Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q3 2019 Earnings Presentation
28 slides from Two Harbors Investment's earnings presentation, Nov 5, 2019
Slide 1: Third Quarter 2019 Earnings Call
Third Quarter 2019 Earnings Call NOVEMBER 6, 2019
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: Quarterly Summary
Quarterly Summary Strong Economic Return of 6.7% in Volatile Environment(1) • Grew book value to $14.72 per common share, representing a 6.7% quarterly total return on book value. Total return on book value for the first nine months of 2019 of 22.0%.(1) • Generated Comprehensive Income of $257.6 mil
Slide 4: Focused on Generating Long-Term Stockholder Value
Focused on Generating Long-Term Stockholder Value DELIVERED TOTAL STOCKHOLDER RETURN OF 211% SINCE INCEPTION(1) 250 211% 200 53% outperformance since inception 150 158% 100 50 0 1 0 0 1 0 0 0 1 0 0 1 0 0 0 0 7 4 2 9 5 2 0 7 4 2 9 5 2 09/30/19 / / / / / / / / / / / / / / 2 2 0 2 0 3 1 3 2 0 2 1 3 1 9
Slide 5: Book Value
Book Value Q3-2019 YTD-2019 Q3-2019 Book Value YTD-2019 Book Value (Dollars in millions, except per share data) Book Value per share Book Value per share Beginning common stockholders’ equity $ 3,867.5 $ 14.17 $ 3,253.2 $ 13.11 GAAP Net Income: Core Earnings, including dollar roll income, net of tax
Slide 6: Core Earnings Summary
Core Earnings Summary(1) (Dollars in millions, except per share data) Q2-2019 Q3-2019 Variance ($) • Third quarter Core Earnings, including Interest income $ 269.1 $ 251.1 $ (18.0) dollar roll income, was primarily impacted by: Interest expense 192.4 191.1 1.3 Net interest income 76.7 60.0 (16.7) ◦
Slide 7: Performance Summary
Performance Summary • Lower portfolio yield driven by rotation from higher yielding non-Agency securities to lower yielding Agency securities • Lower Agency RMBS also driven by higher amortitzation due to higher prepayment speeds Realized Q2-2019 Realized Q3-2019 As of September 30, 2019 Annualized
Slide 8: Financing Profile and Capital Structure
Financing Profile and Capital Structure ECONOMIC DEBT-TO-EQUITY(1) • 7.2x at September 30, 2019, compared to 7.8x at June 30, 2019 • Average of 7.2x in both the third and second quarters of 2019 RATES – AGENCY RMBS • Outstanding repurchase agreements of $24.1 billion with 24 counterparties • Outstan
Slide 9: Markets and Performance Overview - Rates
Markets and Performance Overview - Rates MARKET OVERVIEW • Current coupon widened 8 basis points in Q2 and 27 basis points in Q3 • MSR prices declined in chorus with the mortgage rate change rather than 5-year and 10-year swap rates • Position in higher coupon Agencies benefitted performance • Speci
Slide 10: Markets and Performance Overview - Credit
Markets and Performance Overview - Credit MARKET OVERVIEW • Low mortgage rates have offset steadily increasing HPA, keeping affordability within recent context • This should allow for increased mobility, higher prepayments, and better overall expected returns • Declining losses over time have provid
Slide 11: Portfolio Composition and Quarterly Activity
Portfolio Composition and Quarterly Activity PORTFOLIO ACTIVITY • Moved roughly $7 billion in mortgage risk from higher coupons to lower coupons as mortgages cheapened in August • Increasing interest in flow-sale MSR partnerships; added $5.8 billion UPB of MSR • Entered into agreements to sell all n
Slide 12: Risk Profile
Risk Profile LOW RISK EXPOSURES • Exposure to changes in interest rates and mortgage spreads remain small • Maintain a slightly long duration bias, increasing 1.4% in a down 50 basis point shock and losing 4.8% in an up 50 shock • Mortgage spread sensitivity mitigated by the presence of MSR in the p
Slide 13: Strategic Opportunities
Strategic Opportunities GENERATING STRONG ECONOMIC RETURNS WITH LOWER VOLATILITY RATES STRATEGY - Combination of Agency RMBS and MSR • Expect capital allocation to this strategy to continue to increase • Current expected returns in low double digits for Agency RMBS paired with MSR • Believe the comb
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Slide 15: Return on Book Value
