Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q2 2020 Earnings Presentation
29 slides from Two Harbors Investment's earnings presentation, Aug 6, 2020
Slide 1: Second Quarter 2020 Earnings Call
Second Quarter 2020 Earnings Call AUGUST 6, 2020
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 Strong Quarterly Performance Resulting From Market Recovery Quarterly Summary • Reported book value of $6.70 per common share, representing a (1.0%) quarterly return on book value(1). Excluding $0.54 of previously anticipated one-time costs associated with terminating the manageme
Slide 4: Two Harbors Today
Two Harbors Today STRATEGY FOCUSED ON AGENCY RMBS PAIRED WITH MSR • Agency-only mortgage REIT • Portfolio constructed almost entirely of Agency RMBS paired with MSR • Continue to believe that this strategy has a higher return potential with lower mortgage spread risk • Expect to continue to grow MSR
Slide 5: Book Value Summary
Book Value Summary Q2-2020 YTD-2020 Q2-2020 Book Value YTD-2020 Book Value (Dollars in millions, except per share data) Book Value per share Book Value per share Beginning common stockholders’ equity $ 1,902.8 $ 6.96 $ 3,969.2 $ 14.54 • Book value of $6.70 GAAP Net Loss: per common share, Core Earni
Slide 6: Swap Book Re-strike
Swap Book Re-strike • Historical swap position transacted in higher rate environment; due to portfolio re-positioning and margining requirements, significant changes in swap positions were executed in late March when 3-month LIBOR was extremely stressed • Re-striking swap position in June materially
Slide 7: Core Earnings Review
Core Earnings Review(1) ($ in millions, except per share data) Q1-2020 Q2-2020 Variance ($) • Second quarter Core Earnings results Interest income $ 255.5 $ 107.3 $ (148.2) impacted by: Interest expense 167.3 62.1 105.2 ◦ Lower net interest income due to sale of Net interest income 88.2 45.2 (43.0)
Slide 8: Performance Summary
Performance Summary EXPECT ONGOING PORTFOLIO EARNINGS POWER TO BE IN LINE WITH CURRENT DIVIDEND LEVEL • Lower portfolio yield driven by: (1) sale of non-Agencies and higher coupon Agencies in Q1; and (2) elevated swap costs due to high fixed rate payer position and falling LIBOR • June 30 as-of yiel
Slide 9: Financing Profile
Financing Profile ECONOMIC DEBT-TO-EQUITY(1) • 7.4x at June 30, 2020, compared to 7.0x at March 31, 2020 • Average leverage of 6.8x in the second quarter DIVERSE FINANCING PROFILE AGENCY RMBS • Outstanding repurchase agreements of $17.0 billion with 20 counterparties • Repo markets have been stable
Slide 10: Special Topic: Taxable Income
Special Topic: Taxable Income 2020 TAXABLE INCOME “CONSTRUCTIVE” CONSIDERATIONS RETURN OF CAPITAL • RMBS sales resulted in a net capital • Return of capital is a tax concept, not an economic concept loss of $1.4 billion; may be utilized over the next 5 years • Tax characterization of the dividend te
Slide 11: Quarterly Activity and Portfolio Composition
Quarterly Activity and Portfolio Composition Q2-2020 PORTFOLIO COMPOSITION(1) PERFORMANCE COMMENTARY $22.4 billion portfolio as of June 30, 2020 • Return on book value of 6.8%(3) excluding the previously anticipated one-time costs associated with terminating the Includes $19.0 billion settled positi
Slide 12: Specified Pools
Specified Pools SPECIFIED POOL PERFORMANCE SPECIFIED POOLS AS OF 6/30/2020 • Despite TBA underperformance in the belly coupons, specified performance was significant and overwhelmed TBA performance FICO, Generic, Seasoned, Other Loan Balance • Drivers of specified pool performance included the Fed’s
Slide 13: Mortgage Servicing Rights
Mortgage Servicing Rights MSR PORTFOLIO ACTIVITY MSR PORTFOLIO AS OF 6/30/2020 • Resumed MSR flow-sale program with all sellers • Added $4.1 billion UPB through MSR flow-sale arrangements As of June 30, 2020 during the quarter Fair value ($ millions) $ 1,279.2 ◦ Added approximately $4.5 billion UPB
Slide 14: Special Topic: MSR Forbearance and Liquidity
Special Topic: MSR Forbearance and Liquidity(1) FORBEARANCE COMMENTARY CURRENT FORBEARANCE EXPERIENCE • Forbearance rates peaked on June 1, 2020 at approximately 7.2% of borrowers by loan count • As of July 28, 2020, approximately 5.8% of loan count in forbearance • As of July 28, 2020, approximatel
