Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q3 2023 Earnings Presentation
37 slides from Two Harbors Investment's earnings presentation, Oct 31, 2023
Slide 1: Third Quarter 2023 Earnings Call
An Agency + MSR REIT Third Quarter 2023 Earnings Call OCTOBER 31, 2023
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: Financials Overview
Financials Overview Book Value Common Stock Economic Return Comprehensive Dividend on Book Value(1) Loss $15.36 $(0.61) $0.45 (3.5)% Income Excluding Market- Portfolio(3) Quarter-end Driven Value Changes Economic (IXM)(2) $14.1b Debt-to-Equity(4) $0.51 6.3x Note: Financial data throughout this prese
Slide 4: RoundPoint Acquisition
RoundPoint Acquisition A TRANSFORMATIVE ACQUISITION AND DEFINITIVE COMMITMENT TO MSR Benefits for Stakeholders • In-house servicing results in: ◦ Significant cost savings over use of third party subservicers; and ◦ Receipt of cashflows associated with MSR, including late fees and ancillary income •
Slide 5: Markets Overview
Markets Overview I. QUARTERLY YIELD CURVE CHANGE(1) II. FED FUNDS RATE EXPECTATIONS(1) • Markets have embraced the soft landing and “higher for • The Federal Reserve left interest rates unchanged at longer” scenario as inflation has moderated while its September meeting, leading to higher expected e
Slide 6: Book Value Summary
Book Value Summary Q3-2023 Q3-2023 Book Value ($ millions, except per share data) Book Value per share Beginning common stockholders’ equity $ 1,576.5 $ 16.39 • Book value of $15.36 per common share, resulting in a (3.5)% quarterly Net income 306.2 economic return on book value(1) Other comprehensiv
Slide 7: Results and Return Contributions
Results and Return Contributions Market-Driven Value Changes Other Total and Certain Income Excluding Three Months Ended September 30, 2023 Comprehensive Comprehensive Operating Market-Driven ($ in thousands) GAAP Net Income Loss Loss Expenses(1)(2) Value Changes(3) (4) RMBS and other Agency securit
Slide 8: IXM Quarterly Review
IXM Quarterly Review Income Excluding Market-Driven Value Changes(1) ($ in thousands) Q3-2023 Q2-2023 Variance RMBS and other Agency securities (2) • Third quarter IXM RMBS and other Agency securities income $ 145,549 $ 142,725 $ 2,824 primarily impacted by: ◦ Net decrease in asset RMBS and other Ag
Slide 9: Strong Balance Sheet and Liquidity Position
Strong Balance Sheet and Liquidity Position BALANCE SHEET AS OF SEPTEMBER 30, 2023 AGENCY RMBS • $8.8 billion of outstanding repurchase agreements with 17 counterparties • Weighted average days to maturity of 99 days 2019 2020 2021 2022 2023 Average Repo Rate - SOFR (bps) (1) 50 Agency RMBS $8.8 bil
Slide 10: Market Conditions
Market Conditions CONTINUED CORRELATION AMONG HIGHER RATES, HIGHER VOLATILITY AND WIDER MORTGAGE SPREADS • Mortgage spreads widened in August and September as interest rates increased; current coupon nominal spreads widened 11 basis points to 151 basis points and option-adjusted spreads (OAS) increa
Slide 11: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) LEVERAGE AND RISK POSITIONING • Quarter-end economic debt-to-equity decreased slightly to At September 30, 2023, $14.1 billion portfolio 6.3x from 6.4x(3) Includes $12.0 billion settled positions ◦ Average economic debt-to-equity
Slide 12: Specified Pools
Specified Pools QUARTERLY HIGHLIGHTS I. SPECIFIED POOL PORTFOLIO(1) • Benefitted on a relative basis from a concentration in “upper Other, 18.6% belly” specified pools • Shifted up-in-coupon by moving $1.9 billion Fannie Mae 5% 6.0 5.5 TBA to 6-6.5% TBAs Investor, 4.3% 5 Loan Balance, 40.0% 4. 2. 5