Return on Book Value(1) Return on common book value Q3-2019 (Per common share amounts, except for percentage) Book value at June 30, 2019 $ 14.17 Book value at September 30, 2019 14.72 Increase in book value 0.55 Dividend declared in Q3-2019 0.40 Return on book value Q3-2019 $ 0.95 Percent return on
Slide 16: Financial Performance
Financial Performance COMPREHENSIVE (LOSS) INCOME BOOK VALUE AND DIVIDEND PER COMMON SHARE(1) $500 50% $18.00 36.2% 25.7% $300 21.0% 30% $16.00 $311.3 $257.6 $0.47 $0.40 $201.0 $0.40 $100 10% $14.00 $0.47 $0.47 -$100 $(102.8) -10% $14.81 $14.72 $12.00 $13.83 $14.17 (11.9)% $13.11 -$300 $(307.9) -30%
Slide 17: Q3-2019 Operating Performance
Q3-2019 Operating Performance Q3-2019 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $ 251.1 $ — $ (1.3) $ 249.8 Interest expense 191.1 — — 191.1 Net interest income 60.0 — (1.3) 58.7 Total o
Slide 18: Q2-2019 Operating Performance
Q2-2019 Operating Performance Q2-2019 Core Earnings, including dollar roll Realized Gains (In millions, except for per common share data) income(1) (Losses) Unrealized MTM Total Interest income $ 269.1 $ — $ (8.1) $ 261.0 Interest expense 192.4 — — 192.4 Net interest income 76.7 — (8.1) 68.6 Total o
Slide 19: GAAP to Core Earnings Reconciliation
GAAP to Core Earnings Reconciliation(1)(2) Reconciliation of GAAP to non-GAAP Information Three Months Ended Three Months Ended (In thousands, except for per common share data) June 30, 2019 September 30, 2019 Reconciliation of Comprehensive income to Core Earnings: Comprehensive income attributable
Slide 20: Rates Metrics
Rates Metrics AGENCY RMBS CPR(1) AGENCY PORTFOLIO COMPOSITION IO & Inverse IO Hybrid ARMs and Other 0.6% 15.0% 13.4% 0.9% 10.1% 10.0% 30-Year Fixed 8.1% 3.0% 6.8% 6.5% 5.1% 5.0% 30-Year Fixed 5% & above 6.8% 0.0% Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 30-Year Fixed 4.5% 30-Year Fixed 4.0% 22.1% 38.
Slide 21: Rates: Agency RMBS
Rates: Agency RMBS Weighted As of September 30, % Prepay Amortized Cost Gross Weighted Average Age 2019 Par Value ($M) Market Value ($M) Protected(1) Basis ($M) Average Coupon (Months) 30-Year fixed 3.0% $ 1,235 $ 1,265 100.0% $ 1,266 3.9% 3 3.5% 6,266 6,512 100.0% 6,444 4.4% 4 4.0% 8,963 9,510 100.
Slide 22: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) Gross Weighted Weighted Weighted Weighted Unpaid Average Average Average Average (dollars in Number of Principal % Fannie Coupon Loan Age Original Original 60+ Day 3-Month Net Servicing millions) Loans Balance Fair Value Mae Rate (months) FICO(2) LTV Delinquencies
Slide 23: Credit Metrics
Credit Metrics NON-AGENCY 60+ DAY DELINQUENCIES NON-AGENCY PORTFOLIO COMPOSITION 25.0% Other: 0.1% Prime: 1.1% 19.6% 19.2% 18.7% 20.0% 18.1% 18.3% Option-ARM: 15.0% 9.0% 10.0% Q3-2018 Q4-2018 Q1-2019 Q2-2019 Q3-2019 Alt-A: 13.1% NON-AGENCY CPR 10.0% Sub-prime: 76.7% 6.6% 5.9% 5.3% 5.2% 4.9% 5.0% 0.0
Slide 24: Credit: Non-Agency Securities
Credit: Non-Agency Securities As of September 30, 2019 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $ 2,990.3 $ 483.0 $ 3,473.3 % of non-Agency portfolio 86.1% 13.9% 100.0% Weighted average purchase price(1) $ 63.32 $ 65.52 $ 63.63 Weighted average coupon 3.0
Slide 25: Financing
Financing $ in millions Repurchase Revolving Credit Term Notes Convertible Total Outstanding Outstanding Borrowings and Maturities(1) Agreements FHLB Advances Facilities Payable Notes Borrowings Percent (%) Within 30 days $ 7,154.3 $ — $ — $ — $ — $ 7,154.3 26.9% 30 to 59 days 6,779.4 — — — — 6,779.
Slide 26: Interest Rate Swaps
Interest Rate Swaps INTEREST RATE SWAPS Average Maturity Maturities Notional Amounts ($B) Average Fixed Pay Rate Average Receive Rate Years Payers 2019 $ 3.6 1.834% 2.204% 0.1 2020 3.6 1.806% 2.186% 1.1 2021 15.7 1.681% 2.177% 1.7 2022 2.6 1.911% 2.185% 3.0 2023 and after 7.5 2.344% 2.212% 7.0 $ 33.
Slide 27: Interest Rate Swaptions
Interest Rate Swaptions Option Underlying Swap Average Notional Average Average Cost Fair Value Months to Amount Average Pay Receive Term Swaption Expiration ($M) ($M) Expiration ($M) Rate Rate (Years) Purchase Contracts: Payer <6 Months $ 5.4 $ 1.4 4.0 $ 1,250 2.05% 3M LIBOR 5.2 Total Payer $ 5.4 $
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