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| 8-K - 8-K THIRD QUARTER 2017 INVESTOR PRESENTATION - TWO HARBORS INVESTMENT CORP. | a8-kq3x2017investorpresent.htm |
Third Quarter 2017 Investor Presentation
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, consequently, readers should not rely on these forward-looking statements as
predictions of future events. Words such as “expect,” “target,” “assume,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “intend,” “plan,” “may,” “will,”
“could,” “should,” “believe,” “predicts,” “potential,” “continue,” and similar expressions are intended to identify such forward-looking statements. These
forward-looking statements involve significant risks and uncertainties that could cause actual results to differ materially from expected results, including, among other
things, those described in our Annual Report on Form 10-K for the year ended December 31, 2016, and any subsequent Quarterly Reports on Form 10-Q, under the
caption “Risk Factors.” Factors that could cause actual results to differ include, but are not limited to: the state of credit markets and general economic conditions;
changes in interest rates and the market value of our assets; changes in prepayment rates of mortgages underlying our target assets; the rates of default or decreased
recovery on the mortgages underlying our target assets; the occurrence, extent and timing of credit losses within our portfolio; the concentration of credit risks we are
exposed to; declines in home prices; our ability to establish, adjust and maintain appropriate hedges for the risks in our portfolio; the availability and cost of our target
assets; the availability and cost of financing; changes in the competitive landscape within our industry; our ability to effectively execute and to realize the benefits of
strategic transactions and initiatives we have pursued or may in the future pursue; our ability to manage various operational risks and costs associated with our
business; interruptions in or impairments to our communications and information technology systems; our ability to acquire mortgage servicing rights (MSR) and
successfully operate our seller-servicer subsidiary and oversee our subservicers; the impact of any deficiencies in the servicing or foreclosure practices of third parties
and related delays in the foreclosure process; our exposure to legal and regulatory claims; legislative and regulatory actions affecting our business; the impact of new
or modified government mortgage refinance or principal reduction programs; our ability to maintain our REIT qualification; and limitations imposed on our business
due to our REIT status and our exempt status under the Investment Company Act of 1940.
Readers are cautioned not to place undue reliance upon any forward-looking statements, which speak only as of the date made. Two Harbors does not undertake or
accept any obligation to release publicly any updates or revisions to any forward-looking statement to reflect any change in its expectations or any change in events,
conditions or circumstances on which any such statement is based. Additional information concerning these and other risk factors is contained in Two Harbors’ most
recent filings with the Securities and Exchange Commission (SEC). All subsequent written and oral forward-looking statements concerning Two Harbors or matters
attributable to Two Harbors or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above.
This presentation may include industry and market data obtained through research, surveys, and studies conducted by third parties and industry publications. We
have not independently verified any such market and industry data from third-party sources. This presentation is provided for discussion purposes only and may not be
relied upon as legal or investment advice, nor is it intended to be inclusive of all the risks and uncertainties that should be considered. This presentation does not
constitute an offer to purchase or sell any securities, nor shall it be construed to be indicative of the terms of an offer that the parties or their respective affiliates
would accept.
Readers are advised that the financial information in this presentation is based on company data available at the time of this presentation and, in certain
circumstances, may not have been audited by the company’s independent auditors.
2
Two Harbors Investment Corp. Overview (1)
LEADING HYBRID MORTGAGE REAL ESTATE INVESTMENT TRUST
3
1) Except as otherwise indicated in this presentation, reported data is as of or for the period ended September 30, 2017. On November 1, 2017, the company completed its previously announced one-for-two reverse stock split of its outstanding shares of
common stock. In accordance with generally accepted accounting principles, all common share and per common share amounts presented herein have been adjusted on a retroactive basis to reflect the reverse stock split.
2) Includes Agency and non-Agency RMBS, inverse-interest only securities (Agency Derivatives), MSR, net economic interest in securitization trusts, residential mortgage loans held-for-sale and commercial real estate assets, which consists of the consolidated
financial results of Granite Point and its subsidiaries, which assets include senior, mezzanine and B-note commercial real estate debt and related instruments.
3) Two Harbors’ total stockholder return calculated for the period October 29, 2009 through September 30, 2017. Total stockholder return is defined as stock price appreciation including dividends. Source: Bloomberg.
