Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q1 2024 Earnings Presentation
35 slides from Two Harbors Investment's earnings presentation, Apr 30, 2024
Slide 1: An MSR + Agency REIT: First Quarter 2024 Earnings Call
An MSR + Agency REIT First Quarter 2024 Earnings Call APRIL 30, 2024
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 Book Value Common Stock Economic Return per Share Dividend on Book Value(1) $15.64 $0.45 5.8% Comprehensive Investment Quarter-End Economic Income Portfolio(2) Debt-to-Equity(3) $0.85 $14.7b 6.0x Note: Financial data throughout this presentation is as of or for the quarter ended
Slide 4: Markets Overview
Markets Overview • Interest rates moved higher during the quarter on the back of stronger than expected economic data, with 3-month annualized core CPI reaching 4.5%, its highest level since June 2023 • At quarter-end, the market anticipated three interest rate cuts in 2024, down from six at the sta
Slide 5: RoundPoint Operations Update
RoundPoint Operations Update I. KEY INITIATIVES • Completed all 10 scheduled servicing transfers to the Render cost savings and economies of scale RoundPoint platform in accordance with transition plan – Final “clean up” servicing transfer planned for early June 2024 Develop direct-to-consumer origi
Slide 6: Book Value Summary
Book Value Summary • Reported book value of $15.64 per common share, and declared a first quarter common stock dividend of $0.45 per share, representing a 5.8% quarterly economic return on book value(1) 6
Slide 7: Comprehensive Income Summary
Comprehensive Income Summary • Generated Comprehensive Income of $89.4 million, or $0.85 per weighted average common share • Positive performance resulting from spread tightening on RMBS and MSR 7
Slide 8: Balance Sheet and Liquidity Position
Balance Sheet and Liquidity Position BALANCE SHEET AS OF MARCH 31, 2024 AGENCY RMBS • $8.1 billion of outstanding repurchase agreements with 18 counterparties • Weighted average days to maturity of 88 days 2020 2021 2022 2023 2024 Average Repo Rate - SOFR (bps) (1) 50 Agency RMBS $8.2 billion Agency
Slide 9: Portfolio Composition and Risk Positioning
Portfolio Composition and Risk Positioning PORTFOLIO COMPOSITION(1) INTEREST Interest RateRATE EXPOSURE Exposure (4) Summary At March 31, 2024, $14.7 billion portfolio —% Includes $11.3 billion settled positions (0.3)% (0.2)% (0.3)% (0.3)% 30 8.0x (0.5)% (0.5)% 6.4x (0.8)% 25 6.3x Up 25 basis points
Slide 10: Agency RMBS Investment Landscape
Agency RMBS Investment Landscape DECLINING VOLATILITY DROVE POSITIVE PERFORMANCE FOR AGENCY RMBS • Performance varied across the coupon stack, with belly and higher coupons outperforming lower coupons • Mortgage performance was aided by lower than expected supply, positive fixed-income fund inflows,
Slide 11: Agency RMBS
Agency RMBS QUARTERLY HIGHLIGHTS I. SPECIFIED POOL PORTFOLIO(1) • Replaced approximately $2.4 billion notional 2.5% - 5% TBAs with an equal amount of 5.5% - 6.5% TBAs to Other, 22.0% more defensively positioning our portfolio from a spread 6.0 perspective Loan Balance, 36.0% 5 4. 5. 2. 5 5 • Rotated
Slide 12: Mortgage Servicing Rights Investment Landscape
Mortgage Servicing Rights Investment Landscape MSR SPREADS WELL SUPPORTED; PREPAYMENTS EXPECTED TO REMAIN HISTORICALLY SLOW • Activity in MSR market is brisk, with $160 billion UPB bid in Q1-2024 • Bulk packages of MSR are well bid, with regional banks, non-bank originators and REITs seeking to add
Slide 13: Mortgage Servicing Rights
Mortgage Servicing Rights QUARTERLY HIGHLIGHTS I. MSR PORTFOLIO CHARACTERISTICS(1) • Settled $3.1 billion UPB through bulk and flow acquisitions 3/31/2024 12/31/2023 and recapture Fair value ($ millions) $ 3,085 $ 3,052 • Price multiple increased to 5.7x from 5.6x Price multiple 5.7x 5.6x • Prepay s
Slide 14: Return Potential and Outlook
Return Potential and Outlook ATTRACTIVE RETURN OPPORTUNITIES FOR UNIQUELY POSITIONED MSR AND AGENCY RMBS STRATEGY PORTFOLIO INVESTED MARKET VALUE CAPITAL STATIC RETURN As of March 31, 2024 ($ millions) ALLOCATED(1) ESTIMATE(2) • Market Presence: Our size allows SERVICING MSR 3,085 us to be nimble an
Slide 15: Appendix
Appendix 15
Slide 16: Effective Coupon Positioning
Effective Coupon Positioning ZV to SOFR TBA Market TBA Specified Pools MSR/Agency IO Spreads for Coupon (%) Price(1) Notional ($m) Par Value ($m)(2) UPB ($m)(3) Combined ($m) Specified Pools(4) 2.5% $ 82.76 $ — $ 414 $ — $ 414 104 3.0% $ 86.15 — 234 — 234 103 3.5% $ 89.59 659 66 — 725 111 4.0% $ 92.
Slide 17: 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 2.2 % 1.1 % (2.6)% 0.7 % (4) 0 -25 Bull Flattener 5.9 % (2.8)% (4.1)% (1.
