS TO PERFORM AND CONTROL SERVIC ING OF A MORTGAGE LOAN IN EXCHANGE FOR A SERVIC ING FEE • Servicing responsibilities include: collecting principal and interest (P&I) payments, holding escrow funds, paying taxes and insurance (T&I) pa
Slide 10: MSR Provide Different Benefits to Different Participants
MSR Provide Different Benefits to Different Participants 10 Who? What? Why? Banks New, high quality, rate-sensitive MSR, including both GSE and Ginnie • MSR provide a hedge to the origination business • When rates fall (rise), MSR values fall (rise) but origination fees increase (decrease) • Financi
Slide 11: Current Market Overview
11 Current Market Overview MSR MARKET IS LARGE AND RAPIDLY EVOLVING • Volume opportunities abundant; cumulative volume of new issue MSR expected to exceed $1.0 trillion unpaid principal balance (UPB) in 2016(1) • The top 25 servicers of GSE-backed loans comprise roughly 80% of the entire universe(2)
Slide 12: How are MSR Made?
How are MSR Made? 12 • The Net Servicing Fee for MSR is the difference between the Gross Servicing Fee and the coupon on the RMBS, less the fee paid to the GSEs or Ginnie to guarantee the mortgage. ― Additionally, in many cases the holder of MSR has the right to receive float income on principal and
Slide 13: MSR Are More Than Just Interest-Only
MSR Are More Than Just Interest-Only 13 • MSR are “interest-only” (IO) in the sense that when the loan goes away, the MSR goes away; the longer the mortgage is outstanding, the longer the investor receives MSR cash flows. • Unlike IO securities, there are “other components” that an MSR holder enjoys
Slide 14: Cash Flows Overview
Cash Flows Overview
Slide 15: Illustrative Treasury Cash Flow Scenarios
Illustrative Treasury Cash Flow Scenarios 15 CASH FLOWS ON TREASURIES ARE NOT IMPACTED BY RATE ENVIRONMENT HIGH RATE SCENARIO BASE CASE SCENARIO LOW RATE SCENARIO • Total cash flow is 105% of face amount • Weighted average life of 5 years • Yield of 1.25% ↔ PV of 98.79% • Yield of 2.25% ↔ PV of 94.1
Slide 16: Illustrative RMBS Cash Flow Scenarios
Illustrative RMBS Cash Flow Scenarios 16 CHANGING RATE ENVIRONMENTS INFLUENCE AVERAGE LIFE AND YIELD OF R MBS • Effect of changing discount rate dominates the effect of changing prepayments HIGH RATE SCENARIO BASE CASE SCENARIO LOW RATE SCENARIO • Total P&I is 130.0% of face amount • Weighted averag
Slide 17: Illustrative MSR Cash Flow Scenarios
Illustrative MSR Cash Flow Scenarios 17 CHANGING RATE ENVIRONMENTS INFLUENCE AVERAGE LIFE AND YIELD OF MSR • Effect of changing prepayments dominates the effect of changing discount rate. HIGH RATE SCENARIO BASE CASE SCENARIO LOW RATE SCENARIO • Total cash flow is 2.2% of face amount • Weighted aver
Slide 18: Impact of Interest Rates
Impact of Interest Rates 18 MSR AND RMBS PRICE CHANGES MOVE IN OPPOSITE DIRECTIONS, PROVIDIN G A HEDGE FOR ONE ANOTHER IN CHANGING INTEREST RATE ENVIRONMENTS • When interest rates rise, Treasury prices decrease. When interest rates fall, Treasury prices increase. • When interest rates rise, RMBS pri
Slide 19: MSR in a Portfolio Context
MSR in a Portfolio Context
Slide 20: Portfolio With MSR Has Higher Yield Potential
Portfolio With MSR Has Higher Yield Potential 20 MSR HAVE POSIT IVE Y IELD; PAYER SWAPS HAVE NEGATIVE Y IELD Capital Asset/ Liability Yield(1) Duration (years) Change per 1 basis point shift in rates Agency RMBS $100 $900 2.30% 4.9 $441 Agency Repo $798 (0.75%) - - 5-year Swaps $882 (0.70%) (5.0) ($
Slide 21: Higher Yield of MSR Portfolio is Not Free
Higher Yield of MSR Portfolio is Not Free 21 A PORTFOLIO OF RMBS + MSR IS MORE NEGATIVELY CONVEX… 1) Graph illustrates the impact of a theoretical instantaneous and parallel shift in interest rates to the portfolios detailed on slide 20. Note: The above scenarios are intended to illustrate the poten
Slide 22: MSR Portfolio Generates More Revenue
MSR Portfolio Generates More Revenue 22 …BUT OUTPERFORMS AN RMBS + SWAPS PORTFOLIO IN MOST SCENARIOS OVER T IME 1) Graph illustrates the impact of a theoretical immediate parallel shift in interest rates held constant for one year to the portfolios detailed on slide 20. Note: The above scenarios are
Slide 23: Enhanced MSR Portfolio Outperforms
Enhanced MSR Portfolio Outperforms 23 …EXCESS REVENUE CAN BE USED TO PURCHASE SWAPTIONS THAT CAN HEDGE THE NEGATIVE RETURNS IN THE -100 SCENARIO 1) Graph illustrates the impact of a theoretical immediate parallel shift in interest rates held constant for one year to the portfolios detailed on slide
Slide 24: MSR Portfolio Has Less Basis Risk
MSR Portfolio Has Less Basis Risk 24 THE “RMBS + SWAPS” PORTFOLIO IS EXPOSED TO CHANGES IN THE BASIS; THE “RMBS + MSR” PORTFOL IO IS HEDGED WITH RESPECT TO BASIS CHANGES 1) Graph illustrates the impact of a theoretical instantaneous shift in the mortgage basis to the portfolios detailed on slide 20.
Slide 25: Portfolio With MSR Has Lower Leverage
Portfolio With MSR Has Lower Leverage 25 MSR HAVE POSIT IVE Y IELD; PAYER SWAPS HAVE NEGATIVE Y IELD • It’s better to get paid to hedge instead of paying to hedge RMBS & SWAPS PORTFOLIO RMBS & MSR PORTFOLIO 1) Illustrative market yields/returns as of October 11, 2016. Such yields/returns do not take
Slide 26: Conclusion
26 Conclusion 1) Illustrative returns reflective of a duration neutral position. For more details, see slide 20. Note: The above scenarios are intended to illustrate the potential benefits of hedging Agency RMBS with MSR. The numbers used in the scenarios above are hypothetical amounts and are not b
Slide 27: Closing Remarks
Closing Remarks 27 CONTACT INFORMATION Investor Relations 612-629-2500 investors@twoharborsinvestment.com
Slide 28: Two Harbors Investment Corp.
TWO HARBORS Investment Corp.
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