Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2022 Earnings Presentation
34 slides from Two Harbors Investment's earnings presentation, Feb 9, 2023
Slide 1: An Agency + MSR Mortgage REIT Fourth Quarter 2022 Earnings Call
An Agency + MSR Mortgage REIT Fourth Quarter 2022 Earnings Call FEBRUARY 9, 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 TIGHTENING MORTGAGE SPREADS DROVE INCREASE IN BOOK VALUE Portfolio(1) $14.7b Quarter-end Common Stock Economic Return Economic Book Value Dividend on Book Value(2) Debt-to-Equity(3) $17.72 $0.60 11.6% 6.3x Comprehensive Income Excluding Market- Earnings Available for Income Drive
Slide 4: Key Market Highlights
Key Market Highlights STRONG QUARTER FOR MBS PERFORMANCE AS INFLATION FEARS MODERATE I. RMBS PERFORMANCE REMAINS VOLATILE(1) II. RMBS SPREADS PEAKED IN OCTOBER THEN TIGHTENED(2) III. HIGHER COUPONS HAVE WIDER SPREADS(3) • Interest rate expectations have leveled off; market anticipates Fed Funds Rate
Slide 5: Book Value Summary
Book Value Summary Q4-2022 YTD-2022 Q4-2022 Book Value YTD-2022 Book Value ($ millions, except per share data) Book Value per share Book Value per share • Book value of $17.72 per Beginning common stockholders’ equity $ 1,418.2 $ 16.42 $ 2,017.7 $ 23.47 common share, resulting in an Earnings Availab
Slide 6: Results and Return Contributions
Results and Return Contributions Market-Driven Value Changes Other Total and Nonrecurring Income Excluding GAAP Net Income Comprehensive Comprehensive Operating Market-Driven ($ in thousands) (Loss) Income Income Expenses Value Changes(1) RMBS(2) RMBS (loss) income $ (263,686) $ 422,672 $ 158,986 $
Slide 7: Earnings Available for Distribution
Earnings Available for Distribution • Fourth quarter EAD reflects: ($ millions, except per share data) Q4-2022 Q3-2022 Variance ◦ Increased interest income due to higher rates on cash, Interest income $ 99.3 $ 94.4 $ 4.9 partly offset by decreased RMBS portfolio size Interest expense 115.6 83.4 (32.
Slide 8: Portfolio Yields and Financing Costs
Portfolio Yields and Financing Costs • Portfolio yield increased 31 bps to 4.92% primarily due to sales of lower coupon available-for-sale securities (AFS) with high unamortized premium, purchases of higher coupon AFS with lower unamortized premium, lower CPR experienced on AFS and higher proportion
Slide 9: Strong Balance Sheet and Liquidity Position
Strong Balance Sheet and Liquidity Position BALANCE SHEET AS OF DECEMBER 31, 2022 AGENCY RMBS • $8.2 billion of outstanding repurchase agreements with 20 counterparties • Weighted average days to maturity of 48 days 2019 2020 2021 2022 50.00 Average Repo Rate - SOFR (bps) (1) Agency RMBS $7.7 billio
Slide 10: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) LEVERAGE At December 31, 2022, $14.7 billion portfolio • Mortgage spread tightening resulted in lower portfolio leverage: shifted from “overweight” to a more “neutral” Includes $10.8 billion settled positions position ◦ Quarter-en
Slide 11: Specified Pools
Specified Pools QUARTERLY HIGHLIGHTS I. SPECIFIED POOL PORTFOLIO(1) Other, 8.4% • Mortgages reversed much of the widening experienced during the third and early part of the fourth quarter Investor, 7.9% ◦ Majority of portfolio allocated to 4.0% to 5.0% coupon specified 5.5+, 5 pools, which were the
Slide 12: Mortgage Servicing Rights
Mortgage Servicing Rights QUARTERLY HIGHLIGHTS I. MSR PORTFOLIO CHARACTERISTICS(1) • $166 billion UPB of conventional MSR offered in the fourth quarter, 12/31/2022 9/30/2022 bringing the 2022 full year total to just over $600 billion, a record Fair value ($ millions) $ 2,985 $ 3,022 annual amount Pr
Slide 13: Return Potential and Outlook
Return Potential and Outlook HISTORICALLY WIDE MORTGAGE SPREADS OFFER ATTRACTIVE OPPORTUNITIES BUT RISKS REMAIN PORTFOLIO INVESTED MARKET PROSPECTIVE MARKET RETURNS CAPITAL VALUE STATIC MARKET As of December 31, 2022 ALLOCATED(1) ($ millions) RETURN ESTIMATE(2) RMBS + MSR MSR 2,985 PROSPECTIVE MARKE
Slide 14: Appendix
Appendix 14
Slide 15: 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) 2.0% $ 81.78 $ (600) $ — $ — $ (600) 2.5% $ 84.97 $ — $ — $ — $ — 3.0% $ 88.04 $ — $ — $ — $ — 3.5% $ 91.10 $ — $ — $ — $ — 4.0% $ 94.03 $ (400) $ 1
Slide 16: 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 -25 0 Bull Steepener(3) 3.3 % 0.5 % (3.9)% (0.1)% 0 -25 Bull Flattener(4) 5.0 % (2.2)% (3.8)% (1.0
Slide 17: Financial Performance
Financial Performance COMPREHENSIVE (LOSS) INCOME QUARTERLY ECONOMIC RETURN ON BOOK VALUE(1) $300 20% $150 10% $160.2 11.6% $0 0% $(60.3) (2.9)% $-150 $(90.4) (5.7)% (4.7)% $(128.6) -10% $-300 -20% (16.2)% $(287.8) Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q4-2021 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Compr
