Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q2 2023 Earnings Presentation
38 slides from Two Harbors Investment's earnings presentation, Aug 1, 2023
Slide 1: An Agency + MSR REIT: Second Quarter 2023 Earnings Call
An Agency + MSR REIT Second Quarter 2023 Earnings Call AUGUST 1, 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 Benefitted From Attractive Spreads and Volatility Trending Lower Portfolio(1) $15.2b Quarter-end Common Stock Economic Return Economic Book Value Dividend on Book Value(2) Debt-to-Equity(3) $16.39 $0.45 2.2% 6.4x Comprehensive Income Excluding Market- Earnings Available for Incom
Slide 4: Markets Overview
Markets Overview I. FED FUNDS RATE EXPECTATIONS(1) II. HISTORICAL YIELD SPREADS(2) • Amidst ongoing concerns about stress in the banking system and the debt ceiling debate, the Federal Reserve hiked interest rates once in the quarter to 5.25% and subsequently in July to 5.5%, while signaling that an
Slide 5: Hedging Mitigates Funding Rate Risk
Hedging Mitigates Funding Rate Risk Consider a REIT with a portfolio of RMBS that is levered 9x and funded with repo funding tied to SOFR I. UNHEDGED REIT EXPOSED TO LEVEL OF REPO FUNDING II. HEDGED REIT MITIGATES EXPOSURE FROM CHANGES TO SOFR • Unhedged REIT is highly exposed to net asset value cha
Slide 6: Book Value Summary
Book Value Summary Q2-2023 Q2-2023 Book Value ($ millions, except per share data) Book Value per share • Book value of $16.39 per common share, Beginning common stockholders’ equity $ 1,593.4 $ 16.48 resulting in a 2.2% quarterly economic Net income 197.4 return on book value(2) ◦ Both components of
Slide 7: Results and Return Contributions
Results and Return Contributions Market-Driven Value Changes Other Total and Nonrecurring Income Excluding Comprehensive Comprehensive Operating Market-Driven ($ in thousands) GAAP Net Income Loss Income Expenses Value Changes(1) (2) RMBS and other Agency securities RMBS and other Agency securities
Slide 8: Earnings Available for Distribution
Earnings Available for Distribution ($ millions, except per share data) Q2-2023 Q1-2023 Variance Interest income $ 117.8 $ 116.6 $ 1.2 • Second quarter EAD primarily driven by: Interest expense 159.6 142.5 (17.1) ◦ Increased interest expense as a result of higher Net interest (expense) income (41.8)
Slide 9: Portfolio Yields and Financing Costs
Portfolio Yields and Financing Costs • Portfolio yield increased 15 bps to 5.24% primarily due to purchases of higher coupon available-for-sale securities with lower unamortized premium and a higher proportion of the total portfolio invested in higher yielding assets, offset by a slightly higher CPR
Slide 10: Strong Balance Sheet and Liquidity Position
Strong Balance Sheet and Liquidity Position BALANCE SHEET AS OF JUNE 30, 2023 AGENCY RMBS • $8.8 billion of outstanding repurchase agreements with 18 counterparties • Weighted average days to maturity of 67 days 2019 2020 2021 2022 2023 50 Average Repo Rate - SOFR (bps) (1) Agency RMBS $8.9 billion
Slide 11: Market Conditions
Market Conditions VOLATILITY TRENDED LOWER INTO QUARTER END, DRIVING RMBS PERFORMANCE • Spreads initially widened in the beginning of the quarter, but the resolution of the debt ceiling in late May coupled with falling rate volatility drove spreads tighter across the coupon stack into the end of the
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 decreased slightly to At June 30, 2023, $15.2 billion portfolio 6.4x from 6.5x(2) Includes $12.3 billion settled positions ◦ Average economic debt-to-equity of 6.
