Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2017 Earnings Presentation
29 slides from Two Harbors Investment's earnings presentation, Feb 6, 2018
Slide 1: Fourth Quarter 2017 Earnings Call
FEBRUARY 7, 2018 Fourth Quarter 2017 Earnings Call
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: Quarterly and Annual Summary
Quarterly and Annual Summary(1) • Generated Comprehensive Income of $65.7 million, or $0.38 per weighted average basic common share. • Reported book value of $16.31 per common share. • Reported Core Earnings of $81.3 million, or $0.47 per weighted average basic common share.(2) • Closed a 2-year, $3
Slide 4: Strategic Overview
Strategic Overview 4 Plan for 2017 Accomplishments in 2017 More focused business model - Reduced operating complexity and costs in 2017, following the discontinuation of the mortgage loan conduit business - Formed Granite Point to continue and expand on commercial real estate business; potential for
Slide 5: Two Harbors Going Forward
Two Harbors Going Forward 5 ü Deliver strong results and book value stability through a variety of rate environments Acute focus on Rates(1) and Credit(2) strategies – Leverage competitive advantages in MSR and legacy non-Agency RMBS Manage balance sheet composition to optimize earnings and stockhol
Slide 6: Book Value Roll-Forward
(Dollars in millions, except per share data) Q4-2017 Book Value Q4-2017 Book Value per share FY-2017 Book Value FY-2017 Book Value per share Beginning common stockholders’ equity $3,510.3 $20.12 $3,401.1 $19.56 Distribution of special dividend of Granite Point common stock (639.6) (639.6) 2,870.7 $1
Slide 7: Core Earnings Summary
(Dollars in millions, except per share data) Q3-2017 Q4-2017 Variance ($) Interest income $195.6 $195.1 ($0.5) Interest expense 99.0 94.8 4.2 Net interest income 96.6 100.3 3.7 Gain on investment securities — 0.7 0.7 (Loss) gain on swaps and swaptions (0.4) 2.0 2.4 Gain on other derivatives 2.8 2.8
Slide 8: Tax Characterization of Dividends
Tax Characterization of Dividends(1) 8 (1) The U.S. federal income tax treatment of holding Two Harbors common stock to any particular stockholder will depend on the stockholder’s particular tax circumstances. You are urged to consult your tax advisor regarding the U.S. federal, state, local and for
Slide 9: Optimizing Financing Profile and Capital Structure
Optimizing Financing Profile and Capital Structure 9 DEBT-TO-EQUITY • 5.9x at December 31, 2017; excluding the consolidation of Granite Point, the company’s debt-to-equity ratio would have been 5.8x at September 30, 2017 • Maintain substantial liquidity to opportunistically take advantage of market
Slide 10: Portfolio Composition
HISTORICAL CAPITAL ALLOCATIONPORTFOLIO COMPOSITION(1) Portfolio Composition 10 $22.4 BILLION PORTFOLIO AS OF DECEMBER 31, 2017 (1) For additional detail on the portfolio, see Appendix slides 21-25. (2) MSR includes Ginnie Mae buyout residential mortgage loans. (3) Assets in “Rates” include Agency RM
Slide 11: Portfolio Performance
Portfolio Performance 11 Q4-2017 PERFORMANCE SUMMARY (1) “Legacy” non-Agency securities includes non-Agency bonds issued up to and including 2009. “New issue” non-Agency securities includes bonds issued after 2009. (2) Cost of funds includes interest spread expense associated with the portfolio’s in
Slide 12: Rates Update
Rates Update 12 • Pairing MSR with Agency RMBS results in a portfolio that has higher return potential with lower mortgage spread risk – Mitigates adverse impact to book value in spread widening scenario • Opportunity to capitalize on Fed's tapering of RMBS • Expect attractive investment opportuniti
Slide 13: Protecting Book Value and Income
Protecting Book Value and Income 13 HEDGING ACROSS THE CURVE Curve Exposures Short end of the curve - income effect Long end of the curve - book value effect Income change to increasing rates Market value change to increasing rates Repo Fixed rate Agency RMBS LIBOR received on swaps MSR Non-Agency f
Slide 14: Credit Update
Credit Update 14 • Home prices continue to improve; CoreLogic Home Price Index up 6.6% on a rolling 12-month basis(1) – Home prices expected to increase 4-6% in 2018(2) – Supported by affordability, low housing supply and strong demand • Continued re-equification has potential to result in strong pe
Slide 15: Appendix
E oo ——— = Appendix TWO HARBORS: nt Corp.