•$3.5 billion market cap
•$23.7 billion portfolio(2)
•Incorporated in 2009
MARKET PRESENCE
•Rates: Agency RMBS and mortgage servicing rights
(MSR)
•Credit: mortgage credit assets
INVESTMENT STRATEGIES
•Low leverage
•Strong repo counterparties
•Diversified capital structure through convertible
debt and preferred stock
FINANCING & LIQUIDITY
•Sophisticated approach to hedging
•Overall low exposure to rates
•Superior asset selection
RISK MANAGEMENT
•Total stockholder return since inception of 205%(3)
•Top performer during times of volatility
LEADING PERFORMANCE
LEADING HYBRID MREIT
VALUE APPROACH TO
PORTFOLIO MANAGEMENT
DIVERSIFIED FINANCING
PROFILE AND STRONG
BALANCE SHEET
HIGH QUALITY RETURNS
WITH LESS VOLATILITY
OUTPERFORMED PEER
GROUP
Strategic Overview
4
Delivered total stockholder return of 25% in 2017(2)
Grew Core Earnings to $0.51 per basic common share(3)
Three dividend increases
(1) Includes offering of 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock in November 2017.
(2) Two Harbors’ total stockholder return is calculated for the period December 31, 2016 through September 30, 2017. Total stockholder return is defined as stock price appreciation including dividends.
Source: Bloomberg.
(3) Core Earnings is a non-GAAP measure. Please see Appendix slide 16 of this presentation for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.
Plan for 2017 Executing on Plan
More focused business model
- Reduced operating complexity and costs in 2017, following
discontinuation of mortgage loan conduit business
- Formed Granite Point Mortgage Trust to continue and expand on
commercial real estate business; potential for higher valuation for
both companies
- On 11/1/2017, distributed approximately 33.1 million shares of
Granite Point common stock to Two Harbors' stockholders
Attractive investment opportunities in target assets
Opportunistically added Agency and non-Agency RMBS; grew
portfolio of high-quality new issue MSR through flow sale
arrangements and bulk deals
Opportunistic use of capital structure
Enhanced balance sheet and capital structure through a
convertible debt and three preferred stock offerings(1); effected
one-for-two reverse stock split
Sophisticated approach to risk management Book value and income stability through hedging with swaps,
swaptions and MSR paired with Agency RMBS
Book Value Stability Drives Dividend Sustainability
5
• Book value has grown by 10.6% since inception; peer median over
same time period is (21.8%)(1)
• Book value volatility of 7.5% since inception; significantly less than
hybrid mREITs (14.8%) and Agency mREITs (13.2%)(2)
BOOK VALUE STABILITY AND GROWTH
• Stockholders with TWO since inception have received dividends of
$20.00 per share
• Dividend distributions are a function of several factors including core
earnings, taxable income, book value and market conditions
DIVIDEND SUSTAINABILITY
1) Book value growth measured from December 31, 2009 through September 30, 2017. Companies A-H represent comparable mortgage REIT peers.
2) Book value volatility since inception is measured from December 31, 2009 or the company’s inception, whichever is later, through September 30, 2017. Book value volatility calculated by dividing the standard deviation of book values in the
measured period by the average book value from the measured period. Agency mREITs include NLY, AGNC, CYS and CMO. Hybrid mREITs include ANH, ARR, CIM, MFA, IVR, MTGE, NYMT, MITT and WMC.
16.3% 16.4%
15.8%
11.2%
10.3%
11.3%
11.0% 10.4%
0.0%
4.0%
8.0%
12.0%
16.0%
20.0%
2010 2011 2012 2013 2014 2015 2016 2017
Dividend Yield
10.6%
TWO Co. A Co. B Co. C Co. D Co. E Co. F Co. G Co. H
(64.0%)
15.0%
-20.0%
10.0%
40.0%
70.0%
100.0%
130.0%
160.0%
190.0%
220.0%
10/29/2009 10/29/2010 10/29/2011 10/29/2012 10/29/2013 10/29/2014 10/29/2015 10/29/2016
TWO BBG REIT MTG Index
Delivering Results
6
1) Two Harbors’ total stockholder return is calculated for the period October 29, 2009 through September 30, 2017. Total stockholder return is defined as stock price appreciation including dividends. Source: Bloomberg.
2) Bloomberg REIT Mortgage Index total stockholder return for the period October 29, 2009 through September 30, 2017. The Bloomberg REIT Mortgage Index tracks publicly traded REITs whose principal business consists of originating,
servicing or investing in residential mortgage interests. The index uses a modified market capitalization weighted methodology, and components are reviewed quarterly for eligibility. Source: Bloomberg.
• Outperformed peer group by over 70% since inception
• Delivered total stockholder return of 205% during that time(1)
― Bloomberg REIT Mortgage Index total stockholder return of 133% over the same period of time(2)
• Maintained comparable dividend yield with lower leverage and less interest rate exposure than peer average
205%
132%
(2) (1)
9/30/2017
…LESS INTEREST RATE R ISK (3 ) . . .
Attractive Returns With Lower Risk
7
AT T R AC T I VE & C O M PA R A BLE D I V I D E ND Y I E L D (1 ) …WITH LOWER LEVERAGE (2 ) . . .
