Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q2 2018 Earnings Presentation
29 slides from Two Harbors Investment's earnings presentation, Aug 7, 2018
Slide 1: Second Quarter 2018 Earnings Call
Second Quarter 2018 Earnings Call AUGUST 8, 2018
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 Summary
Quarterly Summary STRONG QUARTER HIGHLIGHTED BY GROWTH IN BOOK VALUE AND CORE EARNINGS • Reported book value of $15.69 per common share, representing a 3.4% total quarterly return on book value(1) • Generated Comprehensive Income of $90.8 million, or $0.52 per weighted average basic common share • R
Slide 4: Acquisition of CYS Investments, Inc.
Acquisition of CYS Investments, Inc. TRANSACTION SUMMARY • For each share of CYS common stock owned, CYS common stockholders received (i) 0.4680 newly issued shares of Two Harbors common stock and (ii) cash consideration of $0.0965 – As an illustrative example, a CYS stockholder holding 1,000 shares
Slide 5: Two Harbors Strategic Overview
Two Harbors Strategic Overview KEY DIFFERENTIATING FACTORS P Utilize a variety of instruments to hedge interest rate exposure P Strategy of pairing MSR with Agency RMBS P Unique portfolio of discounted legacy non-Agency securities AREAS OF FOCUS IN 2018 Acute focus on Rates(1) and Credit(2) strategi
Slide 6: Book Value
Book Value Q2-2018 YTD-2018 Q2-2018 Book Value YTD-2018 Book Value (Dollars in millions, except per share data) Book Value per share Book Value per share Beginning common stockholders’ equity $2,741.4 $15.63 $2,845.1 $16.31 Comprehensive GAAP Net Income: Income (GAAP) Core Earnings, net of tax(1) 91
Slide 7: Core Earnings Summary
Core Earnings Summary(1) Q1-2018 Q2-2018 Variance ($) (Dollars in millions, except per share data) • Core Earnings, including dollar roll Interest income $194.0 $187.3 ($6.7) income, of $0.09, was $0.53 per Interest expense 96.6 108.4 (11.8) weighted average basic common share, Net interest income 9
Slide 8: Optimizing Financing Profile and Capital Structure
Optimizing Financing Profile and Capital Structure DEBT-TO-EQUITY • 5.3x debt-to-equity at June 30, 2018(1) • Economic debt-to-equity, which includes to-be-announced (“TBA”) position, of 6.2x at June 30, 2018, compared to 6.0x at March 31, 2018(2) • Maintain substantial liquidity to opportunisticall
Slide 9: Portfolio Composition
Portfolio Composition PORTFOLIO COMPOSITION(1) HISTORICAL CAPITAL ALLOCATION $20.8 BILLION PORTFOLIO AS OF JUNE 30, 2018 June 30, March 31, June 30, 2017 2018 2018 Non-Agency $3.5b Rates(2) 54% 69% 68% MSR $1.5b Credit(3) 28% 31% 32% Rates(3) Commercial(4) 18% —% —% $10,766 Agency $15.8b Rates(2) $1
Slide 10: Portfolio Performance
Portfolio Performance DRIVING SUPERIOR PORTFOLIO PERFORMANCE Q2-2018 PERFORMANCE SUMMARY PORTFOLIO METRICS • Overall portfolio performance benefitted from floating- rate coupons on non-Agency securities, the LIBOR side March 31, June 30, Three Months Ended 2018 2018 of swaps and MSR float income Ann
Slide 11: Rates Update
Rates Update STRATEGY OF PAIRING MSR WITH AGENCY RMBS IS DISTINGUISHING FACTOR AGENCY RMBS ACTIVITY • Allocated capital from Agency pools into TBAs • Continued to add exposure to Fannie Mae TBA 4.5’s due to attractiveness of coupon – Roll for this coupon traded special most of the quarter, with impl
Slide 12: Protecting Book Value and Income
Protecting Book Value and Income • Active management of risk positioning leads to stability in returns through periods of market volatility HEDGING ACROSS THE CURVE Book value exposure to changes in rates(1) Net income exposure to changes in rates(2) +25 basis points (0.7%) +25 basis points (0.1%) +
Slide 13: Credit Update
Credit Update UNIQUE NON-AGENCY PORTFOLIO DRIVES ATTRACTIVE TOTAL RETURNS • Non-Agency securities holdings of $3.5 billion; primarily positioned in deeply discounted legacy subprime non-Agency RMBS with LIBOR floating rate coupons • Increased holdings of low dollar priced legacy non-Agencies by appr
Slide 14: Portfolio Considerations for Acquisition of CYS Investments, Inc.
