Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q1 2023 Earnings Presentation
37 slides from Two Harbors Investment's earnings presentation, May 2, 2023
Slide 1: An Agency + MSR Mortgage REIT First Quarter 2023 Earnings Call
An Agency + MSR Mortgage REIT First Quarter 2023 Earnings Call MAY 2, 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 Attractive Opportunities Ahead From Wide RMBS Spreads and Slow MSR Prepayment Speeds Portfolio(1) $15.8b Quarter-end Common Stock Economic Return Economic Book Value Dividend on Book Value(2) Debt-to-Equity(3) $16.48 $0.60 (3.6)% 6.5x Comprehensive Income Excluding Market- Earnin
Slide 4: Key Market Highlights
Key Market Highlights I. FEDERAL RESERVE RATE EXPECTATIONS(1) II. IMPACT OF INTEREST RATE CHANGES TO MSR MULTIPLES(2) • MSR cashflows are more complex than IO securities and • Financial markets were roiled in early March by banking consist of costs to service, float income, ancillary income regulato
Slide 5: Book Value Summary
Book Value Summary Q1-2023 Q1-2023 Book Value ($ millions, except per share data) Book Value per share • Book value of $16.48 per common Beginning common stockholders’ equity $ 1,531.2 $ 17.72 share, resulting in a (3.6)% quarterly Earnings Available for Distribution, net of tax(1) 20.6 economic ret
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 and other Agency securities(2) RMBS and other Agency sec
Slide 7: Comparison of GAAP and non-GAAP Measures
Comparison of GAAP and non-GAAP Measures Comprehensive Income, Excluding Realized, Unrealized Earnings Available Income Excluding Comprehensive and Nonrecurring for Distribution Market-Driven Value ($ in thousands) Income Expenses (EAD)(1) Changes (IXM)(2) RMBS and other Agency securities(3) Coupon
Slide 8: Earnings Available for Distribution
Earnings Available for Distribution ($ millions, except per share data) Q1-2023 Q4-2022 Variance Interest income $ 116.6 $ 99.3 $ 17.3 • First quarter EAD primarily driven by: Interest expense 142.5 115.6 (26.9) ◦ Increased interest income due to: (i) higher rates on cash and reverse repurchase agre
Slide 9: Portfolio Yields and Financing Costs
Portfolio Yields and Financing Costs • Portfolio yield increased 17 bps to 5.09% primarily due to sales of lower coupon Agency RMBS with high unamortized premium, purchases of higher coupon Agency RMBS with lower unamortized premium, lower experienced CPR on Agency RMBS and a higher proportion of th
Slide 10: Strong Balance Sheet and Liquidity Position
Strong Balance Sheet and Liquidity Position BALANCE SHEET AS OF MARCH 31, 2023 AGENCY RMBS • $8.6 billion of outstanding repurchase agreements with 19 counterparties • Weighted average days to maturity of 81 days 2019 2020 2021 2022 2023 50.00 Average Repo Rate - SOFR (bps) (1) Agency RMBS $8.7 bill
Slide 11: RMBS Market Conditions
RMBS Market Conditions ANTICIPATE THAT SUPPLY AND DEMAND FOR RMBS WILL RESULT IN SPREADS BEING WIDER FOR LONGER • Mortgage spreads narrowed early in the first quarter on lower volatility and higher demand for RMBS, but rapidly widened in March following the banking crisis, resulting in net underperf
Slide 12: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) LEVERAGE AND RISK POSITIONING • Quarter-end economic debt-to-equity increased slightly to 6.5x from At March 31, 2023, $15.8 billion portfolio 6.3x(2) Includes $12.1 billion settled positions ◦ Average economic debt-to-equity of 6
Slide 13: Specified Pools
Specified Pools QUARTERLY HIGHLIGHTS I. SPECIFIED POOL PORTFOLIO(1) • Mortgage performance was mixed across the coupon stack ◦ Low coupon 2.0% and 2.5% RMBS widened by around 5/8 of a point, driven primarily by supply concerns from the sale of 5.5 assets from seized bank portfolios +, 1 % .5 1.3 12
Slide 14: Mortgage Servicing Rights
Mortgage Servicing Rights QUARTERLY HIGHLIGHTS I. MSR PORTFOLIO CHARACTERISTICS(1) • $224 billion UPB of conventional MSR offered in the first quarter, 3/31/2023 12/31/2022 compared to $166 billion UPB in the fourth quarter 2022 Fair value ($ millions) $ 3,072 $ 2,985 • Settled $10.7 billion UPB of
Slide 15: Return Potential and Outlook
Return Potential and Outlook HISTORICALLY WIDE MORTGAGE SPREADS OFFER ATTRACTIVE OPPORTUNITIES BUT RISKS REMAIN PORTFOLIO INVESTED MARKET PROSPECTIVE MARKET RETURNS CAPITAL VALUE STATIC MARKET As of March 31, 2023 ALLOCATED(1) ($ millions) RETURN ESTIMATE(2) RMBS + MSR MSR 3,220 PROSPECTIVE MARKET R
Slide 16: Appendix
Appendix 16
Slide 17: 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% $ 82.60 $ — $ — $ — $ — 2.5% $ 86.18 — — — — 3.0% $ 89.64 — — — — 3.5% $ 92.84 — — — — 4.0% $ 95.58 353 535 — 888 4.5% $ 97.92 564 2,957 (46) 3
Slide 18: Risk Positioning
Risk Positioning BOOK VALUE EXPOSURE TO CHANGES IN RATES % Change in Common Book Value 2-Year Rate (basis 10-Year Rate Agency P&I MSR/Agency IO points) (basis points) RMBS/TBA RMBS(1) Other(2) Combined (3) -25 0 Bull Steepener 2.7 % 0.6 % (2.2)% 1.1 % (4) 0 -25 Bull Flattener 5.0 % (3.8)% (2.9)% (1.