SUPERIOR ASSET SELECTION AND RISK MANAGEMENT DRIVE RETURNS WITH LESS RISK
TWO Peer Average TWO Peer Average
TWO Peer Average
…AND LESS PREPAYMENT EXPOSURE (4 )
TWO Peer Average
Note: Two Harbors and peer financial data for Dividend Yield, Leverage, Prepayment Risk and Interest Rate Exposure on this slide is based on available financial information as of September 30 2017 as filed with the SEC. Peers include AGNC, ANH, ARR, CMO, CYS, IVR, MFA , NLY and HTS
(financial information for HTS is included in peer financial data only for the periods ending prior to the second quarter of 2016).
(1) Represents average of annualized yields on all quarterly cash dividends per respective fiscal year. Annualized yields for each quarter are calculated by dividing annualized quarterly dividends by closing share price as of respective quarter-ends. Peer dividend data based on peer
company press releases. Historical dividends may not be indicative of future dividend distributions. Our company ultimately distributes dividends based on its taxable income per share of common stock.
(2) Represents average of debt-to-equity ratios for all reportable quarters per respective fiscal year. Debt-to-equity is defined as total borrowings to fund RMBS, residential mortgage loans held-for-sale, commercial real estate assets, MSR and Agency Derivatives divided by total equity.
(3) Represents average of estimated change in equity value for theoretical +100bps parallel shift in interest rates for all reportable quarters per respective fiscal year. Change in equity market capitalization is adjusted for leverage.
(4) Represents average of the constant prepayment rate (CPR) on Agency RMBS, including Agency Derivatives, for all reportable quarters per respective fiscal year.
10.3%
11.3% 11.0%
10.4%
11.9%
13.0%
11.8%
9.9%
0.0%
6.0%
12.0%
18.0%
2014 2015 2016 2017 2014 2015 2016 2017
3.0x 3.0x
3.8x
4.8x
6.4x 6.6x
6.2x
5.8x
0.0x
2.0x
4.0x
6.0x
8.0x
2014 2015 2016 2017 2014 2015 2016 2017
7.6%
9.3%
8.7%
7.2%
11.2%
13.5%
14.8%
13.5%
0.0%
5.0%
10.0%
15.0%
20.0%
2014 2015 2016 2017 2014 2015 2016 2017
-1.0%
-3.2%
-3.0%
-3.7%
-8.2%
-6.7% -7.0%
-9.3%
-11.0%
-6.0%
-1.0%
2014 2015 2016 2017 2014 2015 2016 2017
Optimizing Financing Profile and Capital Structure
8
RATES – RMBS
• Outstanding borrowings of $14.9 billion with 21 active counterparties
• Outstanding secured FHLB advances of $2.0 billion with weighted average borrowing rate of 1.56%
• Repo markets functioning efficiently for RMBS; new counterparties entering market and larger counterparties favoring
pool spreads versus treasuries
RATES – MSR
• Outstanding borrowings of $40.0 million under revolving credit facilities; additional available capacity of $50.0 million as
of September 30, 2017
• Post quarter-end, closed 2-year, $300 million MSR financing facility with large banking counterparty to finance Fannie
Mae MSR collateral
― Financial terms are 48.75% advance rate at LIBOR +225 basis points(1)
• Continue to advance other MSR financing discussions
CREDIT – RMBS
• Outstanding borrowings of $1.9 billion with 11 active counterparties
• Market for non-Agency RMBS has seen improvement in both advance rates and spreads in 2017
PREFERRED STOCK ISSUANCES
• $285 million net proceeds of a 7 year fixed coupon at 7.25%(2)
• $417 million net proceeds of 10 year weighted fixed coupon of 7.79%
(1) Excludes non-usage, commitment and other fees associated with facility.
(2) Includes offering of 7.25% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock in November 2017.
HISTORICAL CAPITAL ALLOCATION PORTFOLIO COMPOSITION(1)
Portfolio Composition
9
$23.7 BILLION PORTFOLIO AS OF SEPTEMBER 30, 2017
(1) For additional detail on the portfolio, see Appendix slides 17-22.
(2) Commercial consists of the consolidated financial results of Granite Point and its subsidiaries, which assets include senior, mezzanine and B-note commercial real estate debt and related
instruments.
(3) MSR includes Ginnie Mae buyout residential mortgage loans.
(4) Assets in “Rates” include Agency RMBS, Agency Derivatives, MSR and Ginnie Mae buyout residential mortgage loans.
(5) Assets in “Credit” include non-Agency securities, net economic interests in securitization trusts, prime jumbo residential mortgage loans and credit sensitive residential mortgage loans.
Rates(3)
$10,766
Commercial(2)
$2.2b
September
30,
2016
June 30,
2017
September
30,
2017
Rates(4) 54 % 54 % 55 %
Credit(5) 31 % 28 % 29 %
Commercial(2) 15 % 18 % 16 %
Agency
$17.6b
MSR(3)
$1.0b
Non-Agency
$2.6b
Rates(4) $18.6b Credit(5) $2.9b Commercial(2) $2.2b
Conduit
$0.3b
If Granite Point shares had been
distributed on September 30,
2017, capital allocation to the
Rates and Credit strategies
would have been 66% and 34%,
respectively.
