Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2020 Earnings Presentation
28 slides from Two Harbors Investment's earnings presentation, Feb 9, 2021
Slide 1: Earnings Call
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: Strong Performance in a Repositioned Portfolio
Strong Performance in a Repositioned Portfolio Quarterly Summary Annual Summary Post-Quarter End Update
Slide 4: Quarterly and annual book value summary
• • • Beginning common stockholders’ equity $ 2,018.4 $ 7.37 $ 3,969.2 $ 14.54 Ending common stockholders’ equity $ 2,087.7 $ 7.63 $ 2,087.7 $ 7.63 Ending total equity $ 3,089.0 $ 3,089.0
Slide 5: Core Earnings summary
Core Earnings(1) 94.5 101.0 6.5 Core Earnings attributable to common stockholders(1) $ 75.6 $ 82.0 $ 6.4 Basic weighted average Core EPS $ 0.28 $ 0.30 Core Earnings annualized return on average common equity 15.7 % 15.9 % • ◦ ◦ ◦ ◦
Slide 6: Portfolio yield, cost of funds and net spread
Annualized portfolio yield(2) 2.42 % 2.26 % 2.23 % Annualized cost of funds(3) 0.64 % 0.50 % 0.50 % Annualized net spread for aggregate portfolio 1.78 % 1.76 % 1.73 % ◦ ◦
Slide 7: Financing Profile
Financing Profile BALANCE SHEET AS OF 12/31/2020 CONSERVATIVE LEVERAGE FOR AGENCY + MSR STRATEGY + Strong capital and liquidity position + $1.4 billion of unrestricted cash + Economic debt-to-equty of 6.8x at December 31, 2020, compared to 7.7x at September 30, 2020" + Average economic debt-to-equit
Slide 8: Balance sheet summary: assets, liabilities, equity
◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦ A ss e ts Total Assets $ 19,516 $ 19,494 $ (22) Li a b ili ti e s Total Liabilities $ 16,427 $ 16,680 $ 253 E q u it y Total Equity $ 3,089 $ 2,814 $ (275) R a ti o s
Slide 9: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION” PERFORMANCE COMMENTARY Return on book value of 5.8%) $21.8 billion portfolio + Spreads tightened in MBS as the Federal Reserve Includes $16.3 billion settled positions continued its purchases + Current coupon mortgages continue to b
Slide 10: Specified Pools
Specified Pools SPECIFIED POOL PERFORMANCE SPECIFIED POOL PORTFOLIO + Specified pools outperformed TBA on a relative basis in 3.0 through 4.0 coupons + Specified pool prepayment speeds continue to be slower and more stable than TBA speeds Loan Balance! + Expect that while prepayments may remain elev
Slide 11: Mortgage Servicing Rights
Mortgage Servicing Rights A 4Q-2020 MSR PORTFOLIO ACTIVITY MSR —EeE— Settled $23.0 billion UPB of MSR through flow-sale ” arrangements and an additional $20.4 billion UPB through bulk purchases + Experienced $22.5 billion UPB runoff in the fourth quarter + Grew portfolio UPB balance year-over-year i
Slide 12: Agency + MSR Advantage
Market Value ($ in billions) Agency + MSR Advantage EFFECTIVE COUPON POSITIONING 77 T 7 . = “ 2 2 =} 8 354 . 535 3.5 : 2 Z eS 2 + 0 0 a g 8 s s 35 4 2-35 B35 = 2 7 T T T T T T T T 7 T T T ™—T T T T 7 T T T T T T T T 15 20 25 3.0 35 40 4.5 5.0 15 2.0 25 3.0 35 4.0 4.5 5.0 15 20 25 3.0 35 40 4.5 5.0 C
Slide 13: Risk Positioning
Risk Positioning AGENCY + MSR DELIVERS BOOK VALUE STABILITY + Interest rate and curve exposure remains low and in line with historical positioning + MSR/IO position duration offsets RMBS/TBA duration + In a 25 basis point parallel shift up in rates, potential book value increase of 0.6% + In a 25 ba
Slide 14: Special Topic: Stability of Agency + MSR Returns
