Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q2 2022 Earnings Presentation
33 slides from Two Harbors Investment's earnings presentation, Aug 4, 2022
Slide 1: An Agency + MSR Mortgage REIT Second Quarter 2022 Earnings Call
An Agency + MSR Mortgage REIT Second Quarter 2022 Earnings Call AUGUST 4, 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 Continued Spread Widening Impacted Book Value but Results in Attractive Opportunities Quarterly Summary • Reported book value of $5.10 per common share, representing a (4.7)% quarterly return on book value(1) • Generated Comprehensive Loss of $90.4 million, representing an annuali
Slide 4: Acquisition of RoundPoint Mortgage Servicing
Acquisition of RoundPoint Mortgage Servicing DELIVERING LONG-TERM FINANCIAL AND STRATEGIC BENEFITS TO TWO HARBORS DETAILS ABOUT ROUNDPOINT (1) COMPLEMENTARY BUSINESS MODEL • Matrix Financial Services Corporation, a • Founded in 2007 • By vertically integrating a servicer as a wholly owned subsidiary
Slide 5: Key Market Highlights
Key Market Highlights HIGH INFLATION COMBINED WITH GROWING RECESSION RISK DRIVE ELEVATED VOLATILITY • Inflation continued to outpace expectations in the second I. MARKET EXPECTATIONS OF HIGHER INFLATION(1) quarter. The Consumer Price Index (CPI) grew at its fastest rate since 1981, with year-over-ye
Slide 6: Key Market Highlights
Key Market Highlights INVESTMENT OPPORTUNITIES AMID SPREAD WIDENING AND DIFFERENTIATED PERFORMANCE ACROSS THE STACK • Heightened volatility and overall risk-off sentiment across I. CHALLENGING MARKET ENVIRONMENT IN 2022(1) asset classes contributed to another quarter of poor RMBS performance • As me
Slide 7: Book Value Summary
Book Value Summary Q2-2022 YTD-2022 • Book value of $5.10 per Q2-2022 Book Value YTD-2022 Book Value common share, resulting in a ($ millions, except per share data) Book Value per share Book Value per share (4.7)% quarterly return on book value(2) Beginning common stockholders’ equity $ 1,903.0 $ 5
Slide 8: Earnings Available for Distribution
Earnings Available for Distribution • Second quarter EAD reflects: ($ millions, except per share data) Q1-2022 Q2-2022 Variance ◦ An increase in interest income driven by investment Interest income $ 44.8 $ 57.0 $ 12.2 in up-in-coupon RMBS as well as lower amortization Interest expense 22.3 37.1 (14
Slide 9: Portfolio Yields and Financing Costs
Portfolio Yields and Financing Costs • Portfolio yield increased 94 bps to 4.39% primarily due to a greater amount of higher coupon available-for-sale securities and higher yields on a larger average MSR portfolio • Net spread widened by 51 bps as a higher portfolio yield offset increased financing
Slide 10: Financing Profile
Financing Profile BALANCE SHEET AS OF JUNE 30, 2022 AGENCY RMBS STRONG LIQUIDITY POSITION • $7.5 billion of outstanding repurchase agreements with 21 counterparties • Although repo term rates increased during the quarter in anticipation of more rate hikes, spread to SOFR remains low 2019 2020 2021 2
Slide 11: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition PORTFOLIO COMPOSITION(1) LEVERAGE At June 30, 2022, $18.4 billion portfolio • Growth in RMBS and TBA positions brings leverage to a roughly “neutral” level Includes $12.0 billion settled positions ◦ Portfolio leverage increased to 6.4x 30 8.0x ◦ Average e
Slide 12: Specified Pools
Specified Pools QUARTERLY HIGHLIGHTS I. SPECIFIED POOL PORTFOLIO(1) • Mortgages underperformed across the stack 4.5, 3.4% ◦ 2.0 through 3.0 coupons underperformed around 30 to 60 ticks, as market participants rotated into higher coupons 3.5, with rising rates 7.0% 4.0, ◦ 3.5 and higher coupons, whic
Slide 13: Mortgage Servicing Rights
Mortgage Servicing Rights QUARTERLY HIGHLIGHTS I. MSR PORTFOLIO(1) • Supply of MSR in the bulk market was consistent with recent 3/31/2022 6/30/2022 quarters, with $144 billion being offered. An additional $56 Fair value ($ millions) $ 3,090 $ 3,226 billion has been offered in July Price multiple 5.