Mortgage Spreads
Change in Agency RMBS and
Mortgage Derivatives Change in MSR
Total Overall Rates Strategy
Change(2)
25 basis points wider ($140) $44 ($96)
(2.9%)
15 basis points wider ($82) $27 ($55)
(1.7%)
15 basis points tighter $75 ($31) $44
1.3%
25 basis points tighter $120 ($53) $67
2.0%
Rates Strategy Update
10
BOOK VALUE SENSITIVITY TO MORTGAGE SPREADS(1)
• Opportunity to capitalize on Fed's tapering of RMBS
• Pairing MSR with Agency RMBS results in a portfolio that has higher return potential with lower mortgage
spread risk
– Mitigates impact to book value in spread widening scenario
• Expect attractive investment opportunities in wider spread environment
• Post quarter-end, closed on $9 billion UPB bulk purchase of MSR
(1) Dollars in millions. The information presented in this table projects the potential impact on book value of instantaneous changes in mortgage spreads. Spread sensitivity is based on results from third party models in conjunction with inputs
from our internal investment professionals. Actual results could differ materially from these estimates.
(2) Percentage shown is the expected change on a pro-forma capital base of approximately $3.3 billion.
Credit Strategy: Tailwinds
11
• Home prices continue to improve; CoreLogic Home Price Index up 7.0% on a rolling 12-month basis(1)
― Home prices are expected to increase 4-6% in 2018(2)
― Supported by affordability, low housing supply and strong demand
• Continued re-equification can drive strong performance for our deeply discounted non-Agency holdings
― Increasing prepayments, lower LTVs, delinquencies, defaults and severities
(1) Source: CoreLogic Home Price Index rolling 12-month change as of September 2017.
(2) Source: J.P. Morgan, Nomura, Citi and CoreLogic research.
(3) Metric associated with legacy non-Agency P&I portfolio only.
(4) The above scenarios for 2018 and 2019 are provided for illustration purposes only and assume approximately 3% HPA per year. Actual results of the portfolio may differ materially.
RESIDENTIAL CREDIT TAILWINDS
Non-Agency Portfolio Mark-to-Market LTV(3)
2014 YE 87
2015 YE 81
2016 YE 75
2017 Q3 70
2018 Q3 Estimate(4) 67
2019 Q3 Estimate(4) 63
Credit Strategy: Attractive Return Expectancy
12
ILLUSTRATIVE LEGACY NON- AGENCY BOND EXAMPLE
• Bond characteristics(1):
― Purchase price in Q1-2017: $52.25
― Total 60+ day delinquencies: 17.4%
― 12-month CPR: 4.6%
― 12-month loss severities: 57.5%
YIELD ANALYSIS – ACE 2007 -WM2 A2D (1)
Base Case Upside
Loss-adjusted yields 5.06% 7.34%
Voluntary Prepays 4.5% 7.5%
Total defaults 33% 20%
Average severity 58% 50%
Bond recovery 58% 64%
Bond Value at 5.06% yield $52.25 58.72
Return Expectancy 9% with upside Mid-teens
(1) Values as of November 10, 2017. Collateral summary and yield analysis scenarios represent the views of Two Harbors and are provided for illustrative purposes only and may not
represent all assumptions used. Actual results may differ materially.
-100 bps -50 bps +50 bps +100 bps
Change in annualized net
interest income (in
thousands) $16, 229 $8,110 ($7,974) ($15,947)
% Change in net interest
income 4.9% 2.5% (2.4%) (4.8%)
Pro-Forma Net Income Exposure
13
PRO-FORMA NET INTEREST INCOME EXPOSURE TO CHANGE IN RATES(1)(2)
HEDGE ACROSS ALL POINTS OF THE CURVE
• Flatter curve has potential to compress net interest margins
• Combination of hedging strategy and floating-rate non-Agency holdings leads to minimal income
exposure to rate changes
Note: Pro-forma net interest income exposure has been prepared for illustrative purposes only, and is not necessarily indicative of Two Harbors’ financial condition and operating results that would have occurred
if the distribution of Granite Point shares had been consummated as of September 30, 2017, nor is it necessarily indicative of the financial condition or results of operations that may be expected for any future
period or date.
1) As of September 30, 2017. Excludes the noncontrolling interest from the Granite Point IPO.
2) Represents estimated percentage change in net interest income for theoretical parallel shifts in interest rates.
Appendix
Illustrative Pro Forma Balance Sheet and Core Earnings
as of Sept. 30, 2017
15
(unaudited, dollars in thousands,
except per share data)
Consolidated
Two Harbors
Investment Corp.
