Two Harbors Investment Corp · NYSE:TWO
Two Harbors Investment — Q4 2016 Earnings Presentation
28 slides from Two Harbors Investment's earnings presentation, Feb 6, 2017
Slide 1: Fourth Quarter 2016 Earnings Call
FEBRUARY 7, 2017 Fourth Quarter 2016 Earnings Call
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: Financial Summary
Financial Summary(1) • Total return on book value of 0.1%(3) – Book value of $9.78 per share and cash dividend of $0.24 per share • Comprehensive Income of $2.2 million, or $0.01 per share • GAAP net income of $341.4 million, or $0.98 per share • Core Earnings(4) of $83.4 million, or $0.24 per share
Slide 4: Strategic Overview
Strategic Overview 4 • Continue to thoughtfully manage Agency portfolio and build out MSR position • Capitalize on tailwinds supporting non-Agency • Increase capital allocated to commercial strategy • Generate additional returns through capital deployment and expense management • Streamlined and sim
Slide 5: Book Value and Comprehensive Income
(Dollars in millions, except per share data) Q4-2016 Book Value Q4-2016 Book Value per share FY-2016 Book Value FY-2016 Book Value per share Beginning stockholders’ equity $3,478.2 $10.01 $3,576.6 $10.11 GAAP Net Income: Core Earnings, net of tax 83.4 313.9 Realized gains and losses, net of tax (61.
Slide 6: Core Earnings Summary
(Dollars in millions) Q3-2016 Q4-2016 Variance ($) Variance (%) Interest income $168.9 $179.1 $10.2 6.1 % Interest expense 60.4 66.2 (5.8) (9.7%) Net interest income 108.5 112.9 4.4 4.0 % Loss on swaps and swaptions (4.3) (2.9) 1.4 31.7% Gain on other derivatives 3.7 4.1 0.4 13.6% Servicing income,
Slide 7: Tax Characterization of Dividend
Tax Characterization of Dividend FULL YEAR 2016 DIVIDEND SUMMARY • Generated REIT taxable income of $316.0 million in 2016 • 2016 dividend declarations totaled $320.5 million, or $0.93 per common share – $28.8 million relates to carryover from 2015 REIT taxable income – $291.7 million relates to 201
Slide 8: Diversified Financing Profile
Diversified Financing Profile 8 REPURCHASE AGREEMENTS • Outstanding borrowings of $9.3 billion with 23 active counterparties; 31 total counterparties • Repo markets functioning efficiently for RMBS FEDERAL HOME LOAN BANK OF DES MOINES • Outstanding secured advances of $4.0 billion • Weighted average
Slide 9: Portfolio Composition
HISTORICAL CAPITAL ALLOCATIONPORTFOLIO COMPOSITION(1) Portfolio Composition 9 $15.6 BILLION PORTFOLIO AS OF DECEMBER 31, 2016 (1) For additional detail on the portfolio, see Appendix slides 19-26. (2) Commercial consists of senior and mezzanine commercial real estate debt and related instruments. (3
Slide 10: Portfolio Performance
Portfolio Performance 10 Q4-2016 PERFORMANCE SUMMARY (1) “Legacy” non-Agency RMBS includes non-Agency bonds issued up to and including 2009. “New issue” non-Agency MBS includes bonds issued after 2009. (2) Cost of funds includes interest spread expense associated with the portfolio’s interest rate s
Slide 11: Rates Update
Rates Update 11 PORTFOLIO SUMMARY MSR INSTRUMENTAL TO BOOK VALUE STABILITY CONSERVATIVE RISK PROFILE • Low interest rate exposure • Utilize a combination of hedging tools • MSR is a key component of hedging strategy; substantial increase in MSR valuation in fourth quarter • Agency RMBS holdings of $
Slide 12: Credit Update
Credit Update 12 • Legacy non-Agency RMBS holdings of $1.9 billion • Average market price of $74.53 allows for upside opportunity(1) • Non-Agency prepayment speeds continued to be strong in 2016 • Continue to release credit reserves • Completed wind down of mortgage loan conduit and redeployed capit
Slide 13: Commercial Real Estate Update
Commercial Real Estate Update 13 PORTFOLIO BY PROPERTY TYPE PORTFOLIO BY GEOGRAPHY (1) Stabilized LTV considers the prospective market value “as stabilized” which reflects the property’s market value as of the time the property is projected to achieve stabilized occupancy. Stabilized occupancy is th
Slide 14: Appendix
E oo ——— = Appendix TWO HARBORS: nt Corp.