Slide 18: Markets Overview
Markets Overview 2-YEAR AND 10-YEAR INTEREST RATE YIELDS(1) COMPOSITION OF MARKET VS. CURRENT RATES(2) ACTUAL VS. IMPLIED VOLATILITY(3) EXISTING HOME SALES(4) 18
Slide 19: Financial Performance
Financial Performance COMPREHENSIVE (LOSS) INCOME QUARTERLY ECONOMIC RETURN ON BOOK VALUE(1) $150 10% $89.4 5.8% $31.5 $38.9 2.2% 2.0% $0 0% $(63.2) $(56.8) (3.6)% (3.5)% $-150 - 10% Q1-2023 Q2-2023 Q3-2023 Q4-2023 Q1-2024 Q 1- 2023 Q 2- 2023 Q 3- 2023 Q 4- 2023 Q 1- 2024 Comprehensive Income ($ in
Slide 20: Earnings Available for Distribution
Earnings Available for Distribution ($ millions, except per share data) Q1-2024 Q4-2023 Variance Interest income $ 117.8 $ 122.4 $ (4.6) • First quarter EAD primarily driven by: Interest expense 160.0 168.1 8.1 – Lower MSR amortization and third-party servicing Net interest expense (42.2) (45.7) 3.5
Slide 21: Q1-2024 Portfolio Yields and Financing Costs
Q1-2024 Portfolio Yields and Financing Costs ($ thousands) Average Portfolio Asset Type Measure Amortized Cost Income(1) Average Yield Available-for-sale securities GAAP $ 8,569,566 $ 100,605 4.70% Adjustments to include other portfolio items: Mortgage servicing rights(2)(3) Non-GAAP 1,923,349 57,08
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, 2024 December 31, 2023 Comprehensive income attributable to common stockholders $ 89,370 $ 38,886 Adjustment for other comprehensi
Slide 23: 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% $ 414 $ 344 —% —%$ 354 3.3 % 33 3.0% 234 203 4.7 % 85.4 % 208 3.7 %
Slide 24: Mortgage Servicing Rights Portfolio
Mortgage Servicing Rights Portfolio(1) Unpaid Principal Gross Current Loan Net Number of Balance Coupon Size Loan Age Original 60+ Day 3-Month Servicing Loans ($ millions) Rate ($ thousands) (months) FICO(2) Original LTV Delinquencies CPR Fee (bps) 30-Year Fixed < 3.25% 299,570 $ 94,021 2.8% $ 371 3
Slide 25: Mortgage Servicing Rights UPB Roll-Forward
Mortgage Servicing Rights UPB Roll-Forward $ millions Q1-2024 Q4-2023 Q3-2023 Q2-2023 Q1-2023 UPB at beginning of period $ 215,647 $ 218,662 $ 222,622 $ 212,445 $ 204,877 Bulk purchases of mortgage servicing rights 2,906 — — 14,234 10,713 Flow purchases of mortgage servicing rights 211 829 472 539 6
Slide 26: Financing
Financing $ millions Repurchase Revolving Credit Term Notes Outstanding Borrowings and Maturities(1) Agreements Facilities Payable Convertible Notes Total Borrowings Percent (%) Within 30 days $ 2,329.0 $ — $ — $ — $ 2,329.0 22.7 % 30 to 59 days 1,367.0 — — — 1,367.0 13.3 % 60 to 89 days 1,023.0 — 2
Slide 27: Futures
Futures Weighted Average Notional Amount Carrying Value Months to Type & Maturity ($M) ($M)(1) Expiration U.S. Treasury futures 2 year $ (497.4) $ — 2.9 5 year (1,354.2) — 2.9 10 year (1,925.5) — 2.6 20 year (40.7) — 2.6 Eris SOFR swap futures - 10 year (30.0) — 122.7 SOFR futures < 1 year (1,416.0)
Slide 28: Interest Rate Swaps
Interest Rate Swaps(1) Maturities Notional Amount ($B)(2) Average Fixed Pay Rate(3) Average Receive Rate(3) Average Maturity (Years)(3) Payers ≤ 1 year $ 2.6 4.7 % 5.3 % 1.0 > 1 and ≤ 3 years 2.0 4.1 % 5.3 % 1.8 > 3 and ≤ 5 years 1.8 3.5 % 5.3 % 3.8 > 5 and ≤ 7 years — —% —% — > 7 and ≤ 10 years 1.0
Slide 29: End Notes
End Notes PAGE 3 - Financials Overview 1. Economic 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. Includes
Slide 30: End Notes (continued)
End Notes (continued) PAGE 11 - Agency RMBS 1. Specified pools include securities with implicit or explicit prepayment protection, including lower loan balances (securities collateralized by loans less than or equal to $300K of initial principal balance), higher LTVs (securities collateralized by lo
Slide 31: End Notes (continued)
End Notes (continued) PAGE 14 - 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 32: End Notes (continued)
End Notes (continued) PAGE 18 - Markets Overview 1. Source: Bloomberg, as of dates noted. 2. Source: RiskSpan. UMBS30 UPB as of 4/1/2024 Factor Date; Freddie Mac’s Primary Mortgage Market Survey (PMMS) as of March 28, 2024. 3. Source: Bloomberg, as of dates noted. 4. Source: Bloomberg and National A
Slide 33: End Notes (continued)
End Notes (continued) PAGE 21 - 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 yiel
Slide 34: End Notes (continued)
End Notes (continued) PAGE 23 - Agency RMBS Portfolio 1. Weighted average actual one-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
Slide 35: Two Harbors Investment Corp.
Two Harbors Investment — Q1 2024 Earnings Presentation on 6ix