Granite Point
Mortgage
Trust Inc.
Standalone
Two Harbors
Investment Corp.
Total Assets $ 27,803,774 $ 2,356,727 $ 25,474,505
Total liabilities 23,672,393 1,525,953 22,173,898
Total Stockholders’ Equity 3,941,564 830,774 3,300,607
Noncontrolling interest 189,817 — —
Total equity 4,131,381 830,774 3,300,607
Total Liabilities and Equity $ 27,803,774 $ 2,356,727 $ 25,474,505
Common shares outstanding 174,489,356 43,235,103 174,489,356
Preferred stock liquidation
preference $ 431,250 $ 431,250
Book Value $ 20.12 $ 19.22 $ 16.44
Debt-to-equity 5.0(1) 1.8 5.8
• Pro forma book value of $16.44 at September 30, 2017
• Debt-to-equity nominally increases with removal of lower
levered CRE portfolio of Granite Point
Note: This unaudited pro forma balance sheet has been prepared for illustrative purposes only, and is not necessarily indicative of Two Harbors’ financial condition and operating results that would have occurred if the distribution of Granite
Point shares has been consummated as of September 30, 2017, nor is it necessarily indicative of the financial condition or results of operations that may be expected for any future period or date.
(1) Defined as total borrowings to fund RMBS, commercial real estate assets, MSR and Agency Derivatives, divided by total equity. The company’s September 30, 2017 debt-to-equity ratio includes the consolidation of Granite Point’s
assets and liabilities. Excluding the noncontrolling interest from the Granite Point IPO, the company’s debt-to-equity ratio as of September 30, 2017 would have been 5.8x.
(2) Core Earnings is a non-GAAP measure. Please see Appendix slide 16 of this presentation for a definition of Core Earnings and a reconciliation of GAAP to non-GAAP financial information.
Q3 As Reported Q3 Pro Forma
(Dollars in
millions, except
per share data) $
Per Basic
Share $
Per Basic
Share
Core
Earnings(2) $ 89.2 $ 0.51 $ 78.5 $ 0.45
Average
Common
Equity $ 3,487.9 $ 2,847.3
Core Earnings
as a % of
Average
Common
Equity 10.2 % 11.0 %
• Expect to have numerically lower Core Earnings due to
the lower capital base, but believe that Core Earnings
as a percent of book value has the potential to
increase
PRO FORMA BALANCE SHEET PRO FORMA CORE EARNINGS(2)
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) June 30, 2017 September 30, 2017
Reconciliation of Comprehensive income to Core Earnings:
Comprehensive income $85,959 $161,601
Adjustment for other comprehensive income attributable to common stockholders:
Unrealized gains on available-for-sale securities attributable to common stockholders (81,626 ) (68,425 )
Net income attributable to common stockholders $4,333 $93,176
Adjustments for non-core earnings:
(Gain) loss on sale of securities and residential mortgage loans, net of tax (23,258 ) 2,168
Unrealized loss (gain) on securities and residential mortgage loans held-for-sale, net of tax 2,008 (9,752 )
Other-than-temporary impairment loss 429 —
Unrealized losses on interest rate swaps and swaptions hedging interest rate exposure (or duration), net of tax 43,121 11,340
Realized loss (gain) on termination or expiration of swaps and swaptions, net of tax 35,358 (14,563 )
Losses on other derivative instruments, net of tax 14,497 14,578
Realized and unrealized gains on financing securitizations, net of tax (1,408 ) (6,835 )
Realized and unrealized loss (gain) on mortgage servicing rights, net of tax 16,600 (5,864 )
Change in servicing reserves, net of tax (16 ) (315 )
Non-cash equity compensation expense(2) 3,682 3,917
Tax valuation allowance (11 ) (57 )
Transaction expenses associated with the IPO of Granite Point 2,193 —
Adjustments for Granite Point income to dividends on Granite Point shares:
Controlling interest in GPMT core earnings for the three months ended September 30, 2017 — (9,273 )
TWO's share of GPMT dividends declared during the three months ended September 30, 2017 — 10,658
Core Earnings attributable to common stockholders $97,528 $89,178 (3)
Weighted average basic common shares outstanding 174,473,168 174,488,296
Core Earnings per weighted average basic common share outstanding $0.56 $0.51
16
(1) Core Earnings is a non-U.S. GAAP measure that we define as comprehensive income attributable to common stockholders, excluding “realized and unrealized gains and losses” (impairment losses, realized and unrealized gains or losses on the aggregate portfo lio, reserve
expense for representation and warranty obligations on MSR, certain upfront costs related to securitization transactions, non-cash compensation expense related to restricted common stock, restructuring charges and transaction costs related to Granite Point’s initial public
offering). As defined, Core Earnings includes interest income or expense and premium income or loss on derivative instruments and servicing income, net of estimated amortization on MSR. We believe the presentation of Core Earnings provides investors greater transparency
into our period-over-period financial performance and facilitates comparisons to peer REITs.