Slide 13: Mortgage Servicing Rights
Mortgage Servicing Rights QUARTERLY HIGHLIGHTS I. MSR PORTFOLIO CHARACTERISTICS(1) • Completed acquisition of RoundPoint Mortgage Servicing LLC 9/30/2023 6/30/2023 ◦ Approximately two thirds of our MSR has been transferred Fair value ($ millions) $ 3,213 $ 3,274 from our subservicing network to Roun
Slide 14: Return Potential and Outlook
Return Potential and Outlook ATTRACTIVE RETURN OPPORTUNITIES FOR UNIQUELY POSITIONED AGENCY RMBS AND MSR PORTFOLIO PORTFOLIO INVESTED PROSPECTIVE MARKET RETURNS MARKET VALUE CAPITAL STATIC MARKET As of September 30, 2023 ($ millions) ALLOCATED(1) RETURN ESTIMATE(2) • Market Presence: Our size allows
Slide 15: Appendix
Appendix 15
Slide 16: Effective Coupon Positioning
Effective Coupon Positioning TBA Market TBA Specified Pools MSR/Agency IO Coupon (%) Price(1) Notional ($m) Par Value ($m)(2) UPB ($m)(3) Combined ($m) 2.5% $ 79.41 $ — $ 429 $ — $ 429 3.0% $ 82.77 — 244 — 244 3.5% $ 86.04 300 79 — 379 4.0% $ 89.10 — 515 — 515 4.5% $ 91.87 189 2,823 — 3,012 5.0% $ 9
Slide 17: Risk Positioning
Risk Positioning BOOK VALUE EXPOSURE TO CHANGES IN RATES % Change in Common Book Value 2-Year Rate 10-Year Rate Agency P&I MSR/Agency IO (basis points) (basis points) RMBS/TBA RMBS(1) Other(2) Combined (3) -25 0 Bull Steepener 2.4 % 0.7 % (2.4)% 0.7 % (4) 0 -25 Bull Flattener 7.4 % (2.3)% (6.7)% (1.
Slide 18: Financial Performance
Financial Performance COMPREHENSIVE (LOSS) INCOME QUARTERLY ECONOMIC RETURN ON BOOK VALUE(1) $300 20% $160.2 11.6% $150 10% $31.5 2.2% $0 0% $(63.2) $(56.8) (3.6)% (3.5)% $-150 -10% $-300 -20% (16.2)% $(287.8) Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q3-2023 Comprehens
Slide 19: Comparison of GAAP and non-GAAP Measures
Comparison of GAAP and non-GAAP Measures Earnings Available Income Excluding Comprehensive for Distribution Market-Driven Value ($ in thousands) Income (EAD)(1) Changes (IXM)(2) RMBS and other Agency securities(3) Coupon income $ 114,170 $ 114,170 $ 114,170 Amortization (6,252) (6,252) (6,252) (4) R
Slide 20: GAAP to IXM Reconciliation
GAAP to IXM Reconciliation Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended ($ thousands, except for per common share data) September 30, 2023 June 30, 2023 Comprehensive (loss) income attributable to common stockholders $ (56,845) $ 31,478 (1) Adjustments to excl
Slide 21: Earnings Available for Distribution
Earnings Available for Distribution ($ millions, except per share data) Q3-2023 Q2-2023 Variance Interest income $ 123.6 $ 117.8 $ 5.8 • EAD is expected to continue to diverge from Interest expense 173.1 159.6 (13.5) ongoing earnings power(6) Net interest expense (49.5) (41.8) (7.7) ◦ EAD for assets
Slide 22: Q3-2023 Portfolio Yields and Financing Costs
Q3-2023 Portfolio Yields and Financing Costs ($ thousands) Average Portfolio Asset Type Measure Amortized Cost Income(1) Average Yield Available-for-sale securities GAAP $ 9,284,380 $ 107,827 4.65% Adjustments to include other portfolio items: Mortgage servicing rights(2)(3) Non-GAAP 2,029,201 59,27
Slide 23: 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, 2023 June 30, 2023 Comprehensive (loss) income attributable to common stockholders $ (56,845) $ 31,478 Adjustment for other co
Slide 24: 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% $ 428 $ 341 4.6 % —% $ 365 3.3 % 27 3.0% 243 202 2.6 % 85.4 % 215 3.