Slide 13: Specified Pools
Specified Pools QUARTERLY HIGHLIGHTS I. SPECIFIED POOL PORTFOLIO(1) • The TBA stack outperformed over the quarter driven by (1) the continued market recovery from bank stress initiated in March, (2) inflows into fixed-income funds and (3) strong money manager interest in bonds sold by the FDIC 6.0 5
Slide 14: Mortgage Servicing Rights
Mortgage Servicing Rights QUARTERLY HIGHLIGHTS I. MSR PORTFOLIO CHARACTERISTICS(1) • MSR bulk packages remain well bid with notable strong demand: $145 6/30/2023 3/31/2023 billion UPB of conventional MSR offered in the second quarter, bringing Fair value ($ millions) $ 3,274 $ 3,072 total to $370 bi
Slide 15: Return Potential and Outlook
Return Potential and Outlook ATTRACTIVE RETURN OPPORTUNITIES FOR UNIQUELY POSITIONED AGENCY RMBS AND MSR PORTFOLIO PORTFOLIO MARKET INVESTED PROSPECTIVE MARKET RETURNS VALUE CAPITAL STATIC MARKET As of June 30, 2023 ($ millions) ALLOCATED(1) RETURN ESTIMATE(2) RMBS + MSR • Market Presence: Our size
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) 2.5% $ 84.75 $ 187 $ 248 $ — $ 435 3.0% $ 87.97 — — — — 3.5% $ 91.09 670 80 — 750 4.0% $ 93.81 353 527 — 880 4.5% $ 96.13 189 2,889 — 3,078 5.0% $ 9
Slide 18: 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 % (2.0)% 1.1 % (4) 0 -25 Bull Flattener 6.0 % (3.2)% (4.4)% (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% $31.5 2.2% $0 0% $(63.2) (4.7)% (3.6)% $-150 $(90.4) -10% $-300 -20% (16.2)% $(287.8) Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Q2-2022 Q3-2022 Q4-2022 Q1-2023 Q2-2023 Comprehens
Slide 20: Comparison of GAAP and non-GAAP Measures
Comparison of GAAP and non-GAAP Measures Earnings Available Income Excluding Comprehensive for Distribution Market-Driven Value ($ in thousands) Income (EAD)(1) Changes (IXM)(2) RMBS and other Agency securities(3) Coupon income $ 112,678 $ 112,678 $ 112,678 Amortization (8,385) (8,385) (8,385) Reali
Slide 21: 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) June 30, 2023 March 31, 2023 Comprehensive income (loss) attributable to common stockholders $ 31,478 $ (63,242) Adjustments to exclude mark
Slide 22: Q2-2023 Operating Performance
Q2-2023 Operating Performance Q2-2023 Earnings Available Realized Gains ($ millions, except for per common share data) for Distribution(1) (Losses) Unrealized MTM Total Interest income $ 117.8 $ — $ — $ 117.8 Interest expense 159.6 — — 159.6 Net interest income (41.8) — — (41.8) (Loss) gain on inves
Slide 23: 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 24: 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) June 30, 2023 March 31, 2023 Comprehensive income (loss) attributable to common stockholders $ 31,478 $ (63,242) Adjustment for other compre
Slide 25: 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% $ 248 $ 211 5.6 % —% $ 212 3.3 % 24 3.0% — — —% —% — —% — 3.5% 80 73
Slide 26: 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% 305,114 $ 97,790 2.1% $ 378 2
Slide 27: Mortgage Servicing Rights UPB Roll-Forward
Mortgage Servicing Rights UPB Roll-Forward $ millions Q2-2023 Q1-2023 Q4-2022 Q3-2022 Q2-2022 UPB at beginning of period $ 212,445 $ 204,877 $ 206,614 $ 227,074 $ 229,416 Bulk purchases of mortgage servicing rights 14,234 10,713 — — — Flow purchases of mortgage servicing rights 539 669 2,678 4,449 5
Slide 28: 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 $ 3,160.0 $ — $ — $ — $ 3,160.0 28.2 % 30 to 59 days 1,833.3 — — — 1,833.3 16.4 % 60 to 89 days
Slide 29: Futures
Futures Weighted Notional Amount Carrying Value Average Days to Type & Maturity ($M) ($M)(1) Expiration U.S. Treasury futures - 5 year $ (2,386) $ — 96 U.S. Treasury futures - 10 year (1,676) — 91 U.S. Treasury futures - 20 year 30 — 91 SOFR futures < 1 year (1,322) — 286 > 1 and < 2 years (1,083) —
Slide 30: 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 % 5.090 % 1.7 2027 — —% —% — 2028 and Thereafter 3.1 3.508 % 5.090 % 6.5 $ 5.7 4.099 % 5.0
Slide 31: End Notes
End Notes PAGE 3 - Financials Overview 1. Includes $12.3 billion in settled positions and $2.9 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 32: End Notes (continued)
End Notes (continued) PAGE 8 - 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 33: End Notes (continued)
End Notes (continued) PAGE 10 - Strong Balance Sheet and Liquidity Position 1. Source: Bloomberg. Represents the average spread between repurchase rates and the Secured Overnight Financing Rate (SOFR) over trailing 3-month and 6- month periods between Q2 2019 and Q2 2023 (as of June 30, 2023). 2. Ba
Slide 34: End Notes (continued)
End Notes (continued) PAGE 14 - 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 35: End Notes (continued)
End Notes (continued) PAGE 18 - Risk Positioning 1. MSR/Agency IO RMBS includes the effect of unsettled MSR. 2. Other includes all other derivative assets and liabilities and borrowings. Other excludes TBAs, which are included in the Agency P&I RMBS/TBA category. 3. Bull Steepener/Bear Flattener is
Slide 36: End Notes (continued)
End Notes (continued) PAGE 21 - GAAP to IXM Reconciliation 1. RMBS and other Agency securities market-driven value changes refers to the sum of interest income, realized and unrealized gains and losses on RMBS and other Agency securities, less the sum of the realization of RMBS and other Agency secu
Slide 37: End Notes (continued)
End Notes (continued) PAGE 25 - 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 38: Two Harbors Investment Corp.
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