(2) This non-cash equity compensation expense was included in Core Earnings for periods ending prior to March 31, 2017.
(3) For the three months ended September 30, 2017, Core Earnings excludes our controlling interest in Granite Point’s Core Earnings and includes our share of Granite Point’s declared dividend. We believe this presentation is the most accurate reflection of our incoming cash
associated with holding shares of Granite Point common stock and assists with the understanding of the forward-looking financial presentation of the company.
Rates: Agency RMBS Metrics
17
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 utilized carrying value for weighting purposes.
Portfolio Yield
Realized
Q2-2017
At June 30,
2017
Realized
Q3-2017
At
September
30, 2017
Agency yield 3.1 % 3.0 % 3.0 % 3.0 %
Repo and FHLB costs 1.2 % 1.3 % 1.4 % 1.5 %
Swap costs 0.2 % — % 0.1 % (0.1 %)
Net interest spread 1.7 % 1.7 % 1.5 % 1.6 %
Portfolio Metrics Q2-2017 Q3-2017
Weighted average 3-month CPR(1) 8.0 % 8.0 %
Weighted average cost basis(2) $106.6 $106.6
AGENCY PORTFOLIO COMPOSITION
30-Year Fixed 4-4.5%
67.2%
30-Year Fixed 3-3.5%
26.2%
30-Year Fixed
5% & above
3.5%
IO & Inverse IO
1.7%
Hybrid ARMs and
Other
1.4%
Rates: Agency RMBS
18
As of September 30,
2017 Par Value ($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% $4,466 $4,623 76.1 % $4,665 3.5 % 12
4.0-4.5% 11,045 11,860 97.6 % 11,820 4.2 % 17
≥ 5.0% 552 616 86.4 % 599 5.4 % 76
16,063 17,099 91.3 % 17,084 4.1 % 18
Hybrid ARMs 23 25 — % 24 4.9 % 163
Other 224 223 0.7 % 216 4.6 % 148
IOs and IIOs 3,615 309 (2) — % 320 3.2 % 102
Total $19,925 $17,656 88.5 % $17,644
(1) Includes securities with implicit or explicit protection including lower loan balances (securities collateralized by loans less than or equal to $175K of initial principal balance), higher LTVs
(securities collateralized by loans with greater than or equal to 80% LTV), certain geographic concentrations and lower FICO scores.
(2) Represents market value of $208.0 million of IOs and $101.3 million of Agency Derivatives.
Rates: Mortgage Servicing Rights(1)
19
As of June 30, 2017 As of September 30, 2017
Fair value ($M) $898.0 $930.6
Unpaid principal balance ($M) $84,814.2 $88,789.8
Weighted average coupon 3.9 % 3.9 %
Original FICO score(2) 754 753
Original LTV 73 % 73 %
60+ day delinquencies 0.2 % 0.3 %
Net servicing spread 25.4 basis points 25.4 basis points
Vintage:
Pre-2009 0.4 % 0.4 %
2009-2012 16.8 % 15.4 %
Post 2012 82.8 % 84.2 %
(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.
Credit: Non-Agency Securities Metrics
20
LEGACY NON-AGENCY PORTFOLIO COMPOSITION NON-AGENCY PORTFOLIO YIELDS AND METRICS
(1) Weighted average cost basis includes legacy non-Agency principal and interest securities only. Average purchase price utilized carrying value for weighting purposes. If current face were utilized for
weighting purposes, total legacy non-Agency securities excluding the company’s non-Agency interest-only portfolio would have been $57.40 at September 30, 2017.
Portfolio Yield
Realized
Q2-2017
At June 30,
2017
Realized
Q3-2017
At
September
30, 2017
Non-Agency yield 8.4 % 8.2 % 8.1 % 7.7 %
Repo and FHLB costs 2.9 % 2.9 % 3.0 % 3.0 %
Swap costs 0.1 % — % — % — %
Net interest spread 5.4 % 5.3 % 5.1 % 4.7 %
LEGACY NON-AGENCY CPR
Non-Agency: Loan Type June 30, 2017 September 30, 2017
Sub-prime 79 % 79 %
Option-ARM 11 % 10 %
Prime 2 % 2 %
Alt-A 8 % 9 %
Portfolio Metrics Q2-2017 Q3-2017
Weighted average 3-month CPR 6.2 % 6.4 %
Weighted average cost basis(1) $60.5 $60.0
Credit: Legacy Non-Agency Securities
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As of September 30, 2017 Senior Bonds Mezzanine Bonds Total P&I
Portfolio characteristics:
Carrying value ($M) $1,558.4 $752.8 $2,311.2
% of non-Agency portfolio 67.4 % 32.6 % 100.0 %
Average purchase price(1) $57.38 $65.30 $59.96
Average coupon 2.7 % 2.0 % 2.5 %
Weighted average market price(2) $76.97 $77.21 $77.05
Collateral attributes:
Average loan age (months) 134 142 137
Average loan size ($K) $369 $358 $366
Average original Loan-to-Value 69.8 % 69.1 % 69.6 %
Average original FICO(3) 634 574 615
Current performance:
60+ day delinquencies 22.8 % 20.0 % 21.9 %
Average credit enhancement(4) 8.2 % 15.8 % 10.7 %
3-Month CPR(5) 5.6 % 8.0 % 6.4 %
(1) Average purchase price utilized carrying value for weighting purposes. If current face were utilized for weighting purposes, the average purchase price for senior, mezzanine and total legacy non-Agency
securities, excluding our non-Agency interest-only portfolio, would have been $54.87, $62.66 and $57.40, respectively.