Slide 15: Special Topic: Repo Markets
Special Topic: Repo Markets • Over the course of Q2, Fed purchases in overnight and term repo markets fell close to zero • Repo rates have settled in to much lower levels since spiking in March • Recent data presents picture of healthier funding environment and a free-standing market without support
Slide 16: Effective Coupon Positioning
Effective Coupon Positioning EFFECTIVE COUPON POSITIONING(1) Cash pools/TBA MSR Net COMMENTARY • Today, MSR has similar risks to a short position in 1.5% and 2.0% coupons • Long 2.5% though 5.0% coupons • Subsequent to quarter-end, rotating down in coupon and outright adding to FNCL 2.0 coupon 16 (1
Slide 17: Risk Positioning
Risk Positioning COMMON BV EXPOSURE TO CHANGES IN RATES(1) COMMON BV EXPOSURE TO CHANGES IN SPREADS(3) RMBS MSR All Hedges(2) Combined Agency RMBS MSR Combined COMMENTARY • Exposure to both rates and spreads remains low, in line with historical positioning • In a 25 basis point parallel shift up in
Slide 18: Outlook - Return Expectations
Outlook - Return Expectations OPPORTUNITY SET IN OUR TARGET ASSETS REMAINS ATTRACTIVE TODAY • Estimate returns for Agency RMBS/swaps in high-single to low-double digits • Estimate returns for Agency RMBS / flow MSR in low-to-mid double digits • Advancing obligations from forbearances have turned out
Slide 19: Appendix
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Slide 20: Financial Performance
Financial Performance COMPREHENSIVE INCOME (LOSS) QUARTERLY RETURN ON BOOK VALUE(1) DIVIDEND YIELD(2) BOOK VALUE AND DIVIDEND PER COMMON SHARE(2) 20 (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 d
Slide 21: Q2-2020 Operating Performance
Q2-2020 Operating Performance Q2-2020 Realized Gains (In millions, except for per common share data) Core Earnings(1) (Losses) Unrealized MTM Total Interest income $ 107.3 $ — $ — $ 107.3 Interest expense 62.1 — — 62.1 Net interest income 45.2 — — 45.2 (Gain) loss on investment securities — 53.6 (0.
Slide 22: Q1-2020 Operating Performance
Q1-2020 Operating Performance Q1-2020 Realized Gains (In millions, except for per common share data) Core Earnings(1) (Losses) Unrealized MTM Total Interest income $ 255.5 $ — $ — $ 255.5 Interest expense 167.3 — — 167.3 Net interest income 88.2 — — 88.2 Loss on investment securities — (1,080.7) (0.
Slide 23: 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, 2020 June 30, 2020 Reconciliation of Comprehensive income (loss) to Core Earnings: Comprehensive (loss) income attri
Slide 24: Portfolio Metrics
Portfolio Metrics AGENCY RMBS CPR(1) AGENCY PORTFOLIO COMPOSITION IO & Inverse IO Other P&I(2) 1.1% 0.7% 30-Year Fixed 5% & above 4.0% 30-Year Fixed < 2.5% 11.8% 30-Year Fixed 4.0% 25.8% 30-Year Fixed 4.5% 17.5% MSR CPR 30-Year Fixed 30-Year Fixed 3.5% 3.0% 23.5% 15.6% 24 (1) Agency weighted average
Slide 25: Agency RMBS Portfolio
Agency RMBS Portfolio Weighted Par Value ($ Market Value Weighted % Prepay Amortized Cost Gross Weighted Average Age As of June 30, 2020 millions) ($ millions) Average CPR Protected(1) Basis ($ millions) Average Coupon (Months) 30-Year fixed 2.5% & below $ 1,980 $ 2,092 1.3 % 91.1 % $ 2,079 2.5 % 2
Slide 26: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Gross Weighted Weighted Weighted Unpaid Average Average Average Weighted Number of Principal % Fannie Coupon Loan Age Original Average 60+ Day 3-Month Net Servicing Loans Balance Fair Value Mae Rate (months) FICO(2) Original LTV Delinquencies CPR Fee (bps) 30-Y
Slide 27: Financing
Financing $ in millions Repurchase Revolving Credit Total Outstanding Outstanding Borrowings and Maturities(1) Agreements Facilities Term Notes Payable Convertible Notes Borrowings Percent (%) Within 30 days $ 6,071.0 $ — $ — $ — $ 6,071.0 33.8 % 30 to 59 days 5,022.9 — — — 5,022.9 28.0 % 60 to 89 d
Slide 28: Interest Rate Swaps
Interest Rate Swaps INTEREST RATE SWAPS Average Maturity Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Years Payers 2023 $ 2.3 0.023 % 0.080 % 3.0 2024 and after 1.5 0.257 % 0.080 % 7.0 $ 3.8 0.116 % 0.080 % 4.6 Average Fixed Receive Average Maturity Maturities Notiona
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