Portfolio Considerations for Acquisition of CYS Investments, Inc. REDEPLOYING CAPITAL AND MAINTAINING LOW LEVEL OF RISK • Redeploying capital from 100% Agency assets acquired in merger into our targeted asset mix • Prior to acquisition, portfolio allocation of about 70% to Rates and 30% to Credit •
Slide 15: “Se ee Te To
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Slide 16: Return on Book Value
Return on Book Value Return on common book value Q2-2018 (Per common share amounts, except for percentage) Book value at March 31, 2018 $15.63 Book value at June 30, 2018 15.69 Increase in book value 0.06 Dividend declared in Q2-2018 0.47 Return on book value Q2-2018 $0.53 Percent return on book val
Slide 17: Financial Performance
Financial Performance COMPREHENSIVE INCOME (LOSS) BOOK VALUE AND DIVIDEND PER COMMON SHARE(1) 18.5% $150 20% $25.00 13.1% 9.9% $100 8.5% 10% $161.6 $20.00 $0.52 $0.52 $50 $85.9 $90.8 $4.14(2) $65.7 (3.3)% 0% $0.47 $0.47 $0 $20.12 $(23.7) $15.00 $19.74 -10% $16.31 -$50 $15.63 $15.69 $10.00 -$100 -20%
Slide 18: Q2-2018 Operating Performance
Q2-2018 Operating Performance Q2-2018 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $187.3 $— $— $187.3 Interest expense 108.4 — — 108.4 Net interest income 78.9 — — 78.9 Total other-than-te
Slide 19: Q1-2018 Operating Performance
Q1-2018 Operating Performance Q1-2018 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $194.0 $— $— $194.0 Interest expense 96.6 — — 96.6 Net interest income 97.4 — — 97.4 Total other-than-temp
Slide 20: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation(1) Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended (In thousands, except for per common share data) March 31, 2018 June 30, 2018 Reconciliation of Comprehensive income to Core Earnings: Comprehensive (loss) income attributable
Slide 21: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics AGENCY PORTFOLIO YIELDS AND METRICS AGENCY PORTFOLIO COMPOSITION Hybrid ARMs and Realized At March 31, Realized At June 30, IO & Inverse IO Other Portfolio Yield Q1-2018 2018 Q2-2018 2018 30-Year Fixed 1.7% 1.5% 5% & above Agency yield 3.1% 3.2% 3.0% 3.1% 1.9% Repo and FHL
Slide 22: Rates: Agency RMBS
Rates: Agency RMBS Weighted % Prepay Amortized Cost Weighted Average Average Age As of June 30, 2018 Par Value ($M) Market Value ($M) Protected(1) Basis ($M) Coupon (Months) 30-Year fixed 3.0-3.5% $3,111 $3,106 100.0% $3,265 3.5% 20 4.0-4.5% 11,548 11,949 100.0% 12,314 4.2% 22 ≥ 5.0% 272 296 100.0%
Slide 23: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) As of March 31, 2018 As of June 30, 2018 Fair value ($M) $1,301.0 $1,450.3 Unpaid principal balance ($M) $111,703.2 $119,531.6 Weighted average coupon 4.0% 4.0% Original FICO score(2) 752 752 Original LTV 74% 74% 60+ day delinquencies 0.5% 0.4% Net servicing sprea
Slide 24: Credit: Non-Agency Securities Metrics
Credit: Non-Agency Securities Metrics NON-AGENCY PORTFOLIO YIELDS AND METRICS LEGACY NON-AGENCY PORTFOLIO COMPOSITION Realized At March Realized At June 30, Portfolio Yield Q1-2018 31, 2018 Q2-2018 2018 Non-Agency: Loan Type March 31, 2018 June 30, 2018 Non-Agency yield 8.0% 7.6% 8.1% 7.5% Sub-prime
Slide 25: Credit: Legacy Non-Agency Securities
Credit: Legacy Non-Agency Securities As of June 30, 2018 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $2,282.5 $842.9 $3,125.4 % of non-Agency portfolio 73.0% 27.0% 100.0% Average purchase price(1) $59.62 $65.28 $61.15 Average coupon 3.1% 2.8% 3.0% Weighted a
Slide 26: Financing
Financing $ in millions Repurchase Revolving Credit Total Outstanding Outstanding Borrowings and Maturities(1) Agreements FHLB Advances Facilities Convertible Notes Borrowings Percent (%) Within 30 days $ 2,852.2 $ — $ — $ — $ 2,852.2 15.4% 30 to 59 days 3,614.2 — — — 3,614.2 19.5% 60 to 89 days 3,8
Slide 27: Interest Rate Swaps
Interest Rate Swaps Average Maturity Maturities Notional Amounts ($B)(1) Average Fixed Pay Rate(2) Average Receive Rate(2) Years(2) Payers 2018 $2.0 1.289% 2.318% 0.4 2019 4.4 1.769% 2.358% 1.3 2020 2.9 1.785% 2.327% 2.3 2021 2.4 1.788% 2.339% 3.4 2022 and after 6.5 2.407% 2.345% 8.0 $18.2 1.926% 2.
Slide 28: Interest Rate Swaptions
Interest Rate Swaptions Option Underlying Swap Average Notional Average Average Cost Fair Value Months to Amount Average Pay Receive Term Swaption Expiration ($M) ($M) Expiration ($M) Rate Rate (Years) Purchase Contracts: Payer <6 Months $9.7 $10.7 0.8 $2,545 2.91% 3M LIBOR 5.9 Sale Contracts: Payer
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