Slide 15: Return on Book Value
Return on Book Value 15 (1) Return on book value for three-month period ended December 31, 2016 is defined as the decrease in book value from September 30, 2016 to December 31, 2016 of $0.23 per share, plus dividends declared of $0.24 per share, divided by September 30, 2016 book value of $10.01 per
Slide 16: Financial Performance
Book Value ($) Dividend Declared ($) $12.00 $10.00 $8.00 $6.00 Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 $10.11 $9.70 $9.83 $10.01 $9.78 $0.26 $0.23 $0.23 $0.23 $0.24 Comp. Income ($M) Comp. Income ROAE (%) $150 $100 $50 $0 -$50 -$100 20% 10% 0% -10% -20% Q4-2015 Q1-2016 Q2-2016 Q3-2016 Q4-2016 $(3.2)
Slide 17: Operating Performance
Operating Performance Q3-2016 Q4-2016 (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 $168.9 $— $— $168.9 $179.1 $— $— $179.1 Interest expense 60.4 — — 60.4 66.2 — — 6
Slide 18: 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) September 30, 2016 December 31, 2016 Reconciliation of Comprehensive income to Core Earnings: Comprehensive income $136,532 $2,187 Ad
Slide 19: Rates: Agency RMBS Metrics
Rates: Agency RMBS Metrics 19 AGENCY PORTFOLIO YIELDS AND METRICS AGENCY RMBS CPR(1) (1) Agency weighted average 3-month Constant Prepayment Rate (CPR) includes IIOs (or Agency Derivatives). (2) Weighted average cost basis includes RMBS principal and interest securities only. Average purchase price
Slide 20: Rates: Agency RMBS
Rates: Agency RMBS 20 As of December 31, 2016 Par Value ($M) Market Value ($M) % Prepay Protected(1) Amortized Cost Basis ($M) Weighted Average Coupon Weighted Average Age (Months) 30-Year fixed 3.0-3.5% $6,653 $6,762 70.5% $6,909 3.3% 5 4.0-4.5% 3,238 3,463 100.0% 3,480 4.2% 42 ≥ 5.0% 455 512 100.0
Slide 21: Rates: Mortgage Servicing Rights
Rates: Mortgage Servicing Rights(1) 21 As of September 30, 2016 As of December 31, 2016 Fair value ($M) $455.6 $693.8 Unpaid principal balance ($M) $55,080.9 $62,828.0 Weighted average coupon 3.9% 3.8% Original FICO score(2) 757 756 Original LTV 72% 73% 60+ day delinquencies 0.3% 0.3% Net servicing
Slide 22: Credit: Non-Agency MBS Metrics
Credit: Non-Agency MBS Metrics 22 NON-AGENCY PORTFOLIO COMPOSITIONNON-AGENCY PORTFOLIO YIELDS AND METRICS (1) Weighted average cost basis includes MBS principal and interest securities only. Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weig
Slide 23: Credit: Non-Agency MBS
Credit: Non-Agency MBS 23 As of December 31, 2016 Senior Bonds Mezzanine Bonds Total P&I Portfolio characteristics: Carrying value ($M) $1,210.5 $687.6 $1,898.1 % of non-Agency portfolio 63.8% 36.2% 100.0% Average purchase price(1) $53.64 $65.63 $57.86 Average coupon 2.9% 2.2% 2.6% Weighted average
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: Financing
Financing 25 (1) Weighted average of 3.8 years to maturity. (2) Includes FHLB advances of $2.5 billion with original maturities of 20 years. (3) Excludes FHLB membership and activity stock totaling $167.9 million. (4) MSR over-collateralized due to operational considerations. $ in millions Oustandin
Slide 26: Interest Rate Swaps
Maturities Notional Amounts ($B)(1) Average Fixed Pay Rate(2) Average Receive Rate(2) Average Maturity Years(2) Payers Hedging Repo and FHLB Advances 2017 $2.4 0.765% 0.934% 0.6 2018 1.3 1.002% 0.860% 1.6 2019 0.4 1.283% 0.895% 2.4 2020 1.1 1.463% 0.930% 3.8 2021 and after 4.9 1.897% 0.946% 6.6 $10.
Slide 27: Interest Rate Swaptions
Interest Rate Swaptions 27 Option Underlying Swap Swaption Expiration Cost ($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 $29.4 $21.2 0.7 $2,500 2.56% 3M LIBOR 4.8 Payer >6 Months 1
Slide 28: Two Harbors Investment Corp.
TWO HARBORS Investment Corp. AP vr Capa Managed Gonoany
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