Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2021 Earnings Presentation
33 slides from Two Harbors Investment's earnings presentation, Feb 10, 2022
Slide 1: An Agency + MSR Mortgage REIT: Fourth Quarter 2021 Earnings Call
An Agency + MSR Mortgage REIT Fourth Quarter 2021 Earnings Call FEBRUARY 10, 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 Overall Performance Driven by Spread Widening Quarterly Summary • Reported book value of $5.87 per common share, representing a (5.6)% quarterly return on book value(1) • Generated Comprehensive Loss of $128.6 million, representing an annualized return on average common equity of
Slide 4: Key Market Highlights
Key Market Highlights ACCELERATED TAPER ON THE PATH TO HIGHER INTEREST RATES • In response to inflationary pressures and tight labor market, I. HIGHER RATES AND FLATTER YIELD CURVE(1) the Federal Reserve communicated an accelerated timeline to remove monetary accommodation • The Fed moved its median
Slide 5: Looking Ahead
Looking Ahead SLOWER PREPAYMENT SPEEDS ON THE HORIZON • Realized prepayment speeds in 2021 were much faster than I. FEWER REFINANCEABLE MORTGAGES(1) expected due to home price appreciation, increased use of property inspection waivers, remote notarization, and program changes by the FHFA • Looking f
Slide 6: Book Value Summary
Book Value Summary Q4-2021 YTD-2021 • Book value of $5.87 per Q4-2021 Book Value YTD-2021 Book Value common share, resulting in ($ millions, except per share data) Book Value per share Book Value per share a (5.6)% quarterly return on book value(2) Beginning common stockholders’ equity $ 2,008.6 $ 6
Slide 7: Earnings Available for Distribution and Portfolio Yield
Earnings Available for Distribution and Portfolio Yield • Fourth quarter EAD reflects: ($ millions, except per share data) Q3-2021 Q4-2021 Variance ◦ Lower interest income on lower RMBS balances, Interest income $ 36.0 $ 33.0 $ (3.0) partially offset by a decline in RMBS and MSR Interest expense 21.
Slide 8: Financing Profile
Financing Profile BALANCE SHEET AS OF DECEMBER 31, 2021 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 OIS / SOFR remains low Agency RMBS
Slide 9: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) PORTFOLIO ACTIVITY At December 31, 2021, $13.6 billion portfolio • In anticipation of wider spreads caused by a more active Fed, sold RMBS in early December, reducing leverage to 4.7x from Includes $9.4 billion settled positions 6
Slide 10: Specified Pools
Specified Pools SPECIFIED POOL PERFORMANCE I. SPECIFIED POOL PORTFOLIO(1) • High coupon specified pools underperformed, reversing the spread tightening that occurred during the third quarter ◦ Loan balance 3.5% coupon were particularly impacted as market expectations of burnout were delayed further
Slide 11: Mortgage Servicing Rights
Mortgage Servicing Rights MSR PORTFOLIO PERFORMANCE I. MSR PORTFOLIO(1) • Portfolio growth was flat with new volume replacing run-off 9/30/2021 12/31/2021 ◦ Maintained strong market share position notwithstanding Fair value ($ millions) $ 2,213 $ 2,192 flow volume decline as refinancing activity slo
Slide 12: Special Topic: Sourcing Mortgage Servicing Rights
Special Topic: Sourcing Mortgage Servicing Rights DIVERSIFIED ACQUISITION THROUGH FLOW AND BULK CHANNELS Took advantage of robust market activity in 2021 to grow the I. FLOW CHANNEL: MARKET LEADER(1) portfolio by $15.9 billion, offsetting the impact of fast TOP TEN BUYERS prepayments FLOW CHANNEL •
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 -0.8% for a 25 bps decline and -0.6% for a 25 bps increase ◦
Slide 15: Two Harbors Outlook
Two Harbors Outlook OPPORTUNITY SET IN TARGET ASSETS REMAINS ATTRACTIVE TODAY • The paired MSR construction remains the most attractive opportunity to deploy capital with returns in the low double digits • Lower coupon mortgages widened sharply after quarter end and returns are now in the high singl