(2) Weighted average market price utilized current face for weighting purposes.
(3) FICO represents a mortgage industry accepted credit score of a borrower.
(4) Average credit enhancement remaining on our legacy non-Agency portfolio, which is the average amount of protection available to absorb future credit losses due to defaults on the underlying collateral.
(5) 3-Month CPR is reflective of the prepayment speed on the underlying securitization; however, it does not necessarily indicate the proceeds received on our investment tranche. Proceeds received for
each security are dependent on the position of the individual security within the structure of each deal.
Granite Point’s Commercial Real Estate Portfolio(1)
(1) Due to the company’s controlling ownership interest in Granite Point, the company consolidates Granite Point on its financial statements and reflects noncontrolling interest for the portion of equity and comprehensive income not
attributable to the company.
(2) Cash coupon does not include origination or exit fees. Weighted average cash coupon excludes fixed rate loans.
(3) Yield includes net origination fees and exit fees, but does not include future fundings, and is expressed as a monthly equivalent yield. Weighted average yield excludes fixed rate loans.
(4) Initial LTV considers “as is” value (as determined in conformance with the Uniform Standards of Professional Appraisal Practice, or USPAP) of the underlying property or properties, as set forth in the original appraisal.
(5) Stabilized LTV considers the "as stabilized" value (as determined in conformance with USPAP) of the underlying property or properties, as set forth in the original appraisal. "As stabilized" value may be based on certain assumptions, such
as future construction completion, projected re-tenanting, payment of tenant improvement, leasing commissions allowances or free or abated rent periods, or increased tenant occupancies.
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$ in millions Type
Origination
Date
Principal
Balance Book Value Cash Coupon(2) Yield(3)
Original Term
(Years) State Property Type Initial LTV(4)
Stabilized
LTV(5)
Asset 1 Senior 12/15 $120.0 $120.0 L + 4.20% L + 4.43% 4 LA Mixed-Use 65.5 % 60.0 %
Asset 2 Senior 09/17 107.5 105.8 L + 4.45% L + 4.90% 3 CT Office 62.9 % 58.9 %
Asset 3 Senior 09/15 105.0 105.0 L + 3.42% L + 3.79% 3 CA Retail 70.9 % 66.9 %
Asset 4 Senior 07/16 100.2 99.1 L + 4.45% L + 4.99% 4 Various Office 62.8 % 61.5 %
Asset 5 Senior 04/16 82.0 81.5 L + 4.75% L + 5.44% 3 NY Industrial 75.9 % 55.4 %
Asset 6 Senior 11/15 78.3 78.3 L + 4.20% L + 4.67% 3 NY Office 66.4 % 68.7 %
Asset 7 Senior 10/16 76.1 75.5 L + 4.37% L + 4.83% 4 NC Office 72.4 % 68.1 %
Asset 8 Senior 05/17 68.7 67.7 L + 4.10% L + 4.82% 4 MA Office 71.3 % 71.5 %
Asset 9 Senior 12/16 62.3 60.8 L + 4.11% L + 4.87% 4 FL Office 73.3 % 63.2 %
Asset 10 Senior 06/16 51.8 51.5 L + 4.49% L + 4.93% 4 HI Retail 76.2 % 57.4 %
Asset 11 Senior 01/17 52.0 51.4 L + 4.75% L + 5.24% 4 SC Office 67.6 % 67.1 %
Asset 12 Senior 09/17 51.5 50.8 L + 4.38% L + 4.78% 3 NY Industrial 68.7 % 72.0 %
Asset 13 Senior 12/15 48.1 48.1 L + 4.65% L + 4.87% 4 PA Office 74.5 % 67.5 %
Asset 14 Mezzanine 03/15 45.9 45.9 L + 6.75% L + 7.61% 5 Various Hotel 70.3 % 63.5 %
Asset 15 Senior 06/17 45.0 44.4 L + 4.50% L + 5.24% 3 CA Hotel 54.7 % 48.6 %
Assets 16-57 Various Various 1,094.9 1,085.6 L + 4.85% L + 5.45% 3 Various Various 71.0 % 65.4 %
Total/Weighted Average $ 2,189.3 $ 2,171.4 L + 4.62% L + 5.18% 4 69.8 % 64.3 %
Financing
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(1) Weighted average of 1.5 years to maturity.