Slide 25: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Unpaid Principal Current Loan Number of Balance Gross Coupon Size Loan Age 60+ Day Net Servicing Loans ($ millions) Rate ($ thousands) (months) Original FICO(2) Original LTV Delinquencies 3-Month CPR Fee (bps) 30-Year Fixed < 3.25% 302,169 $ 96,221 2.8% $ 376 3
Slide 26: Mortgage Servicing Rights UPB Roll-Forward
Mortgage Servicing Rights UPB Roll-Forward $ millions Q3-2023 Q2-2023 Q1-2023 Q4-2022 Q3-2022 UPB at beginning of period $ 222,622 $ 212,445 $ 204,877 $ 206,614 $ 227,074 Bulk purchases of mortgage servicing rights — 14,234 10,713 — — Flow purchases of mortgage servicing rights 472 539 669 2,678 4,4
Slide 27: 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 $ 1,717.6 $ — $ — $ — $ 1,717.6 15.5 % 30 to 59 days 1,129.0 — — — 1,129.0 10.2 % 60 to 89 days
Slide 28: Futures
Futures Weighted Notional Amount Carrying Value Average Days to Type & Maturity ($M) ($M)(1) Expiration U.S. Treasury futures - 5 year $ (2,868) $ — 96 U.S. Treasury futures - 10 year (2,075) — 90 U.S. Treasury futures - 20 year (335) — 90 SOFR futures < 1 year (1,843) — 239 > 1 and < 2 years (750)
Slide 29: 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 2023 $ — —% —% — 2024 — —% —% — 2025 2.6 4.730 % 5.310 % 1.5 2026 — —% —% — 2027 and Thereafter 3.1 3.570 % 5.310 % 8.7 $ 5.7 4.108 % 5.3
Slide 30: End Notes
End Notes PAGE 3 - Financials Overview 1. Economic 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. Income Ex
Slide 31: End Notes (continued)
End Notes (continued) PAGE 8 - IXM Quarterly Review 1. Income Excluding Market-Driven Value Changes, or IXM, is a non-GAAP measure. Please Appendix slide 20 for a definition of IXM and a reconciliation of GAAP to non-GAAP financial information. 2. RMBS and other Agency securities includes inverse in
Slide 32: End Notes (continued)
End Notes (continued) PAGE 13 - 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 33: End Notes (continued)
End Notes (continued) PAGE 18 - Financial Performance 1. Economic 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 the book value as of the beginning of the p
Slide 34: End Notes (continued)
End Notes (continued) PAGE 20 - GAAP to IXM Reconciliation 1. The market-driven value changes adjustment for each of RMBS and other Agency securities, MSR, swap and swaptions and TBA represents unexpected price changes for the referenced period. As defined, the calculation of IXM includes modeled pr
Slide 35: End Notes (continued)
End Notes (continued) PAGE 22 - Portfolio Yields and Financing Costs 1. Includes interest income, net of premium amortization/discount accretion, on Agency and non-Agency investment securities, servicing income, net of estimated amortization and servicing expenses, on MSR, and the implied asset yiel
Slide 36: End Notes (continued)
End Notes (continued) PAGE 24 - Agency RMBS Portfolio 1. Weighted average actual one-month CPR released at the beginning of the following month based on RMBS held as of the preceding month-end. 2. Determination of the percentage of prepay protected 30-year fixed Agency RMBS includes securities with
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