Slide 16: Appendix
Appendix 16
Slide 17: Financial Performance
Financial Performance COMPREHENSIVE INCOME (LOSS) QUARTERLY RETURN ON BOOK VALUE(1) DIVIDEND YIELD(2) BOOK VALUE AND DIVIDEND PER COMMON SHARE(2) 17
Slide 18: 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 sec
Slide 19: Q3-2021 Operating Performance
Q3-2021 Operating Performance Q3-2021 Earnings Available Realized Gains ($ millions, except for per common share data) for Distribution(1) (Losses) Unrealized MTM Total Interest income $ 36.0 $ — $ — $ 36.0 Interest expense 21.9 — — 21.9 Net interest income 14.1 — — 14.1 Gain on investment securitie
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) September 30, 2021 December 31, 2021 Comprehensive income (loss) attributable to common stockholders $ 45,226 $ (128,594) Adjustment for oth
Slide 21: Portfolio Metrics
Portfolio Metrics AGENCY RMBS CPR(1) AGENCY PORTFOLIO COMPOSITION (2) MSR CPR 21
Slide 22: 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 $ 1,244 $ 1,271 5.9 % —% $ 1,272 3.3 % 3 3.0% 1,317 1,384 9.6
Slide 23: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Gross Weighted Weighted Unpaid Principal Weighted Weighted Average Average Average Weighted Number of Balance Average Loan Size(2) Loan Age Original Average 60+ Day Net Servicing Loans ($ millions) Coupon Rate ($ thousands) (months) FICO(3) Original LTV Delinqu
Slide 24: Mortgage Servicing Rights Portfolio UPB Roll-Forward
Mortgage Servicing Rights Portfolio UPB Roll-Forward MSR ROLL-FORWARD: Q4-2021 MSR ROLL-FORWARD: FULL YEAR 2021 *Includes recapture 24
Slide 25: 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 $ 1,627.3 $ — $ — $ 143.7 $ 1,771.0 19.9 % 30 to 59 days 1,807.5 — — — 1,807.5 20.3 % 60 to 89
Slide 26: 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 0.420 % 0.070 % 0.7 2023 2.6 0.113 % 0.068 % 1.5 2024 — —% —% — 2025 0.4 1.030 % 0.050 % 4.0 2026 and Thereafter 2.8 0.652 % 0
Slide 27: Futures
Futures FUTURES Weighted Notional Amount Carrying Value Average Days to Type & Maturity ($ thousands) ($ thousands) Expiration U.S. Treasury futures - 10 year $ 687,900 $ 1,809 90 Eurodollar futures - 3 month < 1 year (3,582,000) 15,121 213 > 1 and < 2 years (2,269,500) 14,952 560 > 2 and < 3 years
Slide 28: Tax Characterization of Dividends in 2021
Tax Characterization of Dividends in 2021 FULL YEAR 2021 DISTRIBUTION SUMMARY • Generated estimated REIT taxable income of $63.9 million in 2021 • 2021 distribution declarations for tax purposes totaled $256.2 million – $256.2 million consists of distributions to common shares of $192.5 million ($0.
Slide 29: 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. Beginning in the th
Slide 30: End Notes (continued)
End Notes (continued) PAGE 8 - Financing Profile 1. Source: Bloomberg. 2. Balance of 5-year MSR term notes excludes deferred debt issuance costs. PAGE 9 - Quarterly Activity and Portfolio Composition 1. For additional detail on the portfolio, see Appendix slides 21-23. 2. Economic debt-to-equity is
Slide 31: End Notes (continued)
End Notes (continued) PAGE 13 - Agency + MSR Advantage 1. RMBS + MSR represents an internally calculated exposure of a synthetic TBA position and the current coupon equivalents of our MSR and Agency IO RMBS. 2. RMBS + RATES represents our investment portfolio after excluding the internally calculate
Slide 32: End Notes (continued)
End Notes (continued) PAGE 21 - Portfolio Metrics 1. Agency weighted average 3-month Constant Prepayment Rate (CPR) includes IIOs (or Agency Derivatives). 2. Other P&I includes 15-year fixed, Hybrid ARMs, CMO and DUS pools. PAGE 22 - Agency RMBS Portfolio 1. Weighted average actual 1 month annualize
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