(2) Includes FHLB advances of $1.2 billion with original maturities of 20 years.
(3) Excludes FHLB membership and activity stock totaling $85.2 million.
(4) Revolving credit facilities over-collateralized due to operational considerations.
$ in millions
Outstanding Borrowings and Maturities(1)
Repurchase
Agreements FHLB Advances
Revolving Credit
Facilities Convertible Notes
Total Outstanding
Borrowings Percent (%)
Within 30 days $ 3,167.5 $ — $ — $ — $ 3,167.5 15.4 %
30 to 59 days 2,911.8 — — — 2,911.8 14.1 %
60 to 89 days — — 20.0 — 20.0 0.1 %
90 to 119 days 3,298.6 — — — 3,298.6 16.0 %
120 to 364 days 7,478.6 — 20.0 — 7,498.6 36.4 %
One to three years 1,440.9 815.0 — — 2,255.9 10.9 %
Three to five years — — — 282.5 282.5 1.4 %
Ten years and over(2) — 1,183.8 — — 1,183.8 5.7 %
$ 18,297.4 $ 1,998.8 $ 40.0 $ 282.5 $ 20,618.7 100.0 %
Collateral Pledged for Borrowings(3)
Repurchase
Agreements FHLB Advances
Revolving Credit
Facilities(4) Convertible Notes
Total Collateral
Pledged Percent (%)
Available-for-sale securities, at fair value $ 17,940.1 $ 2,048.9 $ — n/a $ 19,989.0 88.8 %
Derivative assets, at fair value 101.2 — — n/a 101.2 0.5 %
Commercial real estate assets 1,997.1 33.6 — n/a 2,030.7 9.0 %
Mortgage servicing rights, at fair value — — 160.6 n/a 160.6 0.7 %
Net economic interests in consolidated securitization
trusts 224.4 2.1 — n/a 226.5 1.0 %
$ 20,262.8 $ 2,084.6 $ 160.6 n/a $ 22,508.0 100.0 %
Maturities Notional Amounts ($B)(1) Average Fixed Pay Rate(2) Average Receive Rate(2)
Average Maturity
Years(2)
Payers
2017 $0.9 0.721 % 1.322 % 0.2
2018 4.3 1.155 % 1.314 % 0.8
2019 1.0 1.524 % 1.313 % 1.8
2020 1.6 1.542 % 1.311 % 3.0
2021 and after 7.8 1.793 % 1.321 % 5.9
$15.6 1.509 % 1.317 % 3.6
Maturities Notional Amounts ($B) Average Pay Rate
Average Fixed Receive
Rate
Average Maturity
(Years)
Receivers
2019 0.5 1.314 % 1.582 % 1.9
2020 0.2 1.312 % 1.642 % 2.8
2021 and after 3.7 1.316 % 2.187 % 7.2
$4.4 1.316 % 2.093 % 6.4
Interest Rate Swaps
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(1) Notional amount includes $200.0 million in forward starting interest rate swaps as of September 30, 2017.
(2) Weighted averages exclude forward starting interest rate swaps. As of September 30, 2017, the weighted average fixed pay rate on interest rate swaps starting in 2017 was 2.7%.
Interest Rate Swaptions
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Option Underlying Swap
Swaption Expiration
Cost
($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 $9.3 $6.3 3.9 $3,225 2.25 % 3M LIBOR 5.0
Total Payer $9.3 $6.3 3.9 $3,225 2.25 % 3M LIBOR 5.0
Receiver <6 Months $17.6 $7.7 2.3 $4,570 3M LIBOR 1.96 % 8.0
Receiver >6 Months — 4.5 7.8 250 3M LIBOR 2.35 % 10.0
Total Receiver $17.6 $12.2 3.1 $4,820 3M LIBOR 1.98 % 8.1
Sale Contracts:
Payer <6 Months $— $— 0.4 ($600 ) 2.42 % 3M LIBOR 5.0
Total Payer $— $— 0.4 ($600 ) 2.42 % 3M LIBOR 5.0
Receiver <6 Months ($9.3 ) ($5.3 ) 3.8 ($4,006 ) 3M LIBOR 1.72 % 5.0
Receiver >6 Months (1.4 ) (3.8 ) 7.8 (625 ) 3M LIBOR 1.95 % 10.0
Total Receiver ($10.7 ) ($9.1 ) 4.3 ($4,631 ) 3M LIBOR 1.75 % 5.7