Slide 19: Financial Performance
Financial Performance COMPREHENSIVE (LOSS) INCOME QUARTERLY ECONOMIC RETURN ON BOOK VALUE(1) $300 20% $160.2 11.6% $150 10% $0 0% $(60.3) $(63.2) (2.9)% (3.6)% $-150 $(90.4) (4.7)% -10% $-300 -20% (16.2)% $(287.8) Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q1-2022 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Compre
Slide 20: Q1-2023 Operating Performance
Q1-2023 Operating Performance Q1-2023 Earnings Available Realized Gains ($ millions, except for per common share data) for Distribution(1) (Losses) Unrealized MTM Total Interest income $ 116.6 $ — $ — $ 116.6 Interest expense 142.5 — — 142.5 Net interest income (25.9) — — (25.9) (Loss) gain on inves
Slide 21: 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 22: 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) March 31, 2023 December 31, 2022 Comprehensive (loss) income attributable to common stockholders $ (63,242) $ 160,233 Adjustment for other c
Slide 23: 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) March 31, 2023 December 31, 2022 Comprehensive (loss) income attributable to common stockholders $ (63,242) $ 160,233 Adjustments to exclude
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 4.0% $ 535 $ 516 4.1 % 100.0 % $ 541 4.6 % 40 4.5% 2,957 2,921 6.7 % 100.0
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% 296,930 $ 95,564 2.8% $ 379 2
Slide 26: Mortgage Servicing Rights UPB Roll-Forward
Mortgage Servicing Rights UPB Roll-Forward $ millions Q1-2023 Q4-2022 Q3-2022 Q2-2022 Q1-2022 UPB at beginning of period $ 204,877 $ 206,614 $ 227,074 $ 229,416 $ 193,771 Bulk purchases of mortgage servicing rights 10,713 — — — 37,197 Flow purchases of mortgage servicing rights 669 2,678 4,449 5,720
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 $ 1,713.3 $ — $ — $ — $ 1,713.3 15.5 % 30 to 59 days 1,558.5 — — — 1,558.5 14.1 % 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 - 2 year $ (1,530) $ — 97 U.S. Treasury futures - 5 year (2,021) — 97 U.S. Treasury futures - 10 year (1,005) — 91 U.S. Treasury futures - 20 year 183 — 91 Eurodollar futures
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 2024 $ — —% —% — 2025 — —% —% — 2026 2.6 4.730 % 4.870 % 2.0 2027 — —% —% — 2028 and Thereafter 2.7 3.510 % 4.870 % 6.5 $ 5.3 4.118 % 4.8
Slide 30: End Notes
End Notes PAGE 3 - Financials Overview 1. Includes $12.1 billion in settled positions and $3.7 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 31: End Notes (continued)
End Notes (continued) PAGE 7 - Comparison of GAAP and non-GAAP Measures 1. Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see Appendix slide 22 for a definition of EAD and a reconciliation of GAAP to non- GAAP financial information. 2. Income Excluding Market-Driven Value
Slide 32: End Notes (continued)
End Notes (continued) PAGE 9 - 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 yield
Slide 33: End Notes (continued)
End Notes (continued) PAGE 11 - RMBS Market Conditions 1. Represents universal mortgage-backed securities (UMBS) TBA spreads as of the dates noted. 2. Source: Mizuho projections. OAS numbers from Bloomberg Agency MBS Index Prepayment Model (BAM). PAGE 12 - Quarterly Activity and Portfolio Compositio
Slide 34: End Notes (continued)
End Notes (continued) PAGE 15 - 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 35: End Notes (continued)
End Notes (continued) PAGE 20 - Q1-2023 Operating Performance 1. Earnings Available for Distribution, or EAD, is a non-GAAP measure. Please see Appendix slide 22 for a definition of Earnings Available for Distribution and a reconciliation of GAAP to non-GAAP financial information. PAGE 21 - Q4-2022
Slide 36: End Notes (continued)
End Notes (continued) PAGE 24 - 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
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