Slide 16: Return on Book Value
Return on Book Value 16 (1) Return on book value for the three-month period ended December 31, 2017 is defined as the decrease in book value per common share from September 30, 2017 to December 31, 2017 of $3.81 per common share, plus the dividend declared of $0.47 per common share and the special d
Slide 17: Financial Performance
Book Value ($) Dividend Declared ($) $25.00 $20.00 $15.00 $10.00 Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 $19.56 $19.82 $19.74 $20.12 $16.31 $0.48 $0.50 $0.52 $0.52 Comp. Income ($M) Comp. Income ROACE (%) $150 $100 $50 $0 -$50 -$100 20% 10% 0% -10% -20% Q4-2016 Q1-2017 Q2-2017 Q3-2017 Q4-2017 $2.2 $
Slide 18: Q4-2017 Operating Performance
Q4-2017 Operating Performance Q4-2017 (In millions, except for per common share data) Core Earnings(1) Realized Gains (Losses) Unrealized MTM Total Interest income $195.1 $— $— $195.1 Interest expense 94.8 — — 94.8 Net interest income 100.3 — — 100.3 Total other-than-temporary impairment losses — —
Slide 19: Q3-2017 Operating Performance
Q3-2017 Operating Performance 19 (1) Core Earnings is a non-GAAP measure. Please see Appendix slide 20 of this presentation for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information. (2) For the six months ended December 31, 2017, Core Earnings excludes our con
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, 2017 December 31, 2017 Reconciliation of Comprehensive income to Core Earnings: Comprehensive income $161,601 $6
Slide 21: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics 21 AGENCY PORTFOLIO YIELDS AND METRICS AGENCY RMBS CPR(1) (1) Agency weighted average 3-month Constant Prepayment Rate (CPR) includes IIOs (or Agency Derivatives). (2) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price
Slide 22: Rates: Agency RMBS
Rates: Agency RMBS 22 As of December 31, 2017 Par Value ($M) Market Value ($M) % Prepay Protected(1) Amortized Cost Basis ($M) Weighted Average Coupon Weighted Average Age (Months) 30-Year fixed 3.0-3.5% $4,371 $4,510 95.9% $4,570 3.5% 13 4.0-4.5% 11,991 12,765 99.1% 12,812 4.2% 17 ≥ 5.0% 453 501 10
Slide 23: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) 23 As of September 30, 2017 As of December 31, 2017 Fair value ($M) $930.6 $1,086.7 Unpaid principal balance ($M) $88,789.8 $101,344.1 Weighted average coupon 3.9% 3.9% Original FICO score(2) 753 753 Original LTV 73% 74% 60+ day delinquencies 0.3% 0.5% Net servici
Slide 24: Credit: Non-Agency Securities Metrics
Credit: Non-Agency Securities Metrics 24 LEGACY NON-AGENCY PORTFOLIO COMPOSITIONNON-AGENCY PORTFOLIO YIELDS AND METRICS (1) Weighted average cost basis includes legacy non-Agency principal and interest securities only. Average purchase price utilized carrying value for weighting purposes. If current
Slide 25: Credit: Legacy Non-Agency Securities
Credit: Legacy Non-Agency Securities 25 As of December 31, 2017 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $1,790.5 $762.3 $2,552.8 % of non-Agency portfolio 70.1% 29.9% 100.0% Average purchase price(1) $57.57 $65.36 $59.89 Average coupon 2.8% 2.3% 2.6% Wei
Slide 26: Financing
Financing 26 (1) Weighted average of 7.8 months to maturity. (2) Includes FHLB advances of $0.4 billion with original maturities of 20 years. (3) Excludes FHLB membership and activity stock totaling $53.8 million. (4) Includes unsettled sales of available-for-sale securities included in due from cou
Slide 27: Interest Rate Swaps
Maturities Notional Amounts ($B)(1) Average Fixed Pay Rate(2) Average Receive Rate(2) Average Maturity Years(2) Payers 2018 $4.3 1.155% 1.508% 0.5 2019 5.5 1.767% 1.386% 1.8 2020 5.5 1.945% 1.509% 2.9 2021 2.4 1.788% 1.628% 3.9 2022 and after 5.2 1.764% 1.516% 6.4 $22.9 1.694% 1.493% 3.0 Maturities
Slide 28: Interest Rate Swaptions
Interest Rate Swaptions 28 Option Underlying Swap Swaption Expiration Cost ($M) Fair Value ($M) Average Months to Expiration Notional Amount ($M) Average Pay Rate Average Receive Rate Average Term (Years) Purchase Contracts: Payer <6 Months $21.4 $17.7 4.0 $7,200 2.27% 3M LIBOR 3.8 Receiver <6 Month
Slide 29: Two Harbors Investment Corp.
TWO HARBORS Investment Corp. AP vr Capa Managed Gonoany
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