Slide 14: Agency + MSR Advantage
Agency + MSR Advantage GREATER EXPOSURE TO CURRENT COUPON SPREAD • Overall exposure to a 25 bps widening of mortgages increased from (2.8)% in the first quarter to (7.6)% driven by two factors ◦ MSR has less sensitivity to mortgage rates with note rates being far out-of-the-money, hedging 1.3% of bo
Slide 15: Risk Positioning
Risk Positioning INTEREST RATE AND CURVE EXPOSURE REMAINS LOW • During this period of heightened movement in the front end of the yield curve, portfolio exposure is well-hedged • Greater use of U.S. Treasury futures and swaps due to increased allocation to RMBS and lower interest rate sensitivity of
Slide 16: Two Harbors Outlook
Two Harbors Outlook HISTORICALLY WIDE MORTGAGE SPREADS OFFER ATTRACTIVE OPPORTUNITIES • Current coupon MBS offers high static spreads and stand to benefit the most when volatility subsides • TBA static returns no longer have significant roll specialness, with static returns driven primarily by wide
Slide 17: Appendix
Appendix 17
Slide 18: Financial Performance
Financial Performance COMPREHENSIVE (LOSS) INCOME QUARTERLY RETURN ON BOOK VALUE(1) DIVIDEND YIELD(2) BOOK VALUE AND DIVIDEND PER COMMON SHARE(2) $0.17 $0.17 $0.17 $0.17 $0.17 18
Slide 19: Q2-2022 Operating Performance
Q2-2022 Operating Performance Q2-2022 Earnings Available Realized Gains $ millions, except for per common share data) for Distribution(1) (Losses) Unrealized MTM Total Interest income $ 57.0 $ — $ — $ 57.0 Interest expense 37.1 — — 37.1 Net interest income 19.9 — — 19.9 Loss on investment securities
Slide 20: Q1-2022 Operating Performance
Q1-2022 Operating Performance Q1-2022 Earnings Available Realized Gains ($ millions, except for per common share data) for Distribution(1) (Losses) Unrealized MTM Total Interest income $ 44.8 $ — $ — $ 44.8 Interest expense 22.3 — — 22.3 Net interest income 22.5 — — 22.5 (Loss) gain on investment se
Slide 21: 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, 2022 June 30, 2022 Comprehensive loss attributable to common stockholders $ (60,322) $ (90,379) Adjustment for other comprehensive
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 $ 512 $ 464 9.9 % 84.2 % $ 460 3.4 % 16 3.0% — — —% —% — —% —
Slide 23: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Unpaid Principal Number of Balance Gross Current Loan Size Loan Age Original 60+ Day Net Servicing Loans ($ millions) Coupon Rate ($ thousands) (months) FICO(2) Original LTV Delinquencies 3-Month CPR Fee (bps) 30-Year Fixed < 3.25% 317,255 $ 103,225 2.8% $ 384
Slide 24: Mortgage Servicing Rights UPB Roll-Forward
Mortgage Servicing Rights UPB Roll-Forward $ millions Q2-2021 Q3-2021 Q4-2021 Q1-2022 Q2-2022 UPB at beginning of period $ 179,014 $ 185,210 $ 194,394 $ 193,771 $ 229,416 Bulk purchases of mortgage servicing rights 6,548 15,328 3,214 37,197 — Flow purchases of mortgage servicing rights 16,435 14,019
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 $ 2,373.3 $ — $ — $ — $ 2,373.3 25.1 % 30 to 59 days 976.0 — — — 976.0 10.3 % 60 to 89 days 2,0
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 2023 $ 0.3 0.793 % 1.500 % 1.2 2024 0.5 0.948 % 1.500 % 1.6 2025 0.7 2.120 % 1.500 % 3.2 2026 0.5 0.767 % 1.500 % 4.2 2027 and Thereafter
Slide 27: Futures
Futures Weighted Notional Amount Carrying Value Average Days to Type & Maturity ($M) ($M)(1) Expiration U.S. Treasury futures - 2 year $ (730) $ — 97 U.S. Treasury futures - 5 year (3,369) — 97 U.S. Treasury futures - 10 year (2,988) — 92 U.S. Treasury futures - 20 year (413) — 92 Federal Funds futu
Slide 28: 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. Earnings Available
Slide 29: End Notes (continued)
End Notes (continued) PAGE 9 - Portfolio Yields and Financing Costs 1. Portfolio yields on the portfolio held as of June 30, 2022 and projected over the remaining life of the investments. Assumes a static portfolio and, as a result, does not represent a projection of future yields due to excluding p
Slide 30: End Notes (continued)
End Notes (continued) PAGE 12 - Specified Pools 1. Specified pools include securities with implicit or explicit protection including lower loan balances (securities collateralized by loans less than or equal to $200K of initial principal balance), higher LTVs (securities collateralized by loans with
Slide 31: End Notes (continued)
End Notes (continued) PAGE 18 - Financial Performance 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 the book value as of the beginning of the period. 2.
Slide 32: End Notes (continued)
End Notes (continued) PAGE 25 - Financing 1. Outstanding borrowings have a weighted average of 6.3 months to maturity. 2. Repurchase agreements and revolving credit facilities secured by MSR and/or other assets may be over-collateralized due to operational considerations. PAGE 26 - Interest Rate Swa
Slide 33: Two Harbors Investment Corp.
w TWO HARBORS Investment Corp.
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