Special Topic: 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
Slide 15: Portfolio expected annualized returns
P or tfo lio Expected Annualized Returns (%) RMBS (TBA) / MSR RMBS (Pools) / MSR RMBS (TBA) / Swaps RMBS (Pools) / Swaps 0 5 10 15
Slide 16: — «fs oe DT ee
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Slide 17: Financial Performance
Financial Performance COMPREHENSIVE INCOME (LOSS) QUARTERLY RETURN ON BOOK VALUE” $1,000 200% 40% 4 20% + 12.1% — $0 1.5% E 0% 0% A (1.0)% $-1,000 -20% ~ -200% -40% ~ $-2,000 (225.2)% “60% + (52.1)% $-3,000 r T T T T -400% -80% T T T T T Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q4-2019 —Q1-2020—Q2-20
Slide 18: Q4 net income and Core Earnings reconciliation
Net income (loss) 101.0 114.8 (4.6) 211.2 Net income (loss) attributable to common stockholders $ 82.0 $ 114.8 $ (4.6) $ 192.2
Slide 19: Full year net income and Core Earnings reconciliation
Net income (loss) 94.5 209.5 (102.1) 201.9 Net income (loss) attributable to common stockholders $ 75.6 $ 209.5 $ (102.1) $ 183.0
Slide 20: Comprehensive income, net income and Core Earnings
Comprehensive income attributable to common stockholders $ 219,180 $ 113,481 Net income attributable to common stockholders $ 182,964 $ 192,220 Core Earnings attributable to common stockholders(1) $ 75,571 $ 82,007
Slide 21: Portfolio Metrics
Portfolio Metrics 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% MSR CPR AGENCY RMBS CPR ] 27.0% 7 23.1% | 19.9% | 14.3% | a 12.3% Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 50.0% > 41.5% 41.2% 40.0% | 35.6% 30.0% + | 20.8% 19.9% 20.0% | 10.0% ] LJ 0.0% Q4-2019 Q1-2020 Q2-2020 Q3-2020 Q4-2020 1) Agency weight
Slide 22: Agency RMBS and TBA positions
30-Year fixed Other P&I(2) IOs and IIOs(3) Total Agency RMBS $ 17,071 $ 14,699 96.7 % $ 14,070 TBA Positions Net TBA position $ 5,197 $ 5,481
Slide 23: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) 23 Number of Loans Unpaid Principal Balance ($ in millions) % Fannie Mae Gross Weighted Average Coupon Rate Weighted Average Loan Age (months) Weighted Average Original FICO(2) Weighted Average Original LTV 60+ Day Delinquencies 3-Month CPR Net Servicing Fee (b
Slide 24: Financing
Financing a mil Within 30 days $ 5,370.5 $ —$ —$ =$ 5,370.5 33.3% 30 to 59 days 4,292.9 = = = 4,292.9 26.6% 60 to 89 days 2,062.2 _ _ _ 2,062.2 12.8% 90 to 119 days 1,610.2 _ - _ 1,610.2 10.0% 120 to 364 days 1,808.1 60.0 ai an 1,868.1 11.6% One to three years — 223.8 — 286.2 510.0 3.2% Three to fiv
Slide 25: Interest Rate Swaps
Interest Rate Swaps INTEREST RATE SWAPS Ay Vlaturit Maturitie Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate e Payers 2021 $ = =e =% 0.0 2022 74 0,042 % 0.090 % 17 2023, 23 0.023 % 0.090 % 25 2024 = —% —% om 2025 and after 1.5 0.257 % 0.090 % 6.5 25 Average Fixed Receive Average M
Slide 26: Swaptions
Swaption Expiration Cost ($M) Fair Value ($M) Average Months to Expiration Notional Amount ($M) Average Pay Rate Average Receive Rate Average Term (Years)
Slide 27: Tax Characterization of Dividends in 2020
Tax Characterization of Dividends in 2020 FULL YEAR 2 DIVIDEN MMARY + Generated estimated REIT taxable loss of $640.5 million in 2020 largely resulting from the realized losses on the termination of swap positions designated as debt hedges for tax purposes. + 2020 distribution declarations for tax p
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