Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q2 2016 Earnings Presentation
28 slides from Two Harbors Investment's earnings presentation, Aug 3, 2016
Slide 1: Second Quarter 2016 Earnings Call
August 4 , 2016 Second Quarter 2016 Earnings Call
Slide 2: Safe Harbor Statement
Safe Harbor Statement F O R W A R D - L O O K I N G S T A T E M EN T S 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, estimate
Slide 3: Financial Summary
Financial Summary(1) DELIVERED SOLID QUARTER IN VOLATILE INTEREST RATE ENVIRONMENT • Total return on book value of 3.7%(2) ― Cash dividend of $0.23 per share • Comprehensive Income of $122.3 million, or $0.35 per share • GAAP net loss of $17.0 million, or $0.05 per weighted average share • Core Earn
Slide 4: Business Overview
Business Overview RATES STRATEGY • Increased Agency RMBS holdings • Added 3 MSR flow sellers – Portfolio of $55.6 billion in unpaid principal balance (UPB) at June 30, 2016(1) • MSR complements Agency RMBS holdings – MSR exhibits positive yield, negative duration and hedges mortgage basis risk CREDI
Slide 5: Book Value and Comprehensive Income
(Dollars in millions, except per share data) Q2-2016 Book Value Q2-2016 Book Value per share YTD-2016 Book Value YTD-2016 Book Value per share Beginning stockholders’ equity $3,370.7 $9.70 $3,576.6 $10.11 GAAP Net Loss: Core Earnings, net of tax 76.2 148.0 Realized gains and losses, net of tax (39.3
Slide 6: Core Earnings Summary
(Dollars in millions) Q1-2016 Q2-2016 Variance ($) Variance (%) Interest income $130.8 $154.8 $24.0 18.4% Interest expense 41.4 54.0 (12.6) (30.5%) Net interest income 89.4 100.8 11.4 12.8% Loss on swaps and swaptions (6.2) (7.7) (1.5) (23.7%) Gain on other derivatives 5.4 5.0 (0.4) (7.6%) Servicing
Slide 7: Financing Profile
Financing Profile 7 REPURCHASE AGREEMENTS • Outstanding borrowings of $9.7 billion with 23 active counterparties; 31 total counterparties ― Increased borrowings due to purchases of Agency RMBS • Repo markets functioning efficiently; improved advance rates on financing non-Agency RMBS • Added direct
Slide 8: Portfolio Composition
HISTORICAL CAPITAL ALLOCATION PORTFOLIO COMPOSITION (1) Portfolio Composition 8 $16.1 BILLION PORTFOLIO AS OF JUNE 30, 2016 (1) For additional detail on the portfolio, see Appendix slides 18-24. (2) Commercial consists of senior and mezzanine commercial real estate debt and related instruments. (3)
Slide 9: Portfolio Performance and Hedging
Portfolio Performance and Hedging 9 Q2-2016 PERFORMANCE HIGHLIGHTS (1) Defined as total borrowings to fund RMBS, residential mortgage loans held-for-sale, commercial real estate assets and Agency Derivatives, divided by total equity. (2) “Legacy” non-Agency RMBS includes non-Agency bonds issued up t
Slide 10: Rates Strategy Update
Rates Strategy Update 10 AGENCY RMBS • Agency holdings increased $2.0 billion(1) • Converted TBA positions into pools, including specified pools for prepayment protection • Approximately 60% of pools had some form of prepayment protection as of July 31, 2016 • Added $5.7 billion UPB from flow sale a
Slide 11: Credit Strategy Update
Credit Strategy Update 11 LEGACY NON-AGENCY RMBS • Favorable tailwinds drove performance • Strong realized yield of 8.3% • Opportunistically added to holdings • Benefitted from Countrywide RMBS class action settlement proceeds • Credit reserve reduced by $40 million in the quarter and $155 million i
Slide 12: Commercial Real Estate Update
• Aggregate portfolio carrying value of $926.4 million at June 30, 2016, up from $744.3 million at March 31, 2016 ― Eighteen senior and six mezzanine assets • Weighted average stabilized loan-to-value (LTV) of 65.5%(1); weighted average spread of LIBOR plus 486 basis points • Strong and attractive p
Slide 13: Appendix
Appendix
Slide 14: Return on Book Value
Return on Book Value 14 (1) Return on book value for three-month period ended June 30, 2016 is defined as the increase in book value from March 31, 2016 to June 30, 2016 of $0.13 per share, plus dividends declared of $0.23 per share, divided by March 31, 2016 book value of $9.70 per share. (2) Retur
Slide 15: Financial Performance