Slide 18: Q4-2022 Operating Performance
Q4-2022 Operating Performance Q4-2022 Earnings Available Realized Gains ($ millions, except for per common share data) for Distribution(1) (Losses) Unrealized MTM Total Interest income $ 99.3 $ — $ — $ 99.3 Interest expense 115.6 — — 115.6 Net interest income (16.3) — — (16.3) Loss on investment sec
Slide 19: Q3-2022 Operating Performance
Q3-2022 Operating Performance Q3-2022 Earnings Available Realized Gains ($ millions, except for per common share data) for Distribution(1) (Losses) Unrealized MTM Total Interest income $ 94.4 $ — $ — $ 94.4 Interest expense 83.4 — — 83.4 Net interest income 11.0 — — 11.0 Gain (loss) on investment se
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) December 31, 2022 September 30, 2022 Comprehensive income (loss) attributable to common stockholders $ 160,233 $ (287,808) Adjustment for ot
Slide 21: GAAP to Income Excluding Market-Driven Value Changes Reconciliation
GAAP to Income Excluding Market-Driven Value Changes Reconciliation Reconciliation of GAAP to non-GAAP Information Three Months Ended ($ thousands, except for per common share data) December 31, 2022 Comprehensive income (loss) attributable to common stockholders $ 160,233 Adjustments to exclude mar
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 4.0% 1,460 1,382 3.9 % 100.0 % 1,474 4.6 % 20 4.5% 3,087 3,006 5.9 % 100.0
Slide 23: 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% 299,221 $ 96,929 2.8% $ 382 2
Slide 24: Mortgage Servicing Rights UPB Roll-Forward
Mortgage Servicing Rights UPB Roll-Forward $ millions Q4-2022 Q3-2022 Q2-2022 Q1-2022 Q4-2021 UPB at beginning of period $ 206,614 $ 227,074 $ 229,416 $ 193,771 $ 194,394 Bulk purchases of mortgage servicing rights — — — 37,197 3,214 Flow purchases of mortgage servicing rights 2,678 4,449 5,720 7,94
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 $ 2,691.2 $ — $ — $ — $ 2,691.2 25.9 % 30 to 59 days 2,160.7 — — — 2,160.7 20.8 % 60 to 89 days
Slide 26: Futures
Futures Weighted Notional Amount Carrying Value Average Days to Type & Maturity ($M) ($M)(1) Expiration U.S. Treasury futures - 2 year $ (562) $ — 95 U.S. Treasury futures - 5 year (3,856) — 95 U.S. Treasury futures - 10 year (2,397) — 90 U.S. Treasury futures - 20 year 101 — 90 Federal Funds future
Slide 27: Tax Characterization of Dividends in 2022
Tax Characterization of Dividends in 2022 FULL YEAR 2022 DISTRIBUTIONS SUMMARY • Generated REIT taxable income, before dividend distributions and net operating loss deductions, of $625.7 million in 2022 • 2022 distributions for tax purposes totaled $289.1 million ◦ $289.1 million consists of distrib
Slide 28: End Notes
End Notes PAGE 3 - Financials Overview 1. Includes $10.8 billion in settled positions and $3.9 billion net TBA position, which represents the bond equivalent value of the company’s TBA position. Bond equivalent value is defined as notional amount multiplied by market price. Accounted for as derivati
Slide 29: End Notes (continued)
End Notes (continued) PAGE 7 - Earnings Available for Distribution 1. MSR amortization refers to the portion of change in fair value of MSR primarily attributed to the realization of expected cash flows (runoff) of the portfolio, which is deemed a non-GAAP measure due to the company’s decision to ac
Slide 30: End Notes (continued)
End Notes (continued) PAGE 10 - Quarterly Activity and Portfolio Composition 1. For additional detail on the portfolio, see Appendix slides 22 and 23. 2. Economic debt-to-equity is defined as total borrowings to fund RMBS, MSR and Agency Derivatives, plus the implied debt on net TBA cost basis and n
Slide 31: End Notes (continued)
End Notes (continued) PAGE 13 - Return Potential and Outlook 1. Capital allocated represents management’s internal allocation. Certain financing balances and associated interest expenses are allocated between investments based on management’s assessment of leverage ratios and required capital or liq
Slide 32: End Notes (continued)
End Notes (continued) PAGE 18 - Q4-2022 Operating Performance 1. Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see Appendix slide 20 for a definition of Earnings Available for Distribution and a reconciliation of GAAP to non-GAAP financial information. PAGE 19 - Q3-2022
Slide 33: End Notes (continued)
End Notes (continued) PAGE 22 - Agency RMBS Portfolio 1. Weighted average actual 1 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 im
Slide 34: Two Harbors Investment Corp.
Investment Corp. n [a ©) iw) [4 <x any jo) = i N
Two Harbors Investment — Q4 2022 Earnings Presentation on 6ix