DIVIDENDS(1) Financial Performance 15 CONMPREHENSIVE INCOME (LOSS) BOOK VALUE AND DIVIDEND PER SHARE(1) GAAP NET INCOME (LOSS) (1) Historical dividends may not be indicative of future dividend distributions. The company ultimately distributes dividends based on its taxable income per common share, n
Slide 16: Operating Performance
Operating Performance Q1-2016 Q2-2016 (In millions, except for per share data) Core Earnings(1) Realized Gains (Losses) Unrealized MTM Total Core Earnings(1) Realized Gains (Losses) Unrealized MTM Total Interest income $130.8 $— $— $130.8 $154.8 $— $— $154.8 Interest expense 41.4 — — 41.4 54.0 — — 5
Slide 17: 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 share data) March 31, 2016 June 30, 2016 Reconciliation of Comprehensive (loss) income to Core Earnings: Comprehensive (loss) income ($67,585) $1
Slide 18: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics 18 AGENCY PORTFOLIO YIELDS AND METRICS AGENCY RMBS CPR(1) (1) Agency weighted average 3-month Constant Prepayment Rate (CPR) includes IIOs (or Agency Derivatives). (2) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price
Slide 19: Rates: Agency RMBS
Rates: Agency RMBS 19 As of June 30, 2016 Par Value ($M) Market Value ($M) % Lower Balance/HARP(1) Amortized Cost Basis ($M) Weighted Average Coupon Weighted Average Age (Months) 30-Year fixed 3.0-3.5% $6,684 $6,991 — % $6,928 3.2 % 3 4.0-4.5% 3,536 3,901 85.4 % 3,805 4.2 % 36 ≥ 5.0% 513 585 73.7 %
Slide 20: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) 20 (1) Excludes residential mortgage loans held-for-investment in securitization trusts for which the company is the named servicing administrator. (2) FICO represents a mortgage industry accepted credit score of a borrower. As of March 31, 2016 As of June 30, 201
Slide 21: Credit: Non-Agency MBS Metrics
Credit: Non-Agency MBS Metrics 21 NON-AGENCY PORTFOLIO COMPOSITION NON-AGENCY PORTFOLIO YIELDS AND METRICS (1) Weighted average cost basis includes MBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes. If current face were utilized for wei
Slide 22: Credit: Non-Agency MBS
Credit: Non-Agency MBS 22 As of June 30, 2016 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $1,138.8 $503.2 $1,642.0 % of non-Agency portfolio 69.4 % 30.6 % 100.0 % Average purchase price(1) $54.07 $68.89 $58.61 Average coupon 3.0 % 2.3 % 2.8 % Weighted averag
Slide 23: Commercial Real Estate Assets
Commercial Real Estate Assets (1) Cash coupon does not include origination or exit fees. (2) Yield includes net origination fees and exit fees, but does not include future fundings. (3) Initial LTV considers the original appraisal at the time of origination. (4) Stabilized LTV considers the prospect
Slide 24: Commercial Real Estate Assets
Commercial Real Estate Assets (1) Cash coupon does not include origination or exit fees. (2) Yield includes net origination fees and exit fees, but does not include future fundings. (3) Initial LTV considers the original appraisal at the time of origination. (4) Stabilized LTV considers the prospect
Slide 25: Repo and FHLB Financing
Repo and FHLB Financing(1) 25 (1) As of June 30, 2016. (2) Excludes FHLB membership and activity stock totaling $167.9 million. (3) Weighted average of 75 days to maturity. (4) Includes advances of $2.5 billion with original maturities of 20 years. Repo and FHLB Collateral(2) Repo FHLB Total ($M) Av
Slide 26: Interest Rate Swaps
Maturities Notional Amounts ($B)(2) Average Fixed Pay Rate(3) Average Receive Rate(3) Average Maturity (Years)(3) Payers Hedging Repo and FHLB Advances 2016 $1.0 0.435 % 0.640 % 0.5 2017 2.4 0.765 % 0.638 % 1.1 2018 0.3 0.984 % 0.638 % 1.6 2019 0.3 1.283 % 0.642 % 2.9 2020 and after 1.4 1.919 % 0.63
Slide 27: Interest Rate Swaptions
Interest Rate Swaptions(1) 27 (1) As of June 30, 2016. Option Underlying Swap Swaption Expiration Cost ($M) Fair Value ($M) Average Months to Expiration Notional Amount ($M) Average Pay Rate Average Receive Rate Average Term (Years) Purchase Contracts: Payer <6 Months $56.8 $— 2.0 $1,700 4.09 % 3M L
Slide 28: Two Harbors Investment Corp.
TWO HARBORS Investment Corp.
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